Berry Global Group - Q4 2021

Transcript

Speaker 0

Good day, and thank you for standing by, and welcome to the Berry Global Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dustin Stilwell.

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Berry's 4th fiscal quarter 2021 earnings call. Throughout this call, we will refer to the 4th fiscal quarter as a September 2021 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 atberryglobal.com under our Investor Relations section. Joining me from the company are Avaria's Chief Executive Officer, Tom Salmon and Chief Financial Officer, Mark Miles.

Following Tom and Mark's comments today, we'll have a question and answer session. In order to allow everyone the opportunity to participate, As referenced on Slide 2, during this call, we will be discussing some non GAAP financial measures. The most directly comparable GAAP financial measures 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

Speaker 2

Our first question comes

Speaker 1

from the line of John Annual Report on Form 10 ks and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company to differ materially from those expressed or implied in our forward looking statements. Now, I'd like to turn the call over to Berry's CEO, Tom Salmon.

Speaker 3

Thank you, Dustin. Welcome, everyone, and thank you for being with us today. Let's begin this morning on Slide 4, where we've laid out our key takeaways for today. First, Our 4th fiscal quarter results were solid as revenues were a record for any September quarter and free cash flow was a record for any period in our company's history. In In spite of unprecedented inflation and supply chain challenges we faced across the world.

For the fiscal year 2021 was another outstanding year at Berry As we achieved 4% organic volume growth on top of 2% in fiscal 2020, with all four segments delivering strong organic volumes during the year. Revenues and adjusted earnings per share, which were both annual records, grew by 18% 20%, respectively. Our teams have worked diligently to offset the challenges created by COVID, inflation, labor and supply chain challenges, While demonstrating an exceptional ability to remain focused on driving long term sustainable growth and delivering the results you see today. Berry's resilience is a continued reminder of the diverse and robust global portfolio we've built through strategic portfolio management. The second key takeaway was our commitment to improve our strong balance sheet and drive leverage lower.

I'm proud to say that as a result of our strong and stable earnings and cash flow, We've been able to reduce our leverage by a half a turn since the beginning of fiscal year and a full turn in just 2 years ending the year at 3.8 times net debt to adjusted EBITDA. Getting below 4 times was a top priority for us. And as we stated before, we anticipate operating our company in a leverage range of 3 times to 3.9 times. And lastly, We are focused on capitalizing on our strong base by investing in a number of organic growth initiatives, including innovation and sustainability led projects, which will maintain our growth momentum in fiscal 2022 and beyond. Next, let me turn to our number one core value on Slide 5, and that's safety.

Keeping all our teammates healthy and safe is a key priority. As you can see on the slide, we have an ongoing commitment to identifying, [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Managing and minimizing safety risk. During the past few years, the pandemic presented many challenges across our global footprint. Our global Berry team stepped up, took on the challenge, implemented and maintained new protocols while keeping each other safe. And in spite of these added challenges of operating during the pandemic, our safety performance has continued to show improvement and we're very proud of our industry leadership Delivering an OSHA incident rate below 1 for the fiscal year 2021, significantly better than the industry average of 3.7.

Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products that we produce. This has made us a stronger and better company, giving us great optimism on the company's future success. Additionally, As you can see on the slide, we have a strong commitment to ensure that we are providing better opportunities and bringing innovation to provide multiple lives to natural resources, while adding many initiatives with industry and external partners to improve circularity and our carbon footprint. Turning now to the financial highlights on Slide 6. For the 4th fiscal quarter, revenue was up 22% and was a record for any quarter.

Overall demand for our products remained solid and certain markets, which previously experienced pandemic headwinds, continued to improve. Volumes for the quarter were essentially flat, coming off a strong prior year comparison of 4% in September 2020. Free cash flow was a quarterly record at $512,000,000 Throughout fiscal 2021, we experienced significant cost increases in our primary raw material, That being resin as well as inflation in other raw materials, freight and labor on top of supply chain challenges. As you can see, we experienced a significant increase in the level of inflation and recovered 92% of record cost inflation in the September quarter and 95% of the over $1,500,000,000 of cost inflation during the fiscal year. As we've demonstrated Historically, we remain committed to passing through cost inflation and believe we are well positioned given our scale to serve our customers with our facilities in close proximity to their locations.

Looking at some of our financial year highlights on Slide 7. Fiscal year 2021 It was an exceptional year with record revenues and earnings, leverage reduction inside our targeted range, along with an unwavering commitment to service customers in a challenging supply chain environment through much of the fiscal year, all while building strong momentum in each of our businesses heading into fiscal year 2022. For the year, revenue was up over 18%, including organic volume growth of 4%, with all four segments showing 3% or more organic volume growth. From an earnings perspective, our operating EBITDA increased by 3% on a comparable basis to a record $2,224,000,000 Adjusted earnings per share was also an annual record and increased by an impressive 20% to $5.80 per share. Additionally, as I mentioned, we have used our consistent and dependable free cash flow to further strengthen our balance sheet and Our employees around the world have shown an unwavering attention on executing against our strategies.

And as a result, We delivered on our priorities with another year of exceptional results while building strong momentum going into the future. Now, I'll turn the call over to Mark, We'll review Berry's financial results in more detail. Mark?

Speaker 4

Thank you, Tom. Looking at the quarterly and fiscal year performance Regionally, we had modest volume declines in developed markets, which had very tough comparisons and were mostly offset Stronger growth in emerging markets such as India and Eastern Europe. From a market perspective, categories such as food and beverage and foodservice saw Some volume growth, while industrial categories experienced modest headwinds related to supply chain disruptions at our customers. Operating EBITDA in the quarter was modestly down, primarily attributed to the timing lag of recovering inflation. For the year, revenue improved by 12%, Operating EBITDA for the year was up 6%, primarily driven by the organic volume growth, foreign currency translation and productivity gains, offset by a timing lag in recovering cost inflation.

Next, revenue in our Consumer Packaging North America division was up 31 COVID. Volumes were up 4% over the pre pandemic level from the Q4 of 2019. For the fiscal year, revenue was up 23%, primarily from the past year of inflation and a 4% increase in organic volumes driven by continued strength in foodservice and beverage products. Operating EBITDA was down for the quarter and fiscal year due to the timing lag Passing through cost inflation and costs related to managing supply chain challenges. Fiscal 2021 represents the 4th consecutive year organic volume growth delivered by our CP and A team.

Continuing the strong momentum, we recently announced $110,000,000 expansion For our clear sustainable foodservice packaging to manufacture clear drink cups and lids for quick serve restaurants, coffee shops and convenience stores. These investments are customer aligned and the clear design builds an increasing demand for our cup that showcases the customer's premium brand image On Slide 9, our Health, Hygiene and Specialties division delivered a 21% increase in revenue, primarily attributed to the pass through of inflation, partially offset by an organic volume decline of 3% in the quarter from the pandemic driven strong volume quarter a year ago where we generated 12% volume growth. The continued recovery in the building and construction markets was partially offset by strong comparison in the healthcare and hygiene markets a year ago. Organic volumes grew an impressive 9% over the pre pandemic level in Q4 of 2019. Fiscal year 2021 delivered organic volume growth of 5%, building upon the very strong prior year growth of 6% driven by strong demand for our hygiene and healthcare products, including hard surface disinfecting wipes, Healthcare Protection Apparel and Premium Hygiene.

Operating EBITDA for the fiscal year increased by over $90,000,000 or 19%, primarily driven by the organic volume growth, favorable product mix and cost productivity. For the year, we estimate that the favorable product mix related to COVID-nineteen was approximately $40,000,000 higher than fiscal 2020. And lastly, revenue for our Engineered Materials division on a comparable basis adjusted for divestitures was 38% higher in the 4th quarter, Primarily attributed to the pass through of inflation along with organic volume growth of 1%. Volume growth in the quarter was primarily driven by partial recovery of our can liner business in the U. S.

Along with growth in our e commerce and protective films, which was partially offset by supply chain challenges. For the full fiscal year, our Engineered Materials business delivered strong organic volume growth of 4% as we continue to make strategic investments The timing lag of passing through inflation and costs related to managing supply chain challenges. The fiscal 2021 results are yet another example of our proven performance over many different economic cycles. As you can see on Slide 10, we have consistently driven top tier results in nearly all key financial metrics, Our business model is very resilient, including the broadest portfolio of plastic packaging solutions with sizable, dependable and stable free cash to allow us the flexibility to drive strong returns for our shareholders. Next, our fiscal year 2022 guidance and key assumptions are shown on Slide 11.

In order to better align ourselves with our peers, we are now guiding to earnings per share and free cash flow. We are expecting to deliver between $7.20 to $7.70 of adjusted earnings per share, which includes amortization of intangibles from acquisitions. For comparison purposes, our fiscal year 2021 adjusted earnings per along with 2% organic volume growth. Given the timing lag of passing through inflation and continued improvement in the supply chain, We expect fiscal 'twenty two earnings to be stronger in the second half. Our guidance incorporates our commitment of recovering cost inflation and includes recovering the majority of the unfavorable lag experienced in fiscal 2021.

Partially offsetting the inflation recovery, We are conservatively expecting the majority of the favorable product mix primarily inside our HHS segment to not continue in fiscal 2022. With organic volume growth expected to be 2%, our comparable EBITDA is expected to be 3% to 7% higher versus the comparable prior year. In line with our assumptions for earnings per share, we expect volumes and operating EBITDA in the first half to be flat modestly negative versus the prior year due to our very strong December March quarters a year ago, where we delivered volume growth of 7% I am extremely proud of our team's execution and delivering on our cash flow guidance every single year since we started providing guidance 9 years ago. Our capital allocation plan is clear with a flexible return based focus versus a more rigid fixed strategy. We intend to use our strong, dependable and consistent free cash flow to finance customer supported investment around driving sustainable long term organic growth, and opportunistically repurchasing shares, while staying within our targeted leverage range.

This concludes my financial review.

Speaker 5

Now I'll

Speaker 4

turn it back to Tom.

Speaker 3

[SPEAKER STAVROS VIZIRGIANAKIS:] Thank you, Mark. Before we close our prepared remarks today and open the call up for questions, I want to reiterate that we will continue to focus on what has been driving our strong results over the past 2 years. We continue to invest in each of our businesses to build and maintain our world class low cost manufacturing base with an emphasis on key growing markets and regions and continue to see incremental opportunities to invest organically in support of our unwavering commitment to global growth. Overall, the diversity of our end markets and product offerings as well as the essential nature and demand consistency of our products have been core to the underlying performance of the business. I'm very confident in our team's ability to meet our near term long term expectations and commitments to provide sustainable, profitable growth.

Near term, we are a dependable, Low single digit growing business that is supported by robust pipeline of new earned and secured business, which we believe is enhanced As I mentioned, we have several drivers that we've highlighted on previous calls for organic growth shown on slides 13 and 14, Gradual moves into faster growing markets along with continuing to invest into emerging market regions, we will be positioned [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group,

Speaker 6

Inc.:] In line with our focus

Speaker 3

on increasing our presence in the health and wellness area, we announced earlier this year approximately $110,000,000 of investments in both rigid and flexible healthcare solutions in the United States, India and China. As part of this investment, we are opening another manufacturing facility in global healthcare line, which also supports our healthcare business and rigorous healthcare and pharmaceutical applications. Furthermore, on Slide 14, We believe the continued focus on sustainable solutions will be a powerful growth driver for us in the years ahead. For example, We believe our polypropylene drink cup is the most widely recyclable cup for quick serve restaurants and convenience stores, having the ability to incorporate recycled Our demand and growth pipeline for these products, including Other beverage and spirits products has been strong and we expect further opportunities to continue to grow these products and capture share from alternate substrates. We are committed to remaining at the forefront of the innovation necessary to meet customer sustainability goals through investments in the latest We recently announced our collaboration with Wendy's and LyondellBasell to improve cup recyclability and introduce expansion Create multiple lyser PacQ products through advanced recycling along with Wendy's move from their plastic lined paper cups with limited recyclability to our new single substrate clear drink cups that more consumers will be able to recycle, an important pathway towards circularity.

Based on a mass balanced approach, The Cuts will also use 20% ISCC certified recycled plastic Across all North American restaurants, a quick serve industry restaurant first with the potential to increase that amount of recycled plastics used in the future. Given our natural resources, multiple life requires commitment and collaboration across the value chain, Partnering with leading brands that actively pursue opportunities to promote innovative packaging solutions is the key to accelerating a circular economy. This is just one example of many similar partnerships Berry has with leading companies across the world. New Cup set will launch in restaurants in both United States in Canada in early 2022 with the initial set of large cups using recycled plastics. All drink cups We'll use recycled plastics in 2023.

This important first step is estimated to divert £10,000,000 of waste from landfills over the 1st 2 years. [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] The amount of waste diverted from landfills due to this collaboration is projected to only increase as Wendy's works with Berry to expand recycled plastics used throughout its entire cup [SPEAKER SHACEY PETROVIC INSULET CORP.:] .:] Turning now to Slide 16. As we highlighted on our last call and indicated in our Wendy's collaboration, we're very excited The innovative circular solutions we are bringing to the market in close partnerships with our customers and suppliers. New technologies are becoming available that convert many forms of plastic You can see the sizable industry investments that are being made in infrastructure to lower the cost of post consumer recycled material, increase capacity worldwide and attract future value added investments.

We believe as already a global leader with scale, we will have unparalleled access to recycled content affording us the opportunity to to provide sustainable packaging worldwide to ensure and aid our global CPG customers to meet their commitments around sustainability. Ultimately, plastics are the most advanced, versatile material and it's hard to imagine any state of the art solution that will help us achieve net 0 without the use of plastics. We believe plastics are a critical part of the transition to net 0 by 2,050. With Berry Global's capabilities, As evidenced by our supply chain collaboration, we continue to focus on circularity and improving reclamation capabilities to help Meet the growing sustainability demand trends of today and tomorrow. Leveraging our unmatched global scale, Sustainability leadership and deep innovation expertise, we design and develop products that help advance a circular economy.

Today, as you can see on Slide 17, we announced our most ambitious sustainable packaging goal today, 30% circular plastic use across fast moving consumer goods packaging by 2,030. This is an increase from our original target of 10% and includes both recycled and renewable materials. Our new 30 by 30 goal aims to give natural resources multiple lives and introduce alternative renewable resources as the energy industry continues to pivot to recycle and renewable resources. We will meet this new goal through our leading access to innovative material streams, Agility in our manufacturing capabilities and our continued close customer partnerships who count on us to deliver innovations for the future of the world. We look forward to continuing to lead the way in driving innovation and sustainability based growth and announcing many more opportunities over the next several years.

In summary, we have delivered outstanding results across the portfolio on all financial metrics, all in spite of an inflationary environment, coupled with supply chain and labor challenges. We delivered on our strategic goals to drive organic growth 4% for the fiscal year on top of 2% in fiscal 2020 on growth, improving our strong balance sheet and designing products with sustainability in mind. And finally, With our consistent and dependable end markets, a leading cost position along with substantial capacity to invest in long term Steady growth. We are confident in our ability to achieve consistent, low single digit growth through our customer linked capital investments, along with

Speaker 0

Your first question comes from the line of Anthony Pettinari from Citigroup. Your line is

Speaker 3

Good morning. Tom or Mark, is it possible to parse out the 2% volume growth guide for 2022 across the 4 segments, Maybe directionally.

Speaker 4

Yes. We typically, Anthony, wouldn't give volume guidance By segment, but I would say generally we're obviously long term expecting all of our businesses to deliver Long term low volume excuse me, low single digit volume growth. Next year, there may be some pluses and minuses just as things Recover from the pandemic and some of our more industrial businesses, but over the long haul, all should be low single digit volume growers.

Speaker 3

Okay. And then in terms of resin assumptions embedded in

Speaker 7

the guidance for 'twenty two, any additional detail you can give there? And just The general inflation and supply chain headwinds you've seen this year, do you expect those to ease or continue or get worse? Any kind of

Speaker 3

Yes. It's Mason. We kind of take it for granted. We probably as an industry has been dealing with these types of challenges for almost 18 months now, and it certainly came to a crescendo Here in fiscal 2021, but we assumed resin at the close of October. And so it's a conservative guidance in that regard.

And clearly, we continue to see all aspects of the supply chain continue to Find ways to improve reliability and supply continuity, and we would anticipate That would continue to improve each quarter throughout the fiscal year going forward.

Speaker 4

Okay. That's helpful. Mark, I think you also asked about resin maybe at the beginning of the question. We've assumed kind of current pricing, which October is settled, November is yet October is settled, November is yet to settle. October was the first Month where we saw our primary material start to roll over that being predominantly polyethylene and polypropylene resin.

So

Speaker 0

Your next question is from George Staphos from Bank of America. Your line is open.

Speaker 8

Everyone, good morning. There's an echo on the line from the analysts. So apologies if You can't hear me so well. I want to go to Slide 1011, Tom and Mark. You've put up Terrific performance certainly versus peers over the last, really better part of a decade since you were public.

And if I look on Slide 11, you're now adding back the amortization from acquisitions,

Speaker 4

Which a number of your company a number of

Speaker 8

your peers do. Now that peer set Also has very specified value return criteria to investors, both in terms of buyback and dividends. Can you outline for us now given the performance in 2021 and over the last decade, which has been very good, Why you don't have specific targets right now on dividends, on buyback? What are you looking for in terms of leverage to get to that point? Is there some risk factor that you're Adjusting for in terms of your value return target, how would you have us think about that?

And at a minimum, You're counting you're looking for share count of around 141,000,000 in your guidance, Which is up from the 138 in the last quarter. Can we at least expect that you'll try to buy back the dilution in fiscal 2022. Thank you. Thank you.

Speaker 3

Thanks, George. I'm sure Mark will want to weigh in on this as well. But clearly, We do have a long term capital allocation strategy. It is purposefully designed to be both flexible and a return based strategy. 1st and foremost, we were and we're pleased that as an industry leader In terms of cash flow from operations in the $1,700,000,000 to $1,800,000,000 range, it gives us a lot of flexibility.

And 1st and foremost, we've prioritized our organic growth investments as a priority. And in our view, there's no greater way To stand behind the strength and value of our company and by organic growth investment, delivering growth in 2021, 2022 and we clearly expect this to be our 3rd consecutive year of growth in 2022. Our pipeline is exceptional. Our opportunity to expand our business in emerging markets and targeted markets align with our customers, Similarly, what you saw with our collaboration with Wendy's is unmatched in our view, and we're going to continue to bolster that. I'll also state, we are just now at the very top end of our range.

We've noted portfolio management both in form of acquisition and divestiture. We primarily have focused on We primarily have focused on divestiture. And granted, given the fact of the unpredictable nature of that category, It provides us more opportunity to further either reduce our leverage or opportunistically take advantage of buybacks, given that we already have an existing repurchase authorization of $400,000,000 And that's clearly how we're thinking about capital allocation. We think it's prioritized the right way around a return based focus, and we think long term, It will deliver the best opportunities for our shareholders both near term and long term.

Speaker 4

[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP,

Speaker 2

INC.:] Salmon Berry Global Group, Inc.:] Yes.

Speaker 4

And on the returns part of that, George, I mean, we certainly Obviously, measure returns across all of our investments. You can see the results. We've delivered strong returns, return on capital of 14%, 15% The last couple of years, and while that's objective, it's certainly obviously they have assumptions in them when you calculate And risk is obviously something that is considered when you evaluate returns and what projects to invest in, whether or not they're organic, Inorganic or returning capital. So all those things are considered when we evaluate our options. We're fortunate, as Tom said, that we Generate a lot of cash and we got a lot of great options to drive returns for our shareholders.

With respect to your I think you also asked about share count. We recognize that was a conservative assumption in our guidance and we also obviously have the opportunity to drive that down If the company chooses based on share repurchases.

Speaker 8

Okay. Just A quick

Speaker 4

one and I'll turn it over.

Speaker 8

Would it be fair to say that you would put M and A ahead of value return given where the shares sit today? And how would dividends fit at all? It sounds like buyback will be how you return value to shareholders Most over the next 12 months. Thanks guys and good luck in the quarter.

Speaker 4

Yes. I mean obviously we are very committed to staying in that range of 3.0 We are at the top end now. At 3.8, we are excited that we got the company back in the targeted range. As we said in the prepared remarks, we've got a flexible return based approach And we're fortunate that we have a lot of options, but we're not prescribing a fixed amount to any one particular category. Obviously, some of those are The opportunities are unpredictable, whether or not there's going to be M and A available at the right valuation is hard to determine.

Speaker 0

Your next question is from Ghansham Panjabi from Robert W. Baird and Company. Your line is open.

Speaker 6

Thank you. Good morning, everybody.

Speaker 3

Just in terms of

Speaker 6

the supply chain constraints that you touched on in your prepared comments, can you just give us some color in terms of what exactly it cost you the time line to recover that? And then on the price cost mismatch of $66,000,000 from the Q4, how do you how should we anticipate that evolving through your fiscal year 2020

Speaker 3

We would anticipate, being ostensibly price cost neutral by the Q3 of our fiscal year, Ghansham. Great.

Speaker 4

And that's a flat resinous assumption, Ghansham, as we said earlier.

Speaker 6

Understood. And the supply chain constraints?

Speaker 3

Yes. Like I said, they've continued to get better, the resiliency of our team. We've Enabled the opportunity to source material now from in a more fluid way from different geographies around the world. We've continued to expand The number of qualified materials that we have, we are not relying heavily on to a large We can control imported goods. We're serving our local markets with local supply chains, and that frankly It's an advantage given the proximity of our locations to our customers.

It really delivers that surety of supply, which is We believe it's the right model for us going forward and we're excited about that.

Speaker 6

Okay. Then Tom, on the circularity component that you outlined, the 30 by 2,030. How do you see the various buckets kind of playing out between mechanical Mechanically recycled resin versus chemically recycled resin versus bioplastics. How do you sort of envision that constituency, if you will, relative to that 30%

Speaker 4

you outlined. [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group,

Speaker 3

Inc.:] Yes. No one solutions going to win the day. It's going to be a combination of Really all of them. We're pretty well balanced. Significant investment in post consumer recycled materials with Strong investment position throughout Europe.

The Advanced Recycling communications that we've made, the The commercializations that we've made are similarly going to potentially provide very large scale ability to reduce plastic waste, To incorporate materials that are otherwise difficult to recycle and ultimately provide virgin like quality from those outputs. And the bio based materials are right behind that and we continue to incorporate those in solutions and I think they'll continue to evolve. I think the biggest takeaway is that we felt early on that our number one role type of commercializations we're able to announce, the type of collaborations that this has enabled, it's real. And the reason for us ultimately expanding to 30 by 30 was based on the pipeline of opportunity that we have as a company, and I couldn't be more excited about it. And It's something I think is going to go a long way towards helping address plastic waste, which is something that we've been passionate about for quite some time, and not cause the consumer to have to compromise for less effective packaging schemes.

Speaker 0

Your next question is from Arun Viswanathan from RBC Capital Markets. Your line is open.

Speaker 9

Great. Thanks for taking my question. I guess I just wanted to understand the resin and price cost Impact, it looks

Speaker 10

like this quarter, it was a little

Speaker 9

bit more outsized than normal or what we would have expected. You called out kind of the $6,000,000 But when did that really materialize? I mean, did that materialize in, say, September? And now that we've seen October, settle lower. Is there an opportunity now to regain that as you go through the year?

Or if prices

Speaker 4

So, yes, certainly as resin has gone up, I think polyethylene for like 18, it was I don't think it had gone down for 18 months in the U. S. Until the October move, if my memory is right. But, yes, certainly we've built up a I'll remove if my memory is right. But yes, certainly we've built up a significant lag with our customers on resin.

And as that moderates and we would get that back and to the extent it goes down, we would Recover some of the negative lag that we experienced on the way up. I'd tell you what the acceleration was more in the other Purchased items, there are other inputs, things like pallets, Liners, colorants, boxes, that inflation doubled From the Q3. So just as there is a lag in recovering resin, there is a lag in recovering those other raw materials and so there was a Stuff change in the cost of inflation. You saw our total inflation go from $500,000,000 last quarter to over $700,000,000 in Q4. [SPEAKER DOUG MURPHY CHUTORIAN:] We're committed to recovering it.

There's just a timing lag. And as Tom said, I think in the prepared comments, we did a great job of passing it through. We just got more work to do.

Speaker 9

Got you. Thanks for that. And then if we look at free cash flow, Similarly, you're guiding for the wide range, which we can understand since you're just starting the year. But assuming that raws do moderate as we progress through 2022, is that the main swing factor that would push you At the upper end, or is there volume or price cost considerations that we should also kind of keep in mind?

Speaker 11

I think, thanks, Matt.

Speaker 4

No, no. I mean, yes, certainly price cost is probably the biggest mover relative to the low end and the high end

Speaker 3

of the range. Would agree

Speaker 2

with that. Okay, thanks.

Speaker 0

Okay, thanks. Your next question is from Adam Samuelson from Goldman Sachs. Your line is open.

Speaker 4

Yes, thanks. Good morning, everyone.

Speaker 6

First question is a bit of clarification on something

Speaker 3

It seems that if I heard correctly, dollars 40,000,000 benefits for the year, which would have implied that that slipped to a pretty notable headwind in the Fiscal Q4 and I just want to clarify if that's actually correct and

Speaker 12

make sure I'm understanding kind

Speaker 3

of how that has evolved and what the expectation is for

Speaker 4

Yes, Chris, it's Mark. Sorry for the confusion on that. So the mix benefit started in fiscal 2020, started in Q3 Fiscal 2020. And so we had about $50,000,000 in fiscal 2020 and that number was about $90,000,000 in 2020 So it's the year over year is the $40,000,000 So the total kind of mix benefit was $90,000,000 in 'twenty one, $50,000,000 in $20,000,000 So the

Speaker 3

year over year is $40,000,000 Right. And

Speaker 4

I It did moderate It did moderate somewhat in Q4 relative to what we were pacing in Q3.

Speaker 6

Okay. And as you think about that

Speaker 3

in the 2022 guide, just what is assumed there?

Speaker 4

Yes. We've assumed that virtually all of that It's gone in 2022. Now obviously there could be some upside to that, but we've got to we've conservatively guided to Very little benefit in 2022.

Speaker 6

Okay. And then again on the guidance, just to clarify,

Speaker 3

you talked about price cost Getting

Speaker 6

recovery for inflation. It would seem

Speaker 3

the fiscal 2022 guide assumes kind of a net neutral price cost balance Where you're behind coming out of 2021.

Speaker 6

So is that conservatism on the

Speaker 3

pace of Inflation and price recovery or are you missing something there?

Speaker 4

No, it's exactly what we just talked about. So the inflation recovery is being offset by the COVID mix benefit. And so they're netting to a very small number.

Speaker 6

Got it. Okay. That's very helpful. Thank you. Thank you.

Speaker 0

Your next question is from Chris Parkinson from Mizuho. Your line is open.

Speaker 12

Great. Thank you very much. So not necessarily on a segment level, but there have been a lot of moving parts heading into But if you can update us on your thoughts on H and W, e Commerce And food safety outlooks and how that flows into your aggregate 2% growth outlook, that would be very helpful. Yes.

Speaker 3

In general, all businesses we expect would deliver low single digit growth. That's We built the business over the long haul. No doubt we're going to have headwinds in the HHS business given the amazing comps we're facing from the prior year. But based on the capital investments that we've made and we've been continued to make throughout the pandemic, We feel very good that in the back half, we'll be able to see a recovery, because these are all customer linked investments that we're making. The capital projects alone are going to generate over $400,000,000 of growth in 2022.

You heard the investments that we're making certainly In the foodservice space, that is all driven by the amazing demand that we're seeing, in our Clear Drink Cup solution, And that ultimately being translated potentially to other large QSRs inside the space. Strong foodservice is also complemented by what we have seen is a trend that continues around more at home food consumption, which is a plus. And similarly, at the end of our fiscal year and beginning in 2023, we have the benefit of a number of capital investments that we've previously $70,000,000 line in healthcare in China to support our HHS, healthcare business, already in place biopharmaceutical investments To support that space, a white line in North America as well as Europe, and an ongoing business that's very strong Our CPI business, We continue to see foodservice and beverage strength and emerging market growth. We did have some weakness in industrials in CPI, Most driven by supply chain challenges and our end customers not having access to materials that we believe will continue to mitigate over the course of the fiscal year.

Speaker 12

That's very helpful. And just as a follow-up, Just given the effort of polypropylene Recycling Coalition, we've been hearing a lot about it for what it's worth. What else needs to be done To improve overall circularity and then the overall breadth of the opportunity which you highlighted on Slide 5, it seems like there's a sincere goal Amongst you, Lyondell, a few very large customers, but what else really needs to be done to make this financially material and improve the opportunities? If you could just hit Just how this fits into the long term profitability outlook, that would be very helpful. Thank you.

Speaker 3

Yes. I think what you should take is that very increasing its objective to 30% by 2,030 is correlative to the demand creation That we're enjoying. Whenever there is demand, it helps reduce the risk on capital investment in terms of a return. [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] And our job continues to be continue to educate, continue to drive demand, and good things are going to happen in terms of the amount of capacity that's made available to the marketplace.

And it's no different than an electric car. If you listen to the electric car pundits and talk about the expansion, they say electric cars And no different. As we continue to develop the infrastructure to

Speaker 2

Thank you.

Speaker 13

Thank you.

Speaker 0

Your next question is from Kyle White from Deutsche Bank. Your line is open.

Speaker 10

Hey, good morning. Thanks for taking the question. I wanted to focus on some of the non material inflation. What are you guys doing in terms To combat against labor or transportation, are you able to go out with any non material price increases on this? And has that resulted in any increased churn?

Is there any opportunity for maybe automatization in the business? Just any thoughts there?

Speaker 2

[SPEAKER THOMAS E.

Speaker 6

SALMON BERRY GLOBAL GROUP,

Speaker 3

INC.:] Salmon Berry Global Group, Inc.:] We continue to find ways to automate and continuously improve our operations. The Incorporated any type of anticipated inflation in our outlook for 2022 in our guidance and each geography is unique. Each geography is a different labor market across the 2 95 sites that we service. So we'll we treat those all individually To make certain that we can be an employer of choice in the geographies that we serve. Relative to other raw materials, no doubt about it.

It's probably been and it will probably be the last piece to recover. And yes, we have been able to go out to customers with out of market increases based on our stance, which Throughout the pandemic, it's been make certain that beyond anything else, 1st and foremost, focus on service and delivery to our customers, And then we'll come back and we can worry about the price. We've been able to actually go out and recover some of that inflation that we've incurred based on the service around the know how and material science to ultimately reformulate have been some strategies that we've deployed to get that done.

Speaker 4

Yes. I would just add, Look, while nobody likes inflation and we're doing everything we can to mitigate the impact, we remain committed to passing it through. And I'd say competitively, Again, while we don't like it, it probably actually helps us given our scale and proximity to customer locations, right. To the extent freight costs are a higher percentage of The cost of the products are uniquely closely positioned facilities to customer locations puts us at an advantage. You asked about churn.

I wouldn't say that we've seen any increased level of churn. In fact,

Speaker 3

I would say if anything, It's decreased over recent years. I have to add to that. Throughout the pandemic and now the pipeline of growth opportunities and capital investments we can make Linked with customers to grow our business has never been more robust than it is right now. And as Mark said, we are 100% committed. We will offset the inflation and at the same time continue to bring value to our customers.

But I am very bullish on The long term outlook for our company relative to growth, the way we've operated, the way we serve and the way now that we are collaborating with customers To ultimately not only allow them to meet their growth objectives, but also their sustainability objectives at the same time.

Speaker 10

Got it. And then on alternative resin, as you move more and more towards using recycled resin or alternative resin, Is the pass through mechanism the same as it is with virgin resin? Or do you expect that these resins might be a bit more volatile, given that the market isn't as established? And are maybe You're looking to kind of shorten the lag for these specific type of resin?

Speaker 3

It's a fair question. The unique thing about the PCR based, the advanced recycling and bio based materials is that they're typically incorporated at a lower percentage of the overall volume up for the substrate. So while in some instances those materials have a higher cost, which similarly are tied to the same types of indices that we have on our base materials, It's a lower percentage of the overall product cost. As these technologies become operationalized, you will see the percentage of the content grow over time.

Speaker 0

Your next question is from Angel Castillo from Morgan Stanley. Your line is open.

Speaker 5

Hi. Thanks for taking my question. And just wanted to continue, I guess, on the circularity and some of the agreements that you've been signing. I guess, could you give us a little bit more color as to the structure of these agreements currently? How they will how you kind of expect them to evolve in terms of Becoming full contracts and as we think about this technology kind of proving itself out and moving from Whether it's pilot plans to kind of full scale, how should we think about kind of Berry's, I guess, commitment Take that product and at what point it's actually kind of fully contracted?

Speaker 3

[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP,

Speaker 2

INC.:] Salmon Berry Global Group, Inc.:] It's a

Speaker 3

mixed bag. It's either at a minimum tied to a letter of intent, if not a contractual formal agreement. Our commitment It is proven and demonstrated based on the commercial applications that we continue to market. This isn't just a headline For us in a marketing campaign, this is something that we're delivering with major brands around the world, whether it's Mondelez, Conagra, Wendy's, Just to name a few. So, we're demonstrating that these are viable technologies in the marketplace, and I wholly anticipate We'll continue to drive more demand and that's the objective.

As a leader in this industry and a thought leader around sustainability, the more we can do to create Demand, the greater the likelihood is that larger scale facilities get built and operationalized, which brings down cost, Makes it more widely recycled, creates the demand for the recycled content, which promotes the development of the infrastructure. So, we believe we're an integral part of this in driving circularity, and we could be prouder of how the team is ultimately Acting around the world, both in terms of its affiliation with the necessary alliances to drive and promote the circularity, The infrastructure development, as well as the demand with our commercial organizations.

Speaker 5

Understood. Very helpful. And then going back to the raw materials, I just wanted to clarify something. In terms of the EBITDA guidance, the higher end of the range, Does that assume some raw material, I guess, a normalization in terms of prices? And as we look at Consultant data for polyethylene and polypropylene, they have that kind of year over year and kind of in mid teens to high teens decline in terms of prices.

Is that embedded in the higher end? And also as you think about kind of sourcing currently, are you operating any differently in terms of maybe deferring some

Speaker 4

Yes, sure. Yes, as we said, the guidance assumes October polymer prices. So to the extent there's any Change going forward that would be a modification to our guidance. With respect to inventories, our number one priority is servicing our customers. So we want to make sure we've got adequate materials and product to serve our customers.

That's really our focus.

Speaker 0

Your next question is from Adam Josephson from KeyBanc. Your line is open.

Speaker 14

Mark, Dustin, good morning. Thanks very much for taking my questions. Mark, just on volumes, given that it's more than halfway through the Can you provide any update on just volume trends thus far just relative to what you said about the first half being Flat to down. Should we expect a sequential progression upward through the course of the year in terms of Rodney McMullen:] The volume number is just given the comp last year?

Speaker 2

Rodney McMullen:]

Speaker 4

Yes. I think the last part of your question is the right way to think about Adam, we would expect volumes to improve over the course of fiscal 2022 for the reasons that I think Tom mentioned earlier 21, we started off 7% 5% gross in December March respectively. Supply chain challenges continuing to abate And the new capital that we've got that's being implemented, obviously, we spent significantly more capital this past fiscal year And we've got plans to even grow that more in 2022. So as those projects come online with customer commitments behind them, we would expect the volumes to build over the course of the year.

Speaker 14

Yes. And I appreciate that, Mark. And in terms of on previous calls, you've occasionally given expected EBITDA weightings first half versus second half. And just given that you're calling out, this is a year of 2 halves, can you just Frame for us roughly or precisely what you expect that percentage to be versus years past?

Speaker 4

Yes, I think it's pretty ex 2021, I think 2022 will look more similar to prior years. Q1 is typically in the low 20s, 21%, 22% of the total and then the other three quarters are 25% ish plus 1 percent or 2%. Thanks very much. And over the course of 2022, it would be higher in the back half.

Speaker 3

Thank you. Thank you.

Speaker 0

Your next question is from Josh Spector from UBS. Your line is open.

Speaker 13

Yes. Hey, guys. Thanks for taking my question. Just a follow-up on the CapEx build for 2022 and really thinking over the next few years, Does that level increase further over time as you get more new circularity, etcetera? Or is 800 kind of the right sustainable level for us to think about.

And just related with that, it looks like maintenance ticked up about $50,000,000 maybe from how you described it earlier, anything to note around that?

Speaker 4

No. On the last part, Nothing notable of maybe there's some rounding in the percentages. I think in the past we had rounded it to 50 and This time I rounded to 45 if my memory is right. So I think it's just rounding. No change really in the level of maintenance capital.

In the first part of your question, look, I hope so. I mean, I hope we continue to have great returning projects With returns again well above our cost of capital with customer commitments, I think we're still in the early innings of Globalizing many of our products where we've got advantages in certain product categories in certain regions, obviously that was a big Positive to the RPC acquisition we made a couple of years ago and we're still in the early innings of that. So I look forward to continuing to see opportunities from our teams to reinvest

Speaker 3

I echo that. I think it's a statement to the strength of our relationships with our customers and the premium brands we're doing around the world. And That integration of our global teams, it just continues to provide significant long term revenue possibilities for the company. So very excited about it. It'd be a good problem, high quality.

Speaker 13

Yes, thanks. That's helpful. Just quickly on inventories, where would you say your inventory level is And customers and just to clarify for working capital expectations 22, are you assuming flat or is there any build back in there?

Speaker 4

Yes. We've got with respect to working capital a flat guide for 2022 embedded in our guidance. That's our typical Outlook for the year when we provide it, to the extent we have any updates as the year goes, we'll keep you apprised. I would say with respect to where we stand It's going to vary depending on product and geography. In some cases, we're hand to mouth in some product categories.

And in others, we've been able to build Larger inventory position. So again, our number one priority is continuing to serve customers.

Speaker 0

Your next question is from Phil Ng from Jefferies. Your line is

Speaker 15

Good morning, Tom, Mark, Dustin. This is John on Phil Sales. I want to first start off commending you on the progress you guys have made For the Advanced Recycling and acting as an industry leader for the plastic industry. But I did want to touch a little bit more On the financial implications, you've talked about it a little, but in terms of the contracts from your suppliers and how will you match up with Those of your customers, are they pretty well matched in terms of a timing on the pass through mechanism? And then Thinking about the margin profile for some of these products, the higher PCR, the bio resins, etcetera, as you're increasing the percentage Within the products that you're making, are they coming in at higher margins than Some of your current products, I would figure there would be some kind of elasticity on the end consumer side propelling the circularity of plastics and seeing that on store shelves.

But are you seeing that actually materialize right now? Or is it still too early?

Speaker 3

I think it's I'll start with the demand across the markets that we serve in Consumer Packaging North America, Consumer Packaging International Around sustainability continue to be amazingly robust. I'll remind you they are publicly communicated as well. We've been working with some of the leading brands that have the ability ultimately to pass any type of incorporated inflation Tied to that content along. But again, because it's being introduced as a percentage of the overall substrate, It mutes the impact somewhat. Yes, we do have different with different suppliers, different Agreement in terms of the resin pass through, many of them are traditionally built and reviewed on a regular basis.

I'll remind you, We provide a vehicle to allow these companies to help scale this new and innovative technology. The ability to be an anchor customer as part of that allows them to ultimately increase their CapEx investment and increase the size and output of those And we think that's an integral role for us. It is I absolutely have Complete confidence that you will continue to see increased use and expansion of these materials and they'll incrementally grow Over the next several years as the capacity gets increased and the scale gets operationalized, as it's operationalized, you'll start to begin to see Over time, more of an equilibrium between a virgin based material and a recycled stream. And it would ultimately, over the long term, allow more companies to decouple ultimately

Speaker 15

Excellent. And then just to follow-up on that. The And that's when you made with Pure Cycle and some of the others, L'Orealis, Repsol, what kind of due diligence are you doing on these advanced chemical recyclers? What goes into it in terms of, is it just based on your needs from polyethylene, polypropylene, that type

Speaker 16

of resin? Or is it

Speaker 15

Actually checking and seeing how well they can scale up their operations, is it location of their footprint? How are you kind of determining what gets announced and who you partnership with?

Speaker 3

Listen, I think we've been very vocal that we want to be a leader in this. And so we have the ability to have those Investments introduced to us early on, and we would do our due diligence as we would any capital investment or any We tour facilities, meet with management, understand ultimately what their level of technology know how are, what their scale ambitions are to And the technology, the know how, geographically where they reside versus other locations, and we're actually going to produce the product. All those are factored into the analysis.

Speaker 0

Your next question is from Mike Leighton from Barclays. Your line is open.

Speaker 11

Great. Thanks, guys. I'll be brief.

Speaker 3

I just wanted to ask on the

Speaker 1

shift in guidance to EPS from EBITDA. Maybe you could

Speaker 11

just Watch out some of the thinking on why you now felt this is the right time for the company to do this. Relatedly, I think historically annual incentive comp Was largely driven by an adjusted EBITDA target. So when we see the proxy come out shortly, should we see that shift to EPS moving forward? Thanks.

Speaker 4

Yes, sure. I think the EPS is just simply to align to peers. And with respect to EBITDA, obviously, That's the starting point for EPS. So certainly it's the largest driver of our earnings.

Speaker 2

So it's

Speaker 4

still a very important metric relative to the company's performance.

Speaker 0

Your next question is from Mike Roxanne from Stravitz. Your line is open.

Speaker 17

Thanks very much guys. Just one quick question. You mentioned that inflation doubled in fiscal 4Q, and you highlighted some non material items, pallets, What's the time period in

Speaker 1

which you can recover those items? I believe that over time

Speaker 17

you try to improve your contracts with the

Speaker 16

So given the rapid rise

Speaker 17

in those inputs, 1, what's the time period you have

Speaker 3

Yes. On the other raw materials, it really is a mixed bag. And to be frank, we've been pursuing pre price active and often Relative to recapturing that inflation, during these periods of time when you have instability in supply chains that you've seen over the last 18 months, the Primary objective for the customer often is supply 1st and foremost. And everyone's dealing with that. And when we talk about Supply chain, it's not necessarily just on a bare hands.

In some instances, certainly like we saw in our CPI organization in Europe, it's the fact that [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] The end users themselves could not get the components for the required materials that they were purchasing from us or in the United States, a component that would ultimately allow a filling line fill a prescribed material. They may not need the material. So, it's been felt by everyone. This is not an era where it's just From one company to another, we're all in it together.

We're passing it on. We're focused on doing it in a fair and balanced way, and we remain 100% committed that we will recover 100% of that inflation and be price cost neutral by the Q3.

Speaker 4

Yes. So our agreements are coming up perpetually. They're continually coming up. We don't have all of our agreements on a Specific date, so they're coming up with customers on a daily, weekly basis.

Speaker 0

Your next question is from Jeff Zekauskas from JPMorgan. Your line is open.

Speaker 8

Thanks very much. If it turns out that polyethylene and polypropylene prices dropped another $0.13 a pound over the next 3 months, how much more would you earn?

Speaker 4

Yes, I don't know that it depends there's a lot of variables in that depending on when it goes down. Customer agreements work differently in terms So the trigger points, I mean you can look at our earnings through different cycles. We have pretty efficient pass throughs. Again, there is a modest Timing lag and again it's going to vary by customer. So there's no unfortunately formula I can give you that for every And it equates to blank of earnings, because it really depends on the timing and the grade and, the mix of business.

It's unfortunately not a mathematical formula that I can provide. But obviously, in total, we experienced A lot of headwinds last year as it related to timing lag and certainly to the extent of drops That would go the other way. It wouldn't be a windfall, as Tom said.

Speaker 3

How much were volume

Speaker 4

Yes. I would say hard to again get an exact number for that. I think the best way we've looked at it is coming into the quarter we low single digit volume growth and we came in minus 1%. So 2% to 3% is probably our best

Speaker 0

Your next question is Salvator Quijano from Seaport Research Partners. Your line is open.

Speaker 18

Yes, hi. So A little bit on volumes. Again, try to understand, given what's happening with the supply chain and as you Just mentioned the 2% to 3% probably feedback we had in fiscal Q4. What gives you confidence that you will still do 2% next For the full year on average, if probably you're going to be challenged in the 1st part of the year. And secondly, I just want to clarify, Is the 2% including any impact from fewer days or is it a comparable number?

How should we think about that?

Speaker 4

Yes, it's apples to apples. So the numbers that we're providing are adjusting for the days. Just like we did In fiscal 2021, when we reported, we made the appropriate adjustments for the days. We'll do the same thing in future periods. With respect to supply chain, look, we are seeing some improvements.

So I think that's what gives us confidence.

Speaker 3

And in DISH, we spoke about it. We've got about 4 $400,000,000 in growth in 2022 all tied to capital investments that we've made and we've factored in when those will become commercialized Over the course of the fiscal year. So it's really based on those commitments and those capital investments that we've continued to make throughout the pandemic.

Speaker 0

Your last question is from Gabe Hajde from Wells Fargo Securities. Your line is open.

Speaker 16

Good morning, guys. And I apologize in advance for somewhat of a long winded question. But It's 2 part. One is, I'm a little surprised we're not thinking about kind of the inflation that might hit the consumer next year. And in short, what has been sort of your experience in terms of trade down effect?

And I'm thinking about just, I don't know, template steel that could be up 100 Next year and what that does for the cost of the canopies or something like that. So again, if there's any benefit or thought around that. And then longer term, what we've seen here recently kind of the vulnerability of our supply chain or the supply chain, Particularly on the kind of steel aluminum side to what some other countries may or may not choose to do, as well as the energy intensity of those competing substrates. How are your customers thinking about risk mitigation and cost of packaging? And again, given the fact that a lot of the inflation that we saw kind of on the resin side at least was probably more weather related as opposed What was going on again in other parts of the world?

Just trying to understand the cost competitiveness of plastics and energy intensity versus other substrates?

Speaker 2

[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] Yes. I'll answer it best I can.

Speaker 3

But if you look at our portfolio, the diversity of it and how we're ultimately able to Consistently and dependably deliver free cash flow and earnings year in, year out. It's really the nature of the portfolio, and they're amazingly resilient. And we've seen In previous economic recessions or otherwise or downturns or periods of diversity, Our product categories hold up very, very well. These are not discretionary. They're products that, to a large extent, people have to consume every day, and they And we have no concerns about the resiliency

Speaker 2

[SPEAKER EDLAIN K. C. D. BAIRD AND COVID-nineteen, INC.:] D. Baer Pettit MSCI, Inc.:] Of

Speaker 3

this growing raw material, that we ultimately convert, that being plastics, and its competitiveness versus other substrates. [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] I would argue it continues to be a preferred material in the markets in which we serve. The advantages that it brings our customers, both in terms of some of their sustainability goals and objectives, lightweighting, and as I said, the cost Competitiveness and the feature benefits in terms of engineering design are most optimal with plastics as a substrate. And that's You've seen us have success, and we continue to believe that we'll be a low single digit grower and then some long into the future based on the robustness of the portfolio and the [SPEAKER J.

PATRICK O'SHAUGHNESSY:]

Speaker 2

Patrick Gallagher, Jr.:] Thanks.

Speaker 3

[SPEAKER DOUG MURPHY CHUTORIAN:] Listen, guys, I appreciate all your interest in our company. We're about 15 minutes past the hour, and we just want to extend our thanks and appreciation. Continue to stay safe and we'll talk to you at the next call. Take care.

Speaker 0

This concludes today's conference call. Thank you for participating. You may now disconnect.