Berry Global Group - Q4 2018
November 15, 2018
Transcript
Speaker 0
Good morning. My name is Lynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Veri Global Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.
Mr. Dustin Stowell, sir, you may begin your conference.
Speaker 1
Thank you, and good morning, everyone.
Speaker 2
Welcome to Berry's 4th fiscal quarter 2018 earnings call. Throughout this call, we will refer to the 4th fiscal quarter as the September 2018 quarter. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website at barryglobal.com under our Investor Relations section. Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon and Chief Financial Officer, Mark Miles.
Following Tom and Mark's comments today, we will have a question and answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time with a related follow-up and then fall back into the queue for any additional questions. As referenced on Slide 2, during this call, we will be discussing some non GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward looking statements.
These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release, our Annual Report on Form 10 ks and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements. And now, I would like to turn the call over to Berry's CEO, Tom Samuels.
Speaker 3
Thank you, Dustin, and good morning, everyone. I want to thank you all for your interest in Berry and welcome you to our fiscal 2018 Q4 year end conference call. This morning, we'll be discussing several topics, including an update on the Laddawn acquisition, fiscal Q4 and 2018 results, highlights from our 3 operating segments, including investments in both organic growth and cost reduction, as well as our expectations for fiscal 2019. Afterwards, Mark and I will be happy to answer any questions you may have. First, I'd like to welcome the 380 employees of our recently completed acquisition of Laddawn.
Laddawn is a manufacturer of blown polyethylene bags and films with a unique to industry e commerce sales platform, which can be viewed at www.laddawn. Com. The team has a proven track record in delivering strong organic growth with over $145,000,000 in vet sales, and we expect to add annual cost synergies of $5,000,000 The business adds 5 manufacturing facilities spread across the United States and is operated within our Engineered Materials segment. I'm extremely excited with what Laddawn's proven web and mobile sales platforms has brought to Berry and we believe Laddawn's highly technical online capability will support immediate growth via this e commerce platform to assist in quicker customer response times and small order fulfillments for the faster growing small and midsized customer base. The combination is exceeding our expectations and we will soon be adding other Berry products to this platform.
Turning to Berry's overall financial results and highlights for the Q4 and 2018 fiscal year on Slide 3. During 2018, we were met with significant inflation across many of our key inputs, which created
Speaker 1
short term pressure on our earnings.
Speaker 3
But we feel positive about what we've accomplished throughout the year and our outlook for the future. We completed 2 strategic acquisitions, initiated a share repurchase program and made investments for future organic growth, while generating record sales, operating EBITDA, free cash flow and earnings per share. For the Q4, sales grew 9% to $2,054,000,000 For fiscal 2018, we generated $7,900,000,000 of net sales, an 11% increase with all three businesses delivering net sales growth in the year. Operating EBITDA was $1,380,000,000 and our adjusted earnings per share was $3.37 an increase of 10% and an impressive 5 year compounded annual growth rate of 23%. We continued our track record of exceeding free cash flow guidance generating a fiscal year record $634,000,000 of free cash flow in 20 18.
Each year, we communicate our free cash flow guidance to you, and I'm extremely proud of our team successfully exceeding the goal each and every year. Our focus on growing our cash flow and allocating it effectively towards maximizing shareholder value remains unchanged. Looking at some of our highlights. Our Consumer Packaging business reported strong organic sales growth in the quarter fiscal year of 8% 5%, respectively, led by our foodservice products driven by stronger demand in quick serve restaurants and convenience stores along with stronger overall end market demand for certain products. We're encouraged by the momentum of the division delivering 4 consecutive quarters of positive organic sales growth.
Our investments in advantaged products, such as our new polypropylene drink cup and lid and our focus on faster growing end markets have proven successful. Our Drink Cup offering provides a fully recyclable patented design that maintains rigidity, provides clarity for our customers' products and reduces weight. We believe these attributes were instrumental in customers' decisions to convert and roll out nationwide our new all clear cup and lid combination to re energize their drink cup offerings. Our Health, Hygiene and Specialties division recorded strong quarterly sales growth of 21% as well as a 16% improvement in operating EBITDA, including the impact of the recently completed acquisition Clopay. The division recorded sales growth each quarter in fiscal 2018, totaling 15% for the year and grew 3% organically in the 4th quarter.
The integration of Clopay is going as planned as previously noted and we will generate $40,000,000 in annual cost synergies with about half of this amount incrementally benefiting fiscal 2019. This business has brought great people to our Berry family along with leading film technologies into Berry's large product platform serving our global hygiene customers. Inside our Engineered Materials division, we delivered strong sales and operating EBITDA growth for fiscal 2018 of 13% and 12%, respectively. It was a very busy year as this business completed systems conversion related to AEP and Adchem acquisitions and successfully completed the acquisition of Laddawn in late August. This business also brought on great people and new technologies that will further benefit our distribution business in the years ahead.
As you recall, last quarter, we announced balance sheet has strengthened considerably over the past several years and are now in a solid position to return cash to shareholders. While still maintaining financial flexibility to execute our strategic plan, further strengthen our balance sheet and invest in future growth. We expect to continue to execute on our share repurchase plan in fiscal Q1 given current attractive market conditions and valuation. We will continue to update you quarterly on our progress as we remain committed to a balanced and dynamic capital allocation strategy to maximize shareholder value, which will continue to thoughtfully include investment to grow our business organically, execute strategic acquisitions, debt reduction and return cash to shareholders. We have high confidence in our ability to generate significant shareholder value based on our historic track record and future growth prospects.
Now I'd like to discuss what we're doing to promote the benefits of plastics. At Berry, we continue to believe the possibilities of plastics are endless, whether it's used in applications such as health care, medicine, food storage and spoilage protection products, from cell phones to cars, plastics is one of the most versatile materials on the planet. We're encouraged by the progress and are partnering with trade organizations to build alliances and improve collaboration across the value chain with key influencers, specifically around 1st, prevention, where we're focused on the enhancement of our recycling infrastructure 2nd, innovation in developing new sustainable technologies and supporting the use of reprocess materials 3rd, education and engagement, where we're actively engaging with governments, industry and consumers to drive effective solutions and lastly, cleanup, where we're developing solutions to address and clean up areas of existing plastics waste in the environment. Before I turn the call to Mark, who will review our Berry's financial results and fiscal 2019 guidance in detail, I'd like to highlight our expected $670,000,000 of free cash flow in fiscal 2019. We remain committed to growing our cash flow and delivering on these commitments as we have each year.
Mark will provide more detail in his remarks, and then I will come back to summarize our strategy and open the call up for questions. Mark?
Speaker 1
Thank you, Tom, and good morning, everyone. I'd like to refer everyone to Slide 4 now. As Tom referenced, 4th quarter sales were $2,054,000,000 which was up $173,000,000 or 9% of the prior year quarter, primarily due to recently completed acquisitions and organic sales growth of 3%. From an earnings perspective, we achieved quarterly operating EBITDA of $346,000,000 Higher raw material manufacturing and transportation costs of 9% were partially offset by the recent by the additions of recent acquisitions along with cost reduction efforts and price increases. During a year of significant inflation, we continue to work diligently within all three segments to pass through these increased costs and we remain committed to offsetting them in a productive manner.
Just today, we announced that we are taking additional pricing actions to recover these inflationary costs. Now turning to Slide 5, reported sales for the full fiscal year 2018 was an annual record of $7,869,000,000 compared to $7,095,000,000 in 2017. This 11% increase was primarily due to recently completed acquisitions. Operating EBITDA for fiscal 2018 also came in at an annual record of $1,380,000,000 Accounting for the annualized impact of acquired businesses, including cost synergies, our adjusted EBITDA was 1,449,000,000 dollars for fiscal 2018. Our $53,000,000 increase in operating EBITDA was a result of contributions from acquisitions and lower SG and A costs, partially offset by cost inflation in excess of our selling prices.
In this year of significant inflation where costs went up nearly $300,000,000 we were able to largely offset with $200,000,000 of price increases. As a reminder, plastic resin represents about half of our cost and we have automatic pass through arrangements on approximately 75% of our purchased resin with a timing lag of about 1 month. These past due arrangements typically do not cover costs outside of resin and the majority of our under recovery this past year relates to inflation on costs other than resin such as corrugated boxes, freight and colorants to name a few. While we experienced nearly $100,000,000 of under recovered inflation in fiscal 2018, historically we haven't seen back to back years of negative price cost spread. Looking at the results of each operating segment starting on Slide 6, sales for our Engineered Materials division for the quarter was 682 dollars 1% sales dollar decline from the prior year quarter was primarily driven by lower sales volumes, partially offset by an increase in selling prices along with the contributions from the Laddawn acquisition.
The volume headwind was primarily
Speaker 4
The volume headwind was primarily a result of material
Speaker 1
qualifications and development activities in the September 2018 quarter to drive future earnings growth as well as strong volumes late in the September 2017 quarter. Operating EBITDA in our Engineered Materials division was $122,000,000 which is down 8% from the prior year quarter, primarily as a result of incremental volume last year, costs related to our manufacturing cost saving initiatives and the timing lag of inflation recovery. Next on Slide 7, our Health, Hygiene and Specialties division delivered sales of $724,000,000 in the quarter compared to $596,000,000 in the prior year quarter. The increase of 21% was primarily attributed to the Clopay acquisition and organic sales growth of 3%. The organic sales growth was primarily driven by higher selling prices, partially offset by softer volumes in baby care and an unfavorable currency impact.
To the extent weakness in baby care persists in certain regions, we are prepared to reallocate our manufacturing capabilities and resources to other markets such as adult incontinence, healthcare and specialty applications. Operating EBITDA increased 16% in the quarter to $123,000,000 The $70,000,000 increase in operating EBITDA was primarily a result of Clopay acquisition and cost reduction initiatives, partially offset by under recovery of inflation. Turning to Slide 8, sales in our Consumer Packaging division were $648,000,000 in the quarter, which was $49,000,000 higher than the September 2017 quarter. The 8% organic sales growth was a result of higher selling prices of 6% and volume growth of 2%. Operating EBITDA for Consumer Packaging in the quarter was lower at $101,000,000 compared to $111,000,000 in the prior year quarter.
The timing lag of recovering higher raw material transportation and manufacturing costs were partially offset by the volume growth. Our results in the quarter also included increased costs from the start up of new capital expenditures to support our continued growth as well as negative overhead leverage resulting from inventory reductions. Slide 9 provides a summary of our income statement for our fiscal Q4 and fiscal year. Overall, operating income was modestly lower compared to the prior year quarter due to the items previously discussed that drove the operating EBITDA changes. Interest expense was $64,000,000 compared to the prior year expense of $66,000,000 This decrease is primarily a result of interest rate reductions we achieved from proactive measures to lower our interest costs from completed refinancings.
Additionally, we made principal payments of over $300,000,000 on our term loan debt throughout fiscal 2018 and have made an additional $100,000,000 payment to start fiscal 2019. And wrapping up the income statement, our net income for the quarter was $133,000,000 a 21% increase compared to $110,000,000 in the prior year quarter. Earnings per diluted share was $0.99 up 22% compared to the prior quarter and adjusted earnings per diluted share increased 3% to $0.90 in the current quarter. Next on Slide 10, the company generated a quarterly record of $448,000,000 of cash flow from operations, a 13% increase compared to the prior year quarter. Net capital expenditures in the quarter were $66,000,000 in total $333,000,000 for fiscal 2018.
We invested a record level of capital in fiscal 2018 to support the organic growth and new product growth initiatives that we have discussed the past few quarters and are starting to see and look forward to the continued sales and earnings growth from these projects. Our adjusted free cash flow set both quarterly and annual records at $382,000,000 $634,000,000 for the September quarter and fiscal 2018 respectively. Our consistently increasing, dependable and substantial free cash flow provides us the opportunity to return value to our shareholders. And with our new $500,000,000 share repurchase program announced during our last earnings call. We repurchased $35,000,000 of shares outstanding during the September 2018 quarter and as Tom mentioned earlier, if compelling valuations persist, we intend further repurchasing our shares in fiscal Q1.
Our financial guidance and assumptions for fiscal 2019 are shown on Slide 11. We have targeted our fiscal 2019 adjusted free cash flow at $670,000,000 which includes $1,036,000,000 of cash flow from operations, partially offset by capital expenditures of $350,000,000 Our guidance also assumes constant currency rates at the end of fiscal 2018 and a normal inflationary environment on our costs. Cash interest is estimated to be $270,000,000 cash taxes at $165,000,000 and working capital and other cash costs of $45,000,000 This concludes my financial review and I'll turn it back to Tom.
Speaker 3
Thank you, Mark. As I mentioned earlier in fiscal 2018, we generated record financial results. We're extremely proud of our history and predictability having grown our free cash flow and exceeded our targets every single year as a publicly traded company. With respect to capital allocation and our strategies for 2019, we will continue to do what Berry does well, manufacture products within stable end markets, grow our business organically, leverage our scale advantage, locate and integrate accretive acquisitions and generate consistent, dependable free cash flow. Our acquisition pipeline continues to be very robust with global opportunities in each of our three segments.
We feel there is and will be ample opportunity to continue to find accretive acquisitions while applying our proven conservative and disciplined approach. Our successful track record and strategy to uncover and acquire businesses with like materials along with our ability to successfully integrate these businesses in a timely manner and efficiently realize maximum synergies is a core competency of Berry. We work to identify the best people and best practices of each acquired business and apply those resources and practices to the entire enterprise. This historical disciplined track record is the foundation of what has led Berry to where we are today, which has provided consistent long term compound annual growth rates of over 20% on revenue, EBITDA and shareholder return and why we believe we have a bright future ahead. In fiscal 2018, we completed the strategic acquisitions of both Clopay and Ladan.
The Clopay acquisition has strengthened our position within the attractive health and hygiene market and broadened our presence as a global supplier to many of the leading consumer and industrial product manufacturers. We will continue to work with our global customers to provide an enhanced product offering that reduces costs and provides improved performance in our global hygiene films offerings. Laddawn has demonstrated strong organic growth through its proven web and mobile sales platform, which targets the faster growing small and medium sized customer base. The combined Laddawn and Berry custom film product portfolio will provide a vast range of product offerings to thousands of valued customers, further strengthening our core films business. Further, another leg of capital allocation is our share repurchase plan.
Our share repurchase plan gives us the opportunity to return cash to shareholders through opportunistic repurchases and drive long term shareholder value. With our free cash flow yield of 11%, we feel our stock is an attractive investment and anticipate further executing on the share repurchase plan. We will continue to be dynamic in our use of cash to drive value for our shareholders and we'll provide updates quarterly on our progress. Next, through our strategic decisions on capital deployment, we've been able to demonstrate organic volume growth by providing advantaged products in targeted markets. Our record level of capital expenditures in fiscal 2018 and our plan for 2019 is evident to our commitment and focus on organic growth to drive further market value for Berry.
Let me lay out by segment what we're specifically doing to drive positive organic volume growth. Within Consumer Packaging, our value proposition and recent success around connectivity, sustainability and cost innovation has led to innovative packaging solutions, which addresses unmet needs. A few new products being launched include Virdon, which is a unique range of post consumer recycled products for the beauty and personal care markets Embark, a new range of child resistant containers for the growing legalized cannabis market and lastly, we've partnered with Digimarc, creating a new technology where we can provide printing for our rigid products that allow consumer interaction through the use of their smartphones as well as printing that will enable the product to be designed with a full package barcode delivering convenience at checkout. We continue to look for opportunities where we can provide advantaged products in targeted markets and I'm pleased to report that we're continuing to see stronger pipeline and improved hit rates across the business and most pronounced in our Healthcare and Specialty Rigid Packaging products. Within our Health, Hygiene and Specialty division, our previously announced $70,000,000 investment in China for state of the art hygiene products is on target to be commercialized by the end of calendar 2019 and supports our leading position in this global market.
Additionally, as Mark mentioned, the HHS division has redeployed assets and development resources to support the higher growth area of adult incontinence in the Americas and Europe. We are well positioned with our asset base and product solutions related to discretion and comfort to build on a leading market position in the faster growing incontinence segment. With the ensuing rise of the middle class globally, aging populations and higher GDP growth rates in developing countries, applications. Additionally, in 2018, we experienced strong growth in our industrial and health wiping product lines and our pharmaceutical packaging products. Specifically, in wiping product lines, our previously announced $50,000,000 investment in North America with Berry's proprietary Spinlay technology continues construction in our Mooresville, North Carolina location.
And lastly, in our healthcare markets, we are expanding in both our Offernville, France and Bangalore, India sites supporting our global pharmaceutical customer base. The investments in ophthalmic products along with our full line of vial and nasal dispensing products, enhance our global footprint in serving our customers in the Pharmaceutical Packaging segment with our continued commitment to innovation and quality. We remain focused on high growth markets and applications, where we're partnering with our customers in the commercialization of our products and feel confident these investments will promote our longer term growth expectations. And within Engineered Materials, we're utilizing our new film technology and flexible packaging and our recent investments in value added multilayer films to support growth in e commerce, which will provide an opportunity for our customers to have a more cost competitive packaging solution.
Speaker 1
Earlier in
Speaker 3
the year, we secured a multi year supply agreement with 1 of our packaging converter partners who specializes in the manufacturing of protective packaging solutions for e commerce, courier, fulfillment and the distribution markets. In order to support their expected growth, we're investing in excess of $20,000,000 for capacity expansions over the course of the next 6 months in multiple various facilities. Additionally, we're investing in our innovative protection solution product offerings, which provide enhanced load containment, ultimately reducing the breakage damage and loss incurred in the transportation of goods. Lastly, we continue to see opportunities with our food and beverage customers to take share from other substrates with improved film performance, eliminating the need for additional packaging. The fundamentals of our Engineered Materials segment remain positive as reflected by another solid fiscal year.
And finally, Berry will continue to take the steps necessary to remain a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. I'm confident that the people at Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important. I thank you for your continued interest in Berry. And at this time, Mark and I will be glad to answer any questions you may have.
Speaker 0
First question comes from the line of Mr. George Staphos. Sir, your line is now open.
Speaker 5
Hi, thanks operator. Everyone, good morning. Thanks for all the details. Tom, thanks for the rundown on the new products and the like. I guess piggybacking on that, my questions to start would be really on additional guidance for 2019, if it's possible.
Can you talk about what kind of EBITDA growth notionally we should see from the 3 segments, barring acquisitions and obviously holding the raw materials constant and freight constant, should we expect, for that matter, EBITDA growth across each of the three segments? Why, why not? The related guidance question, if you could, just what assumptions are you making for resin pricing, specifically polyethylene, polypropylene and also freight in your assumptions? Thanks, and I'll turn it over.
Speaker 3
George, just a couple of comments. We are a continuous improvement culture. Each of the businesses ultimately are measured against and accountable for driving continuous improvement around margins, around revenue growth, productivity, etcetera. Obviously, we continue to be focused on fully recovering and offsetting the inflation that we incurred in 2018 2019. And you'll hear in certain businesses, we've taken the proactive both in terms of resin and other raw materials to ultimately give us maximum flexibility towards times of inflation.
We're not quoting a specific improvement number by business, but relative to the forecast for 2019 inflation, we're assuming flat inflation based on where we ended 2019 going forward in terms of polyethylene and polypropylene. We realize this is a very dynamic space. And again, we that has been traditional with our budgeting process to just take the ANDI number on the prior year and carry it forward in the coming year. Mark, any comments?
Speaker 1
Yes. George, I'd say with respect to your specific questions on guidance, while we don't provide guidance by segment, we certainly do expect all three of our segments to grow organically on earnings in fiscal 2019. With respect to resin, to Tom's point, we typically project flat on resin, so flat for the year. And with respect to the other costs, I know you mentioned freight specifically. We certainly have some increases as we lap the increases that occurred kind of early to mid-twenty 18.
We've got that accounted for as well as some incremental inflation on freight and other costs assumed in our guidance.
Speaker 5
Okay. Thank you. I will turn it over.
Speaker 0
Next question comes from the line of Mr. Ghansham Panjabi. Sir, your line is now open.
Speaker 6
Hi, good morning.
Speaker 7
This is actually Matt Krueger sitting in for Ghansham. How are you doing today?
Speaker 3
Well, thank you.
Speaker 7
Good, good. First question, can you expand on your base volume expectations by segment for FY 2019 along with some of the key contributors in each of the segments? I think this is something that you've mentioned or guided to in the past. It would be great to get some more detail heading into fiscal 2019.
Speaker 3
Yes. We expect each of our businesses to generate low single digit organic sales growth across each of the spaces. I spoke we've increased our growth capital investments for the company directing our investments towards what we believe are faster growing spaces, where we're targeting specific markets with advantaged products, similar to what we've done inside of our Consumer Packaging business. And similarly, I think another trend is what we've done inside of HHS, where we're migrating more of our capital investments towards higher growth areas of the world, specifically China to support hygiene as well as some of our specialty products in air filtration, not to mention the faster growing white space with the investment in Mooresville. And we obviously talked about Engineered Materials as well in terms of the investments around converted films.
So that will continue to be the trend where we want to be very smart and judicious with our capital spend. We want to make certain that we've got advantages when we're investing. We want to make certain that we've got the appropriate end customer partner to minimize risk. And as always, we're focused on making investments with asset mixes that are as flexible as possible.
Speaker 7
That's very helpful. And then just as a follow-up, trying to dig deeper into a couple of specific product categories, can you provide some added detail on the consumer segment? Is this something that we should expect into FY 2019 as well? And then you referenced the potential to reallocate capacity away from baby care into other categories. Has something changed in the baby care market that makes this market less attractive?
Or is there just better structural growth elsewhere?
Speaker 3
No, it's very good. Great question. No, we continue to be a leader in baby care. We're really seeking out greater balance across the portfolio. Areas like adult incontinence, wipes have higher growth rates at this point, but we're very well equipped to manage that space.
And clearly, we're committed to the space. We're just getting better allocation across the portfolio and focus just as previously answered to make certain that our investments are targeting resources towards the higher growth areas of each respective portfolios. And
Speaker 1
Matt, good morning. With respect to your question on working capital, we're certainly working every day to try to reduce the working capital required to operate the business. So, proud of the efforts of the consumer team. We're continually working to improve our systems and processes to reduce that. So, certainly, our goal for next year is to continue those efforts.
We have a conservative we don't have that built into our guidance. We actually have a more conservative build built into our guidance for working capital and other cash uses. But just like other years, we're going to work hard to do better than that. Great.
Speaker 7
Thank you very much. That's it for me. Thanks.
Speaker 0
Next question is from Mr. Brian Maguire. Sir, your line is now open.
Speaker 8
Hey, good morning guys. Just wanted to follow-up on George's question on some of the cost and price assumptions in the guidance. I know from your slides, it looks like in fiscal 2018 price versus COGS was roughly $100,000,000 headwind.
Speaker 9
Just wondering if you could give
Speaker 8
us a rough sense of how much of that you'd expect to claw back in 2019? Is it like half of that amount? And then just kind of related to that, I think you mentioned that polyethylene, polypropylene prices you expect to be flat. So just to confirm, you're not expecting any drop that we've seen from the recent fall in oil prices to benefit you that would sort of be upside to the guidance?
Speaker 1
Right. Yes. So, about half is a fair, I think, assumption in our guidance for fiscal 2019. About half of that half if you will, so 25% of the total just relates to the mechanical timing lag of the pass through of resin cost changes on our contractual arrangements with the other half or again 25% of the total coming from incremental pricing as agreements mature as we've talked about recovering that inflation that's occurred since the agreement initiated. And you're right.
Again, with respect to guidance on resin, flat is our overall assumption. Obviously, here in the as the year has started, it appears as though that market may be declining with the recent drop in oil prices, but we're early in the fiscal year. So, flat is our assumption for the full year.
Speaker 8
Okay. And could you just remind us what the impact of like a $0.01 move in revenues for capital? I think you've talked about maybe $7,000,000 $8,000,000 in the past. Is that right?
Speaker 1
That is correct. It's $7,000,000 a $0.01 Now that assumes all grades move by a $0.01 Obviously, to the extent one grade moves differently than the other, you would have to prorate that approximately half and half. It's a little more weighted towards polyethylene, but half half is a pretty fair assessment.
Speaker 8
Okay. And it's Tom. I just wanted to ask on Lydon. I think the platform there looks quite different than your existing one. Just wondering how transferable you think it could be to the legacy Berry business.
Maybe you could just talk a little bit about how their order and fulfillment is a little bit different than what you've done historically? And if all of that is applicable, then why only a $5,000,000 sort of synergy number there? Is that potentially a conservative number if you can transfer some of the order and fulfillment system that they've got to the rest of your company?
Speaker 3
Great question. We're very excited about the Laddawn acquisition, and I would look at that purchase for fulfillment. They've got a business model in terms of small lot order fulfillment that is winning in the marketplace. The business is demonstrating very strong growth, high single digit, low double digit growth that we believe is ultimately going to be transferable to other aspects of Berry's portfolio. What LaSalle brought our company and to our team was a technology capability and know how, a front end that was unique to the marketplace and certainly unique to Berry.
The value we bring is the manufacturer competency and scale know how that we can supplement that with. And we're being very judicious and cautious with what we add, how we add and how fast we add because the business is working really well. And what we're focused on is ultimately how we can pace our introduction of new products to that portfolio, not just to benefit Engineered Materials, but potentially other aspects of the company. We'll have more on that in future calls. But it is clearly addressing that Tier 3, Tier 2 customer looking for smaller purchases, looking for greater flexibility and Laddawn model provides that.
Very happy with the acquisition.
Speaker 8
Okay. Thanks very much, Gabe.
Speaker 0
Next question is from Ms. Debbie Jones. Your line is now open.
Speaker 10
Hi, good morning. Just one more question on the bridge to 2019 EBITDA. If I look at Slide 5, you have your 2018 adjusted EBITDA of 1.449 $1,000,000,000 If I take the comments that you just made to Brian, I'm assuming that the bridge to about the 1 point $5,000,000,000 you've implied for next year is all just COGS I'm sorry, the price cost spread. So should we assume that maybe there's some modest volume improvement offset by SG and A or what are the other buckets there?
Speaker 1
Yes, there's some I think that your high level announced there is accurate. There's some other items that offset each other, but that's a fair starting that's a fair way to think about it.
Speaker 10
Okay. And then just second question, you made some comments in the prepared remarks about enhancing the recycling infrastructure and also plastic cleanup. I just wanted to understand what you think your role is in that. Are you referring to some industry initiatives or something specific to Berry?
Speaker 3
Debbie, this is more of an industry wide initiative. And hopefully, and maybe even by the next call, we'll have an opportunity to speak more specifically. But the focus is really on trying to assemble different aspects of the value chain, brand owners, resin chemical companies, converters like ourselves, reclamation houses, waste disposal houses in a collaborative effort to build alliance and collaboration all across that value chain. And I can't be too specific, but we are already having conversations, discussions around the strategy, the plan, the time and the execution of how we leverage the resources across that alliance, if you will, to ultimately drive value in the space around those categories of prevention, innovation, education, engagement as well as cleanup. And, I am I'm really pleased because I'd tell it's the first time I've seen the discussions happen across that value chain with the groups I mentioned.
So more to come on future calls.
Speaker 10
Okay. Thanks. I'll turn it over.
Speaker 0
Next question
Speaker 11
Just another question on the guidance. I guess, first off, was there anything that changed, I guess, relative to 3 months ago? Was it maybe slightly less working capital use or maybe potentially better traction on your price increases or some higher volume expectations? Just wondering what the sensitivity is around that $670,000,000 number for next year? Thanks.
Speaker 1
Yes. No, I wouldn't I would certainly in the near term here, Arun, as we mentioned earlier, there appears to be some modest tailwind to our guidance with recent oil moves, but again, very early in the year. But I would say outside of that nothing has really changed in the macro environment that would drive a guidance change relative to what we were thinking about 3 months ago.
Speaker 11
Right. Okay. And then just as a follow-up, wanted to understand CP a little bit better, good volume growth, but slightly below us on EBITDA. So I was just wondering if that was just a short term resin situation or it was the business integration costs? And have you also increased your cost reduction efforts across the whole company?
And what's kind of the target for cost reductions for next year? Thanks.
Speaker 3
So relative to CP, it's predominantly driven by raw material inflation, the offset of raw material inflation. And relative to the cost reduction opportunity, each of the businesses are ultimately accountable to drive cost reductions because we believe a value proposition for Berry has been a low cost producer. That benefits us both in terms of the profitability of the business as well as our ability to enhance our organic growth proposition. Key areas of inputs clearly for us are around materials, around energy, around scrap and around freight. And each of the businesses have goals and objectives around that, that are incorporated and built into our 2019 guidance, but we're not quoting numbers by business.
Speaker 11
Okay, thanks. I'll turn it over.
Speaker 0
Next question is Mr. Anthony Pettinari. Sir, your line is now open.
Speaker 12
Good morning. Mark, in your prepared remarks, I think you talked about taking additional pricing actions to recover costs and understanding you're probably limited in terms of what you can share. Is it possible to give any kind of detail in terms of what form that's taking, whether it's freight surcharges or non resin price increases or other kind of efforts? And then I think for resin, I think we have a pretty clear picture of the lag times to recover costs. But for non resin costs, stuff like freight and other categories, is it possible to say how many quarters typically takes you to recover those?
Speaker 3
Listen, as we said before, the businesses remain committed and are chartered
Speaker 4
to
Speaker 3
find ways to fully offset inflation. As Mark mentioned, we recently, in 2 different press releases, communicated recent price increase announcements that we have in a couple of the businesses right now. Clearly, the timing lag in other raw materials is longer than the industry based inflationary inflationary options we have in resins. So they typically take longer. They could take as much as quarters, many quarters, because you're working within the confines of purchase and sales agreements.
So as we've said before, we're not deviating from those agreements. We're working collaboratively and creatively with our end customers to find ways to offset the inflation. But the other raw material component and freight component typically takes a longer amount of time.
Speaker 12
Okay. That's helpful. And then just shifting to e commerce. I think you talked about $20,000,000 investment for capacity expansions over the next 6 months. Is it possible to say what products, product categories that's really focused on?
And then the multiyear partnership that you referenced, could you just provide a little bit more color there in terms of what your partner is providing for you and how you're taking that to market?
Speaker 3
Yes. The partner, I choose not to mention their names specifically, but assume they're located in the major distribution houses and the most popular distribution houses around the world, where they're ultimately creating specialty packaging. We're providing the substrate that they ultimately use to compose and build that low cost protection solution. We've entered into a long term agreement with them, and the growth related to that partnership has afforded us the opportunity to reinvest in this business and convert a film substrate that will supply directly to them. And again, they're located inside the distribution houses of the large mass market providers that are out there.
Speaker 4
Okay. That's helpful. I'll
Speaker 12
turn it over.
Speaker 0
Next question is from Mr. Scott Gaffner. Your line is now open.
Speaker 13
Thanks. Good morning, Tom. Good morning, Mark.
Speaker 6
Good morning.
Speaker 13
Tom, just going back to your comment earlier on, I think you said low single digit organic growth in 2019. How should we think about that price versus volume with all these new projects coming online?
Speaker 3
It's a balance and it's a different mix inside of each business. Clearly, in terms of the progress they've made in terms of offsetting some of the inflation with price. But I think we're very excited about the investments that we've made across all of the businesses in growth spaces. And again, the whole theme around targeting specific markets with advantage products, and it will be it's consistent across all three businesses that we've outlined. We're really excited about that.
And I think it's we'd love to say that the mindset around growth happens overnight, but I think we're doing the right things in terms of reinforcing our low cost position and then secondly, making the right capital investment with the right targeted customers with letters of intent to reduce risk and make certain that those investments are as flexible as possible for future use.
Speaker 13
Okay. So it sounds like you're saying we should expect positive volume growth across all three segments in 2019. Is that fair?
Speaker 3
Yes. Organic volume growth in all three of the businesses are projected to be low single digits, correct.
Speaker 13
Perfect. And then just one last question. When you look back on the cyclicality for the business, I mean, clearly, you didn't own a lot of the businesses that you own today back in 2,009. But can you give us a sense on how you view cyclicality in the business on both in EBITDA and a free cash flow basis? And I ask about both because I would think free cash flow would actually be somewhat countercyclical given you'd have input costs come down during a recession.
But any thoughts you can give us around that would be helpful. Thanks.
Speaker 1
Yes, Scott. No, I think you said it well there at the end. I mean, historically, when we've had recessionary type environments, our input costs dropped significantly. And just like we have the lag on the way up as we did in fiscal 2018, we would have a similar lag in a deflationary environment, which would yield certainly lower selling prices, much higher profits and cash flows.
Speaker 5
Thank you.
Speaker 1
That's been the historical experience certainly.
Speaker 0
Next question is from Gabe Hajde. Sir, your line is now open.
Speaker 14
Good morning, gentlemen. Thanks for taking the question. Maybe, Mark, the first one centered around the $300,000,000 of cost inflation that you discussed or mentioned for fiscal 2018. Can you talk about sort of what's in that bucket? I'm assuming it's materials and every wages and labor and all that stuff, but and what you'd expect sort of in a normalized year?
Speaker 1
Sure. Yes, the biggest obviously, our biggest benefit is plastic resin, as you know. And we mentioned in our prepared remarks, about half our cost. Specifically for fiscal 2018, polypropylene had the most significant inflation. On a year over year basis, other categories that we referenced also increased on the nonresin side, but the biggest category was certainly polypropylene resin, which impacted both consumer packaging and health hygiene and specialties more so
Speaker 3
as they're the largest users of polypropylene resin.
Speaker 1
It's all of our COGS are in that $300,000,000 number, Gabe.
Speaker 14
Okay. And then maybe one, I guess, last stab at the guidance. Appreciating that the business is sort of ever evolving with acquisitions. Can you kind of talk about maybe first half, second half split between EBITDA? I mean, fiscal 2018 shook out maybe 48% in the first half and 52% in the second.
I'm thinking about the way some inflation rolled through the system. You probably have some higher costs here in the December quarter, and even in the March quarter that you're lapping such that it might be more pronounced in fiscal 2019?
Speaker 1
Yes. Our business is highly seasonal. That means typically our June quarter is our strongest quarter, followed by September, followed by March. And then our weakest quarter is unfortunately, our Q1 that we started the year off, but the December quarter is seasonally our weakest quarter. And I would expect a similar layout in fiscal 2019 as we've seen in past
Speaker 8
years. Okay. Thank you.
Speaker 0
Mr. Tyler Langton, sir, please ask your question.
Speaker 6
Yes. Good morning. Thank you. Just on Engineered Materials, I think you said in the well, you said in the release, I guess volumes were down 3% for the year, which seems to imply maybe a bigger decrease in the 4th quarter. I think Martin mentioned something about material qualifications.
I'm just trying to get more detail there and whether sort of rationalizations are still impacting that and just should that start to pick up as we go through fiscal 2019?
Speaker 3
Yes. Inside Engineered Materials, it's a we like to say that material science is a key component to what we do there. And there's never a good time to take on large scale qualifications of alternate raw materials, both in terms of resin as well as some of the other various components that could be in there to make up the value proposition of what the products deliver. But we chose to do that in quarter 4, qualifying alternate raw materials with the intent to give us maximum flexibility, both throughout the year as well as during periods of inflation, to make sure that we had maximum flexibility. So the business took on that challenge.
We also made certain that as part of our acquisition of AEP, we did qualifications where we determined which formulations were superior versus what we historically had done and versus what they were doing to make certain that we optimize that. And it has an impact on production. It definitely had an impact in Q4. It's going to have some hangover in our fiscal Q1 as well inside of Engineered Materials, but that is incorporated and included in our guidance for 2019.
Speaker 6
All right. And just on the M and A front, could you just talk about what you're seeing with regards of sort of number of opportunities out there, what sort of pricing and multiples look like? Just any detail there would be great.
Speaker 3
The pipeline continues to be robust. Obviously, you've seen a rise in interest rates of late. Our speculation is that obviously is going to impact valuations. We continue to believe the market can provide ample opportunity for us to continue to do what we've done historically in this fragmented space. And any of you that were at PAC Expo recently in Chicago probably got a strong sense from just the level of fragmentation inside the industry and the fact that for companies like Berry, who truly believe that this is a core competency for our company, we're going to take full advantage of that as we have historically.
But I think as we've also mentioned, we're going to have a very balanced capital allocation program with the goal of always maximizing shareholder value.
Speaker 8
Great. Thanks so much.
Speaker 0
Mr. Adam Josephson, sir, please ask your question.
Speaker 15
Thanks. Good morning, everyone. Mark, just a couple on guidance. I know you don't give explicit quarterly guidance, but given that we're halfway through the December quarter, can you just give us a sense of what's transpired thus far? Have you seen a pickup in organic volume trends?
I think organic volume was down about 2% in 4Q. Are you expecting organic volume to be up this quarter? I know it's a seasonally light quarter, but any commentary on volume trends, price cost expectations, etcetera for this current quarter?
Speaker 1
Yes, I think hi, Chad. Good morning. Relative to guidance, as we mentioned, Q1 is typically our weakest quarter. I would expect the quarters to lay out similar to historically. In terms of specific, we don't give kind of intra quarter guidance on our calls.
Tom did reference though there is some kind of Q1 year over year headwinds relative to these material qualifications we're doing in our engineered materials business. And that was incorporated into our guidance in terms of how we think about the quarters laying out this year.
Speaker 4
Got it.
Speaker 15
And then just Otherwise,
Speaker 1
I would say no other significant deviation.
Speaker 15
Okay. And then just back to the price cost expectation of, call it, up $50,000,000 versus down $100,000,000 I mean, on the surface, one could say you're being conservative by not assuming any resin price declines from here. But on the other hand, you're assuming $150,000,000 delta in price cost year over year. So I mean, how do you think about the conservatism or lack thereof in terms of your price cost expectation for 2019, just taking into account all that that I just talked about?
Speaker 1
Yes. No, historically, we have not seen negative back in the years of price cost, I guess, I would highlight by that. Fiscal 2018 was obviously not a normal inflationary environment, where we saw some things going up double digits. That being said back to your quarterly point, Adam, I do think you have to consider the timing of when those increases really ramped up, which was our early in fiscal 2018. So we still will be lapping that kind of early in fiscal 2019.
Sequentially, we haven't seen that move up over the course of the back half of fiscal twenty eighteen. You'll have a lapping effect and continued improvement on the price cost as the year progresses.
Speaker 8
Thank you, Mark.
Speaker 0
Edlain Rodriguez, please ask your question.
Speaker 16
Hi, guys. This is Saad Safdie on for Edlain. How are you?
Speaker 3
Doing great. Yourself?
Speaker 16
Good. In the baby care weakness that you're seeing in health and hygiene, how long will you wait to make sure to reallocate those assets? Is it a few quarters or like a year?
Speaker 3
Well, the nice thing is we have they're kind of interwoven. We have the ability to utilize those assets to produce baby or AI. And we continue to simply as we've done in all the businesses, we're just reallocating resources to support some of the higher growth spaces. As we've said, we continue to be fully supportive and committed to the hygiene space around baby. We're a leader in that space, and we continue to invest to support that leadership position.
But that's happening real time right now in terms of resource allocation mix, and it's we think it's a good balanced way to manage the business and the portfolio of products, but still very much committed to the baby side.
Speaker 16
Okay. And then, I think within Consumer Packaging, you guys said, you should see volume growth for based on new wins. And I think today you said something about the food and beverage taken away from substrates. I was wondering if you guys could just expand on that a little bit, provide more detail?
Speaker 3
Yes. Listen, we've had good opportunities. We won't talk about some of the specific substrates, but in general, both in our Engineered Materials business as well as CP, we continue to develop advantage products that are providing value proposition for lower cost, greater damage protection, improved clarity for consumers and brand owners to also market their products. And we're seeing we continue to see very strong success on each of those businesses. So, we're bullish on the outlook.
Obviously, we are we're continuing to be very strong believers, that of the possibilities that plastics makes available to the marketplace, and we'll continue to promote and reinforce those every day.
Speaker 16
Okay. Thank you.
Speaker 0
Anojja Shah, please ask your question.
Speaker 9
Hi, good morning. Good morning. I wanted to go back to e commerce. It seems to me like you're really ramping up your activities or capabilities in that business between the Laddawn acquisition and the supply agreement. First of all, is that true?
And second, how it does seem like a pretty crowded market with lots of suppliers here. What does Berry do that's different?
Speaker 3
Great question. All we're doing is investing around what I would suggest is a broader megatrend. And the megatrend of connectivity isn't going away. And people want connectivity, whether it's in the program we have with Digimarc, whether it's in having mobile online capability for an e commerce ordering solution and distribution fulfilling capability with Laddawn or whether it's supporting a partner with converted films to manufacture cost effective protection solutions at the distribution center. So I think in each of those, Laddawn value proposition serving Tier 2, Tier 3 with fulfillment capabilities faster and with more flexibility than other providers out there.
Digimarc, it's both a matter of connectivity with the consumer as well as ease of use during the checkout process. And relative to converted films, lower cost, greater value add, higher protection solutions. We're happy to compete in competitive spaces as long as we continue to build better mousetraps and have a strong cost position, and we think we're doing that.
Speaker 0
Mr. Salvator Tiano, sir, your line is now open.
Speaker 4
Yes. Hi, guys. So my first question is a little bit on the volumes again, and you did mention the positive organic growth you expect across all three segments. But as we see a little bit in Health Hedging and Specialties, it seems the past two quarters we've seen a decline in organic volumes there. And I wanted to know a little bit, all these investments you're finalizing essentially right now, how much do you think they'll contribute towards shifting that number in fiscal 2019 to be positive versus what should be probably another 1 or 2 quarters of lower volumes from the legacy business?
Speaker 1
Yes, sure. As Tom mentioned, we expect organic sales growth from a dollar perspective in all three segments, measuring volumes obviously by segment in terms of some of our products are sold by widgets, some are sold by weight, some are sold by square surface area. So, we've got products that are growing in all three segments and the mix of how that shakes out between pricing and volumes is still TBD. Generally, we assume kind of flat unit volume with again some modest price as we look to 2019 to recover the inflation that we had through fiscal 2018. And as Tom mentioned, we've got obviously a lot of good projects going in all segments that provide upside to that expectation.
Speaker 4
Perfect. And I was wondering if you could talk a little bit about the healthcare footprint we've seen the consumer packaging business and I think health and personal care are around 1 third of the sales there. But if you can focus a little bit on the health care footprint, which areas do you operate in? And what opportunities do you see to expand through M and A? Will there be any antitrust restrictions due to market share?
And would you be willing to make acquisitions should some businesses come to the market
Speaker 3
soon? Relative to acquisitions, we continue to apply our historic disciplined approach around the businesses that we acquire, but are obviously always open to M and A. The healthcare business is an important component of consumer packaged focus area, if you will. It's not only domestic business that allows us to provide a variety of products, everything from ophthalmics, dosage delivery control devices, prescription vials, etcetera. But it's also a global business with our capabilities in Offeringville as well as Bangalore.
We're excited to be making capital investments in both of those international facilities to provide support for domestic North American brand owners. So very excited about the business. We'll look at all aspects in terms of both capital investment, resource deployment, as we are in every business, again, focusing on targeted markets with advantaged products that have improved growth profiles, we're going to invest there. We're excited about the target that's been built inside that business, both domestically and internationally. And the hit rate and win rate inside those businesses continues to improve to the degree that we're we continue to be willing to make those investments in CapEx to support that growth.
Speaker 4
Thank you very much.
Speaker 0
Mr. George Staphos, sir, please ask your question.
Speaker 5
Thanks for taking the follow on. Just a quick question for you on AEP and then on costs. For AEP, it sounded like you were still seeing some impact from the integration and customers finding alternative sources of supply. Is that true? Is there a way to quantify that at all, guys?
And if not, competition than you anticipated in market and that being one of the reasons why we're seeing the AEP related volumes still declining? The second question on cost, I think you've mentioned
Speaker 3
market every day. It's probably the shortest cycle business that we have with the majority of that space being served through distribution. So we compete every day for volume wins, volume losses. So the competitive dynamic hasn't changed. We're very comfortable with our position in that space.
It continues to bring great value to us, more of the same there. We're going to continue to have ebbs and flows of competitiveness and distributor destocking, restocking, that will continue to be a part of it. Relative to the cost reduction initiative, we were specific in that. We definitely incurred some demand softness in the space, frankly, because we allocated time on equipment to support the qualifications. I'd have to, again, restate there's never a great time to do that.
But if you're going to do qualifications, we want to do the qualifications on proposition that we're aspiring for is validated on a production scale as opposed to just a lab
Speaker 1
scale. Yes. And with respect to the freight and other costs, again, we saw this kind of a stepped up incremental inflation in the first half of twenty eighteen. Incrementally since then, it's really been relatively flat across most of the categories. So we have that assumption as well as a modest level of additional inflation assumed in our guidance.
Speaker 5
Okay, Mark. That was worth a try. Thanks, guys. Good luck in the quarter.
Speaker 0
Mr. Scott Gaffner, sir, please ask your question.
Speaker 13
Thanks. Sure. Just one or two follow ups. First, Tom, a lot of focus from us on volume growth, but I think maybe something you could highlight or talk to us. A lot of the new products that you're coming out with have significant reductions in the weight of the product and especially as we focus more on sustainability.
So when you look at it, how important is volume growth? And maybe, what do you think is the long term organic EBITDA growth in the business rather than the long term volume growth?
Speaker 3
Yes. You bring up a great point, and it's probably underappreciated inside of our business. But weight reduction is a core competency of what we do. We're actually chartered every single year to reduce the weight of the products that we ultimately produce in next generation products. So, we've always talked about it, that the percent, it could be 2%, some products significantly more.
So, it's probably not the appropriate measurement of our success. And frankly, when you talk about post consumer, post industrial products, we are proactively marketing that. We want to make certain, Scott, that our end customers know that there's an opportunity out there and that if they choose to go to a post consumer recycled material that we can provide it. And what we want to do is make certain that we are equipping the marketplace with demand that ultimately it supports reinvestment in that infrastructure to support PCR based materials. And we think that's ultimately good business.
Verdin is a great example. It was demonstrated at the show. And for us, it's a clear demonstration that the end customer does not have to forego any of the premiumization they might be looking for by using a PCR based material. And I think the Verdin let as well as a premium package that allows a brand owner to market themselves as effectively as they desire.
Speaker 13
Okay. And then just on the long term EBITDA growth, where do you think that is for the total company?
Speaker 1
[SPEAKER DOUG MURPHY CHUTORIAN:] Well,
Speaker 3
listen, our long term, we've go ahead Mark, if you like. [SPEAKER DOUG MURPHY
Speaker 8
CHUTORIAN:] Yes.
Speaker 1
No, mid single digits kind of has been the historic organic EBITDA growth of the business. Obviously, we've overachieved that historically. We've complemented that with very strategic acquisitions. But I would say organically mid single digits has been a historic track record for Berry, Scott.
Speaker 13
Okay. Last one, Tom, you mentioned packaging for legalized cannabis. I mean, how do you think about that an opportunity? I mean, there's a lot of investments by some large CPGs or beverage producers in the U. S, in Canada, etcetera.
I mean, is that is the discussion heating up there? Or what do you see as the opportunity?
Speaker 3
Yes. I would say we're in the early innings of legalized cannabis packaging. We're simply taking on a lot of the skill set and know how that we've developed over the years in terms of child resistant, tamper evidences, dosage control, food preservation freshness and applying it to a different application. And I would suggest we're in the early innings of that opportunity.
Speaker 13
Great. Thanks guys.
Speaker 0
No more questions in the queue. Mr. Stival, sir, please continue.
Speaker 3
Thanks to everyone for your time. I'd like to wish everybody a very restful and happy Thanksgiving as well. Take care.