Berry Global Group - Q4 2022
November 15, 2022
Transcript
Speaker 0
Day, and thank you for standing by. Welcome to the 4th Quarter 2022 Berry Global Group Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' 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, Investor Relations. Please go ahead.
Speaker 1
Thank you, and good morning, everyone. Welcome to Berry's 4th fiscal quarter 2022 earnings call. Throughout this call, we will refer to the 4th fiscal quarter as the September 2022 quarter. Before we begin
Speaker 2
our call, I I'd like
Speaker 1
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 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. Please note that in our commentary today and within our presentation, when we compare our results to the prior year quarter or full year, We have adjusted to present on a constant currency basis and remove the impact of divested businesses to provide the appropriate comparable results. Reconciliations to reported results have been provided in our earnings release and the appendix of our presentation. 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, Annual Report on Form 10 ks and other filings with the SEC.
Therefore, the actual results of operations or financial condition of the company And now, I'd like to turn the call over to Berry's CEO, Tom Salmon.
Speaker 2
Thank you, Dustin. Welcome everyone and thank you for being with us today. Turning to our key takeaways for the quarter fiscal year on Slide 4. First, our business delivered solid full year fiscal results, including record results for both revenue and earnings per share, growing 10% and 7% respectively, Coming off another record year in fiscal 2021. Secondly, throughout the last 2 years, we've seen significant cost inflation Taken proactive pricing actions and invested in cost reduction projects across our businesses.
Our team has done an exceptional job and continue to make progress on both fronts. 3rd, during the year, we generated a substantial $876,000,000 of free cash flow and returned $709,000,000 to shareholders via share repurchases or approximately 9% of our total shares outstanding. We continue to invest for long term growth while making great strides towards our sustainability goals and we'll continue to be ambitious with our commitments, which are leading Consistent opportunities to expand our relationships with our global customer base. Additionally, As you saw in our press release issued this morning, Berry has decided to initiate a quarterly cash dividend, which is a significant milestone for the company, while also increasing our capacity under our stock repurchase program to over $1,000,000,000 And finally, on today's call, we will review our Fiscal year 2023 goals and commitments, which include a continued focus on organic growth, inflation recovery And reducing our costs along with the opportunity to deliver strong returns on cash to shareholders through further share repurchases, Taking advantages of our significantly undervalued share price. Turning now to the financial highlights on Slide 5.
Our September quarterly performance was modestly below our expectations on revenue and EBITDA, which was primarily impacted by continued inflationary pressures And pockets of supply chain challenges, which resulted in softer customer demand along with the strengthening of the U. S. Dollar. The company again demonstrated its ability to generate substantial cash delivering record free cash flow in the quarter. From an earnings perspective, EBITDA was up over 9% and adjusted EPS increased an impressive 18% from the prior year quarter, including an improvement in price cost spread of $58,000,000 As we've demonstrated historically And during the most recent quarter, we remain committed to passing through inflation and believe we are well positioned given our scale Along with our ability to service our customers from our facilities in close proximity to locations, which provides both cost and sustainability advantages.
For the full year, we delivered revenues of $14,500,000,000 a 10% increase in fiscal year record, And we met our adjusted earnings per share target of $7.40 And finally, we exceeded our most recent Annual free cash flow guidance by $125,000,000 driven by strong working capital management. Also, we were able to delever for the 3rd consecutive year ending the fiscal year at 3.7 net debt to EBITDA, which is our lowest leverage ratio as a publicly traded company. Additionally, as you saw in this morning's announcement, our Board of Directors has authorized an additional $700,000,000 for share repurchases in addition to our current program, which has approximately $340,000,000 remaining, Putting the new total authorization over $1,000,000,000 We believe our shares are significantly undervalued This increased authorization reflects our confidence in the outlook of our business, our long term strategy and the strength of our operating model and cash flows. Before I hand over to Mark, I want to cover a couple of slides. Specifically Slide 6 details our original fiscal 'twenty two guidance to where we ended the year.
Fiscal 'twenty two provided some unique hurdles from an operations and demand perspective, not to mention Forecasting challenges throughout the year. We are very fortunate to have such a dependable and diversified portfolio, which only saw modest headwinds on demand Enabled us to meet or exceed our guidance for cash flow and earnings per share. On Slide 6, we have provided a comparison Of our original guidance to actual fiscal 'twenty two results, as you can see, the majority of the headwind was a result of foreign currency due to the strengthening of the U. S. Dollar, Along with softer customer demand, which despite our very stable and diversified portfolio, we weren't entirely immune to.
In our consumer businesses, which represents 70% of our portfolio, demand remains steady. Our scale, global end markets and product diversity provides a rather insulated demand profile for Berry. Though distribution and industrial markets did see some modest headwinds throughout the year in areas such as automotive and building and construction, We anticipate these to recover as overall global markets improve. And lastly, I'm proud of the agility of our teams working with customers as Costs were consistently increasing throughout the fiscal year as a result of inflation. To put it into perspective, Costs increased over $1,600,000,000 during the fiscal year and we were able to offset these inflationary pressures.
While we did end the year improved from price cost spread, we have more inflation to recover and expect additional improvement in cost reduction benefits in fiscal 2023. On Slide 7, in both the near and long term, we remain focused on driving consistent, Dependable and sustainable organic growth. 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 end markets, which offer greater potential for differentiation and growth, such as healthcare and pharmaceutical. Additionally, We will continue to invest and expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster growing end markets along with continuing to invest in emerging market regions, we will further enhance our ability to provide consistent, Dependable and sustainable long term growth.
We've done a great job since our IPO in 2012, growing our emerging markets from less than 2% To now 15%. Longer term, we believe our emerging market presence can be more than 25% of our total revenues. And lastly, innovation and sustainability are increasingly embedded in everything we do, and we continue to believe this represents a great opportunity for growth And differentiation, as I'll discuss in our later prepared remarks. Now, I'll turn the call over to Mark to review Berry's financial results. Mark?
Speaker 3
Thank you, Tom. I would like to refer everyone to Slide 8 for our quarterly and fiscal year performance by each of our 4 operating segments. Our businesses continue to perform well and focus on inflation recovery and generating cost productivity, while driving long term sustainable organic growth. Our Consumer Packaging International division increased revenue by 8% over the prior year quarter and 11% for the year, primarily from the pass through of inflation And improved product mix. In the quarter, we saw relatively flat demand across our consumer facing categories such as food and beverage, While demand in more discretionary markets such as automotive and surface coatings experienced some softness, along with the lockdown in China having a modest Negative impact on our volumes.
On a 2 year basis, organic volume growth was 2%, driven by capital investments in growth categories Such as closures, dispensing systems and healthcare. EBITDA improved 10% in the quarter over the prior year driven by product mix improvements, Inflation recovery and cost productivity. Next, on Slide 9, our Consumer Packaging North America division delivered growth in the quarter And a 14% increase in revenue over the prior fiscal year, which included pass through inflation and flat volumes coming off a strong 4% organic volume growth delivered in the prior fiscal year. We were able to offset softer demand with organic volume growth from recent capital investments. On a 2 year basis, organic volume growth was 3% As we continue to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable Drink cups used by quick service restaurants and convenience stores.
EBITDA increased by an impressive 27% And 13% over the prior year quarter and fiscal year respectively, as we made continued progress on inflation recovery, A modest reduction in revenue for the quarter from the pass through of lower polymer prices on flat volumes. For the year, revenue increased 3% Over the prior fiscal year, primarily from the pass through of inflation, partially offset by the moderation of advantaged products related to COVID. On a 2 year basis, organic volume growth was 2% with continued market growth in nonwovens. EBITDA was down around 25% for the quarter and fiscal year as expected due to the benefit from the pandemic related mix a year ago And the lag in recovering inflation on costs other than polymer. We continue to pass through these cost increases to our customers and expect earnings will improve sequentially and will be back to positive price cost spread on a year over year basis in the Q3.
And on Slide 9, revenue in our Engineered Materials division was down 7% for the quarter due to lower volumes and finished 10% higher for the fiscal year, Primarily from the pass through inflation, the volume decline as anticipated versus the prior year was primarily related to our focused effort to mix up in certain categories along with softer demand from the distribution market, which we believe included some destocking In anticipation of lower polymer costs, EBITDA was up an impressive 28% over the prior year quarter and 13% over the prior year From our focused effort on improving sales mix, the higher value product categories along with cost inflation recovery. Next, our fiscal 'twenty three guidance and assumptions are shown on Slide 12. We are expecting to generate between $7.30 The $7.80 of adjusted earnings per share, which at the midpoint would be another fiscal year record and our 10th consecutive year of delivering EPS growth, which I am proud to report that we have done every single year as a public company. For comparison purposes, fiscal 'twenty two adjusted for divestitures And recent currency rates was $7 per share. At our 23 midpoint, we would deliver another strong year year over year growth of 8%.
Given the timing lag of inflation recovery, seasonality and timing of cost reduction actions, we expect earnings to be stronger in the second half of 'twenty three similar to 'twenty two. Our comparable EBITDA at the midpoint is expected to grow approximately 5%, which includes continued inflation recovery along with continued cost reduction benefits. Additionally, we expect free cash flow to be in the $800,000,000 to $900,000,000 with cash from operations of $1,400,000,000 to $1,500,000,000 Less capital expenditures of $600,000,000 Our cash flow outlook includes headwinds from foreign currency And higher interest rates than fiscal 2022 and some incremental non recurring costs from cost reduction initiatives. Our cash flow year in and year out has been a dependable key strength and core value of our company. It provides us the opportunity to invest in our businesses to grow and become more efficient while returning capital to shareholders.
As you can see on Slide 13, our capital allocation strategy remains consistent and return based And includes continued investment in organic growth and cost reduction projects, share repurchases, debt repayment and a new quarterly cash dividend. In fiscal 'twenty three, we expect to return $700,000,000 or more to shareholders via share repurchases and dividends, including an approximate 2% dividend yield, while further reducing our shares outstanding by nearly 10% at current valuation levels. We believe we are well positioned for continued value creation through both our dependable and consistent free cash generation And strategic portfolio management opportunities provide us additional capital for opportunistic share repurchases and further debt repayment. This concludes my financial review and I'll turn it back to Tom.
Speaker 2
Thank you, Mark. Our fiscal 2022 results are yet another example of our proven operating As you can see on slide 14, we have consistently driven Top tier results in nearly all key financial metrics, including strong compounded annual growth rates for revenue, earnings and free cash flow, including Growing our adjusted earnings per share every year as a publicly traded company. This year, we grew adjusted EPS by 7% and we expect fiscal 2023 3 to grow by approximately 8%. Our business model has proven resilient, including A broad portfolio of plastics packaging solutions with strong, dependable and stable cash flows to allow us the flexibility To drive strong returns for our shareholders. From our current viewpoint, global market demand for our industrial markets will create a choppy demand environment.
We will continue our focus on inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization Throughout our global footprint to offset any demand challenges. Next on Slide 15, since the RPC acquisition in mid-twenty 19, Over the past 3 years, we have reduced our net debt by nearly $3,000,000,000 including over $1,000,000,000 this past quarter. Furthermore, in fiscal 2022, we returned an additional $709,000,000 to shareholders via share repurchases, totaling over $3,500,000,000 of value returned to our shareholders, while growing our adjusted earnings per share more than 70% Since the RPC acquisition, fiscal 2022 marks the 3rd consecutive year we've reduced our leverage ending the year At 3.7 percent net debt to EBITDA. Next, I want to quickly highlight the news we announced earlier today. We are proud to initiate this new quarterly dividend and authorize supplemental buyback program.
This announcement is clear evidence The work that Berry teams across the globe have completed to position the company to succeed. Today, Berry is stronger than ever has been, And this dividend initiation underscores our commitment to enhancing long term value for all stakeholders. Another element to our value creation has been the strategic investment choices we've made and how we prioritize our investment in our business. We are investing in several markets and product categories that we expect to drive long term organic growth and complements our ongoing efforts of building and increasing resilient portfolio of products, including a few of those which we've highlighted here on Slide 16. 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 end markets which offer greater potential for differentiation and growth like healthcare, Personal Care and Pharmaceutical.
As you can see, we expect these strategic investments to contribute over $300,000,000 in revenue over the next few years. We believe we are well positioned to continue to deliver significant value for our customers and shareholders through these investments, Like those presented with an unmatched global footprint and design capabilities to support circularity. Our second dedicated mechanical recycling facility Located in Europe and pictures in the center of the slide will be operational in Q1. As a top 5 polymer recycler in Europe, This new facility will enhance our capacity for post consumer recycled products that are demanded more and more by our customers globally. This site is the world's 1st closed loop system to mechanically process domestically recovered household waste polypropylene back into food grade packaging Our investments in both innovation and sustainability Provide us a competitive advantage and are increasingly embedded in everything we do.
Innovating circular and sustainable solutions Remaining key aspect of our long term decarbonization and global growth strategy. We see increasing demand for these products, which include attractive design and sustainability advantages that we believe will support longer term higher growth opportunities. Our advantages include the ability to both produce and source recycled resins globally, along with our We will continue to invest in global innovation capabilities and centers of excellence to capitalize on what we believe is one of our Strongest growth opportunities, that being the overwhelming demand for sustainable packaging solutions. Moreover,
Speaker 3
as you can
Speaker 2
see on slide 17, We continue to make great progress on our sustainability targets and have committed to minimizing product impact by enabling 100% of our fast moving consumer packaging products to be reusable, recyclable or compostable by 2025. We are continuously innovating and investing to work towards the global goal of a net zero economy. Next, We are proud to highlight that Berry has received the 2022 Energy Project of the Year from the Association of Energy Engineers for our milestone goal Our equal to CO2 emissions required to power over 16,000 homes for 1 year. Further, From a collaboration standpoint, we partnered with In GreenDance to launch a bottle of a tear care product line made from 100% Post consumer resin, we also recently announced our launch of a new Mars jar for the well known products such as M and M's, Skittles and Starburst, which will be lighter in weight and include 15% post consumer resin. And lastly, Announced recently at PAC Expo, Berry received the prestigious Sustainability Technology Excellence Award For our tethered closure with a tamper evident band, this innovative packaging solution cuts down on waste by securing the closure to the bottle and improving recyclability.
In summary, our strategic priorities remain unchanged. Our entire global team's emphasis Working safely and servicing our customers remains our number one priority and has made us a stronger, better and safer company. We will continue to operate with Agility as we navigate current market dynamics to drive sustainable growth, while recapturing inflation. At the same time, we remain focused on executing our long term strategy of driving shareholder value, expanding our competitive advantages And delivering on our financial priorities to position Berry for long term success. I'm very pleased with the hard work of our employees, Delivering solid results in the face of persistently higher costs and a dynamic global economy.
I thank you for your continued interest in Berry. And at this time, Mark and I will be glad to answer any of your questions.
Speaker 0
Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open. Gansham, your line is now open.
Speaker 4
Thank you. Sorry about that. Good morning, everybody. Hey, Tom, just on
Speaker 5
your comments on driving cost benefits through automation and asset optimization, can you just give us a better sense of Just expand on those comments, is it targeted towards any specific segment across your portfolio? And then just a follow-up question for Mark in terms of the variances On price cost for fiscal year 2020 3 versus 2022, anything you could share there?
Speaker 2
Ghansham, automation is a priority across the entire portfolio. Throughout the company, we've got over 125 dedicated technicians supporting automation projects as well as our internally Proprietary fabrication capability. We're partnering as well with 3rd parties to help us similarly execute those programs at a faster pace. We're making capital investments to support lower cost assets. For example, electric machines in Europe to ultimately reduce our energy costs, Increase throughput yield as a result.
So it's all part of that up to and including what we've been doing around global asset optimization. That meaning Moving more and more business to more higher productivity assets that we have throughout the chain to lower our conversion costs, reduce energy dependence, While at the same time, been able to successfully serve our customers.
Speaker 3
Yes. Good morning, Ghansham. With respect to price cost, As you probably noted, we have about $100,000,000 of growth embedded in our EBITDA guide for 2023 on a constant currency And adjusted for divestitures assumed for the year, that growth is coming from price cost, A little more weighted towards the cost side. As Tom mentioned, we've got a lot of capital driven cost reductions that are coming through. And then we've got some price recovery from inflation that we haven't yet recovered from customers Making up the rest of that $100,000,000
Speaker 5
Okay. And then just last quarter, you talked about perhaps carrying higher inventory levels just based on Issues with rail, freight movement and so on and so forth, have things normalized? I'm just trying to understand how you outperformed from a working capital standpoint.
Speaker 2
Things have clearly normalized. We're keeping an eye on the rail negotiations that are underway right now. We've got a backstop, should anything materialize in that regard as well pivoting from rail to more, traditional means Over the road hauling, but nonetheless, not a concern. It's certainly normalized for us and we were happy to make it through the hurricane season relatively unabated.
Speaker 3
I would say Ghansham with respect to your question on working capital, volumes as we mentioned came in slightly lower than we And then obviously, not the way we want to get there, but certainly that helped working capital as the year closed out. And I'd say our teams did a nice job of Adjusting both purchases on materials as well as our finished good quantities as the year closed out In spite of these challenges, we've had on the supply chain.
Speaker 6
Okay, very good. Thank you.
Speaker 0
Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.
Speaker 7
Good morning. Tom or Mark, just following up on Ghansham's question, The free cash flow guidance for 2023, does that assume that the I think the $150,000,000 inventory headwind that you referenced earlier Reverses or do you get that back next year? And then just in terms of the guidance for 2023, are there any underlying volume assumptions for the Company and then directionally as we think about the 4 segments, any segments where you would expect volumes might be stronger or weaker in 2023?
Speaker 2
I'll start with the overall. No doubt about it, we when you think about 2022, it's a very dynamic and Challenging year and frankly quite proud of the team on a 2 year basis delivering 2% volume growth given that 2021 was a very, very strong year We see that similar dynamic and economic backdrop as we enter our fiscal 2023 as well. There continues to be inflationary pressures. There's pockets of supply chain challenges that are out there. And frankly, our end customers are pointing To a near term outlook that is a little softer customer demand.
Nonetheless, we believe that the capital investments that we're making Better position us versus the market and position us well for the long term for low single digit growth. And clearly, as it relates to demand in that outlook, any deviation we see in terms of demand across the Fiscal year, we'll address with cost and productivity initiatives.
Speaker 3
Yes. On working capital, Anthony, we typically assume 0 Impact, obviously, the year is just getting started here. So, we'll see as the year progresses. As we start the year, polymer is a tailwind In the U. S, which is our largest cost category, but obviously with the situation with energy in Europe, We got a long road here ahead of us for the year.
So, we'll see how the year plays out, but we've assumed 0 in total for working capital in 23, which is consistent with You know how we've done in the past.
Speaker 7
Okay. That's helpful. And then just the return of capital announcements are really welcome. In terms of the dividend and your approach there,
Speaker 3
can you talk about the approach to
Speaker 7
the dividend and maybe possible dividend growth in the future? Are you targeting a certain payout or a certain yield or is there sort of a benchmark or peer set that you're looking at? Just any thoughts there.
Speaker 2
Well, 1st and foremost, we're thrilled to make this historic announcement today, the first dividend in our 10 years as a publicly traded company, really driven by You know the confidence that we have in our operating model and the resiliency of the portfolio and its ability to consistently deliver Strong operating income and cash flow from operations, and that's given us the confidence, coupled with feedback from our investors, which There's been a percentage of our customers that have been interested in the initiation of a dividend. It similarly gives us access to a new shareholder base as well that Ultimately may look at that as a precursor for investment that we've otherwise not been able to take advantage for. And given that we believe our stock is Tremendously undervalued right now. That coupled with the share repurchase authorization, we think is a great combination for Both existing and new shareholders for our company.
Speaker 3
Yes. With respect to, I guess, the quantity, Anthony, certainly, we have More than adequate cash flow to support this dividend and obviously a much larger dividend. We thought it was the right starting point given it's In line with kind of the broader market S and P. And with respect to future announcements on increases, I'd say stay tuned on that. Nothing else to communicate in that regard.
Speaker 7
Okay. That's helpful. I'll turn it over.
Speaker 0
Our next question comes from the line of George Staphos with Bank of America. Your line is now open.
Speaker 8
Hi. Yes, this is actually Tashin Keeler on for George this morning. Thanks for taking my questions. So just building upon some of the Prior questions, can you just comment on what your growth trajectory is here in the Q1? And I guess relative to 2023, The company had some challenges in hitting its growth outlook in 2022.
So, which ultimately give us confidence or comfort In 2023 that this pattern won't repeat?
Speaker 2
Appreciate the question. As I stated earlier, our continued investment That we've made in CapEx alongside our customers, we believe puts us in a better position Relative to the market and given that it's customer length, it gives us great confidence going forward. We're not immune to the dynamic economic backdrop that you heard from a lot of folks. And considering that Barry is coming off of a record 2021 and on a 2 year stack basis to be plus 2%, Given that environment, I think the model has proven itself out, not to mention the resiliency of a portfolio that's 70% tied to very steady resilient businesses that people buy regardless of the economic That they're facing. And this business has performed incredibly well in those environments.
That coupled with our ongoing investment in our low cost Manufacturing base and footprint and ongoing investments around sustainability can ultimately offset any type of weakness that the market may provide In terms of demand, but as we said, we clearly have a near term outlook with around softer customer demand based on our end customers With a stronger back half, but we clearly will pull the levers necessary to deliver on the results.
Speaker 3
Yes. And again, longer term, we continue to view the business as a low single digit growth business. We continue to pivot To markets that are higher growth like health and wellness, personal care, and certainly investments around sustainability, we think are going to be is going to be a future Growth driver for our company. No change in that regard.
Speaker 8
Okay, great. And just early trends here in the Q1?
Speaker 2
Software similar to how we exited 2022. The market continues to be challenging and the team is performing very well. And as we said in our prepared comments, The commitment to offset fully all inflation that we're exposed to continues to be front center as we start our fiscal 2023.
Speaker 8
Okay, thanks. And just one quick follow-up, just relative to that $300,000,000 of revenue from those growth investments over 2023 2024, how can we think about the cadence of that kind of layering in here?
Speaker 3
Yes. I don't have the exact granular detail in front of me. I don't think there's a big hockey stick As I think about those projects that are outlined on those pages, some of those are coming online as we speak. So, I don't think if you just modeled it ratably Over the next 8 quarters, I don't think that would be significantly different.
Speaker 6
Okay. Thanks.
Speaker 0
Our next question comes from the line of Phil Ng with Jefferies, your line is now open.
Speaker 9
Hey, guys. Any update on any potential divestitures? Certainly, the credit gotten a little tougher. Has that made it a little more challenging to execute? And on the flip side, did the move that you've kind of announced today in terms of returning cash Back to shareholders, limit your ability to kind of pursue bolt ons, call it 2023?
Speaker 2
It doesn't impact Our ability to pursue bolt ons, we're going to operate the company within our targeted range between 3x and 3.9x relative to prospective divestments. And we have nothing to report for this call. It continues to be an area of opportunity for us. And as you said, Phil, As the markets ultimately provide those opportunities and we believe that we'll have assets that ultimately can contribute to That strategy and ultimately be deployed in other areas of the company.
Speaker 9
Got you. And then Mark, if I heard you correctly for your 2023 guidance, you're Assuming $100,000,000 price cost tailwind, can you kind of unpack how much of that is cost as it relates to potentially deflation versus Some of the good stuff you guys are doing on the self help side, taking costs out. And then on the pricing side, in a potentially Following resin environment, do you have the ability to get more price, especially on the non resin piece, which dinged you up a little bit this year, but Made pretty good progress to kind of wrap up last year. Thank you. [SPEAKER EDWARD K.
Speaker 1
ALDAG, INC.:] Aldag, Inc.:]
Speaker 3
Yes, sure. Thanks, Phil. I guess the good news and the bad news is we've done an Excellent job of tightening up our lag on resin pass through. As you as I'm sure you saw the last fiscal year, resin was very volatile, Up and downs and kind of record movements. And yes, you saw our earnings have very little impact on our earnings.
Speaker 10
So, Team has done
Speaker 3
a great job of mitigating the impact of resin on our earnings. That's also again kind of the bad news and that as resin drops, We pass that through very efficiently. To your point though, it certainly provides a good backdrop relative to passing through Cost increases outside of resin, and we're certainly active in doing that. And as we said, about I'm going to call it about a fourth of the improvement we're expecting in earnings next year to come from Improved price cost with our customers with the remaining coming from cost reduction efforts the company is initiating, which would include Moving getting more efficient on material usage, which could involve changing suppliers, for example.
Speaker 4
Okay. Thanks a lot.
Speaker 11
Appreciate the color.
Speaker 0
Our next question comes from the line of Josh Spector with UBS. Your line is now open.
Speaker 12
Hi, it's Chris Perrella on for Josh. I just wanted to follow-up on the Engineered Materials. How much of the volume decline in the quarter was due to deselecting? And when do you see the portfolio, The product portfolio set at this point?
Speaker 2
Yes. We'd anticipate in the back half of our Fiscal year, we'll begin to see sequential improvement on the demand front. This has been a conscious effort Inside this predominantly distribution served business to continue to refine our business mix Alongside of some of the capital investments that we've made specifically around areas like multilayer converted films and transportation films. Now in distribution, clearly there has been impact throughout the year just from general destocking efforts that are underway periodically just based Distributors trying to anticipate lower input costs, but I'd say the back half of
Speaker 4
the year will be at
Speaker 2
a more normalized rate. Couldn't be prouder of the work that this team has done In offsetting its inflation, while at the same time, refining and improving its business and its product line mix. So really happy about the group.
Speaker 12
So just to clarify that, so the product line mix, is that set at this point and then you're just waiting for the market Grow or do you still have more bottom slicing to do in the unit?
Speaker 2
There'll be still some work to do in the front half of the fiscal year.
Speaker 12
All right. And then a quick one on CapEx. It's a bit lower than what it's been the last couple of years. How does that Lower CapEx breakout between growth and sustaining versus what you initially expected?
Speaker 3
Sure. Yes, about half of our CapEx, maybe a little more than half is what I would refer to as Maintenance or sustaining. As you mentioned, we've done a great job of increasing The output of our existing assets, so we've got plenty of capacity to grow within the system. So we're going to continue to invest in growth, Tom said behind our customer commitments, but we've got room to grow. We're focused on filling the assets and the Production capabilities that we have, but it's about half and half, reiterating what I said earlier, about half maintenance and the remaining half Split between cost reduction and growth and many of those projects contain both elements, right?
Many of our capital projects are adding capacity and also Reducing cost on our base business.
Speaker 12
All right. Thank you very much.
Speaker 0
Our next question comes from the line of Kyle White with Deutsche Bank. Your line is now open.
Speaker 13
Hey, good morning. Thanks for taking the questions. On the destocking impacts, are we fully cycled through the impact in HH and S from COVID advantaged products? Then you called out some destocking impacts in Engineered Materials, but are you seeing any other impacts from destocking in the consumer segments as well?
Speaker 2
I know that's been pointed to a lot in a lot of the earlier calls and communications. We look at it, nothing has To the point that we would say is dramatically unusual. However, in HHS, their destocking was specifically tied to the COVID benefited areas. Again, that business had more benefit net tied to COVID. In Engineered Materials, that's a regular aspect of that business given its distribution nature and People trying to time benefits in terms of inflation and deflation.
Does that help?
Speaker 13
That does. I guess on the mix impact in HH and S, is that fully cycled through though?
Speaker 2
Mark, yes, that stated. Yes.
Speaker 3
I think we're We're effectively cycling through that on a year over year basis.
Speaker 13
Got you. And then just on a follow-up, in Consumer Packaging North America, can you provide a bit more details on the volumes there? Called out softer customer demand. What exactly was that related to? And are inflationary pressures having any impact on your foodservice demand there?
Speaker 2
Listen, I would compare both CPNA as well as CPI. I mean, overall, in the food and beverage Basic Personal Care businesses, they continue to demonstrate their resilience certainly versus other discretionary spaces. Those teams have really done a nice job in terms of execution, both on price, given The stable demand in the United States and even in Europe, given where there's been some softer customer demand, nonetheless, both those businesses Arguably, 2 of the most stable pieces of our portfolio making up 70% of what we do. And our overall demand in those businesses looks very much like the large CPG Global customers that we serve. From a foodservice perspective, the advantaged nature of our portfolio specifically around all polypropylene, Recyclable clear drink cups continues to be a winner for us both in terms of consumer acceptance As well as the sustainability advantage and we continue to be pleased with the progress inside that space.
Speaker 13
Thank you. I'll turn it over.
Speaker 3
I'd add Kyle on my comments on having capacity. I would exclude that product line from my comment. We're essentially sold out in our foodservice product line And we've got more demand than supply at the moment. We're adding supply. That's a chunk of our CapEx that we committed to In the last 18 months, we're continuing to add supply to meet the customer demand in that area.
Speaker 13
Sounds good. Appreciate that, Mark.
Speaker 0
Our next question comes from the line of Adam Samuelson
Speaker 14
Maybe, Mark, just following up on the comments you made on capacity and understanding kind of the point on The drink cups in North America and CP and A. Can you just frame what volumes could grow over a 1, 2 year period 2, 3 year period Inside the organization, with the capacity you have without really needing more investment. Just trying to think in the context of fiscal 2, where volumes were down slightly versus your initial expectations of up. It doesn't look like there's much volume growth really embedded in the fiscal 20 3 plan and you've kind of again taken the CapEx a little bit lower than we might have thought previously, which all would suggest there's some scope to grow into The current network without putting a lot more capital to work.
Speaker 3
Sure. Yes, obviously, mix is important. We have Asset flexibility on many of our assets, some have less flexibility. So foodservice, we mentioned on that particular asset platform, we're sold out. We have other asset platforms that have Capacity and we're out actively selling in those markets.
To the extent we don't see demand improvement, we're certainly prepared to take Actions on the cost side, and we're doing that and we'll take more if necessary, but I'd say we have adequate Capacity to meet our low single digit growth objective certainly here in the midterm.
Speaker 1
But again, a lot of it will be
Speaker 3
determined by the mix of where the demand comes from. So hard to give an absolute number on that because it depends on where the volume growth comes from.
Speaker 14
Okay. And then if I just think about the fiscal 2023 outlook and again, it seems like at the total company level, there's very Kind of modest if any kind of volume growth embedded in the plan. Can you maybe just maybe provide any color On expectations by the different segments for volume or regions where it makes sense, just help us think about how you're framing kind of the different parts of the portfolio from a growth perspective.
Speaker 2
Not a significant change what we've communicated before. The 70% of our portfolio Tied to areas like food, beverage, spirits, personal care are continuing to remain very Resilient, we've spoken in the past relative to our industrial based businesses that have been more negatively impacted By the economic downturn and softness that you've seen in parts of the world, and we don't see a significant change in that regard At this point.
Speaker 14
Okay. All right. That's helpful. I'll pass it on. Thanks.
Speaker 0
Our next question comes from the line of Angel Castillo with Morgan Stanley. Your line is now open.
Speaker 4
Hi, thanks for taking my question. I just wanted to unpack a little bit more of the 2023. As you think about A second half that's a little bit more back end loaded. Could you just talk about other than destocking perhaps abating in some pockets, What are the aspects of the business that you would anticipate to kind of accelerate as we move through the second half and or improvements that you would kind of anticipate? Is it Specifically on the price cost side or is there some end markets where you would expect better results?
Speaker 2
I think, in general, as we and if We anticipate improved dynamic backdrop versus what we're coming into the year for. You're going to see All boats rise as a result of that. Clearly, we've got a more stable raw material environment right now. And clearly, if we see any type of improvement in terms of FX and currency, that's a net benefit for the company as well. And even though given that we've done a very good job in passing on inflation throughout the year, I would definitely describe the Materials and input cycles as being better and certainly more stable in 2023 than we started in 2022.
Speaker 4
That's helpful. Thank you. And then as you think about your capital structure or capital allocation, clearly, you and the Board are working hard to And as you think about leverage in particular, can you just talk about why is 3x to 3.9x kind of the right And as we think about potential for kind of further delevering from this 3.7, I think a lot of the peer group is maybe below 3.5. So Why not delever further kind of near term just given the macroeconomic environment? Just how are you thinking about that capital structure from your strategy perspective?
Speaker 2
Well, first, we're thrilled that the company is now at the lowest leverage level in its history as a publicly traded company. We've demonstrated our ability based on our cash flow since the RPC We can continue to do that. That said, given the current environment and the fact that Our valuation is incredibly low and that the stock is undervalued. We wanted to take the opportunity to first Buy back stock as quickly as we can, taking advantage ultimately of that opportunity. 2, recognize that there's another component To make, coupled with the continued investments that we're making in organic growth.
Should we choose to do so as we see the valuations improve, we can clearly
Speaker 0
Our next question comes from the line of Mike Roxanne with Truist. Your line is now open.
Speaker 6
Thanks, Tom, Mark, Dustin. I appreciate you taking my questions. Just wondering if you could comment about the cadence of volume growth During the quarter, it seems like a number of your peers have pointed to a particularly weak September as the consumer sort of retrenched during that month. I just wanted to follow-up, Tom, on your comments Also, I suspect customers pointing to some softer demand. What type of can you comment as to the line of sight they have?
Is that are they talking about October or are they talking about November, Just trying to figure out where demand where does your trajectory is headed?
Speaker 2
I know what you referred to. It was very interesting In what is our fiscal Q4, the calendar Q3, there was a real Change or perturbation in demand, that last week in August and in September. It was Quite pronounced. And you've heard that referenced by a number of other companies inside the space. And the reference point in terms of The ongoing dynamic backdrop that we're facing, customers our end customers specifically are just being really cautious in terms of What they're carrying inventory, how they're actually measuring and metering consumer demand.
So there's not going to be a lot of fluff in the supply chain in terms of excess inventories, Given the rationale around that softer customer demand outlook for what is our fiscal Q1 calendar 4th quarter.
Speaker 6
Got it. And then just one quick question. This quarter and last quarter, you mentioned mix changes with the Engineered Materials trying To mix up certain categories. Can you provide us a little bit more color on what you're trying to do in EM aside from reworking distribution?
Speaker 2
Inside our Engineered Materials business, material science is a core competency of what we do. The ability ultimately to Secure more multilayer film structures to take advantage of that material science capability. No, thinning materials, Making them more sustainable while not compromising physical properties is again a core competency that applies to that business in an area that we Continue to seek to grow and to pivot toward and it's consistent with the capital investments that we're making and applies frankly not only inside the food categories, But also applies to the Transportation films as well.
Speaker 6
Thank you. Good luck in the quarter.
Speaker 15
Thank you.
Speaker 0
Our next question comes from the line of Gabe Hajde with Wells Fargo. Your line is now open.
Speaker 11
Tom, Mark, Dustin, good morning.
Speaker 2
Hi, Ken.
Speaker 1
A little bit
Speaker 7
late in the call.
Speaker 11
I did want to dig in a little bit on HH and S. And there's been a lot of, I don't want to say noise in the numbers in terms of obviously pandemic induced benefits. But also you guys have intentionally pivoted the portfolio a little bit away from diaper into adult incontinence and fem care. I'm just curious how far along you are in that, if that's sort of in the room at this point. And then thinking about Diapers is what I'll call a semi discretionary or somewhat convenience item.
Any input from your Customers in terms of expectations for, I know we're not going to talk to you about price strategy, but Volumes kind of going into the next fiscal year and then profitability was a touch short from what we were looking at and it could have just been Us miss modeling things, you called out recovering some price cost in fiscal 2023. Is that contractual in nature or is there anything in there that's just, I guess, out of pattern that you'd call out for us?
Speaker 2
Thanks, Gabe. The ongoing efforts to pivot more of our portfolio to adult incontinence, premium hygiene, Premium Baby continues to be well underway and we'll continue on that path as we look to secure more and more share in that space. For our fiscal Q4, the baby care business was actually positive, and our hygiene products were stable, Which frankly offset, which was the difficult comps that we faced in masks and wipes and drapes and gowns from a year ago That were benefited from the pandemic, along with some of the inventory draw downs that we had spoke of at the end of the pandemic. We would say this From a performance perspective on earnings, it's actually in line with our expectation. And it's more of a function of mix and lag In price recovery tied to the contractual terms with our end customers, specifically on non resin cost, We're the primary drivers and we anticipate sequential improvement from an earnings perspective in fiscal Q1 and we expect to get back to A price cost positive position in our fiscal Q3, which is the June quarter of 2023.
Speaker 11
All right. Thank you. And not to pin you down too much. You guys obviously ramped up the share repurchase activity this year kind of in March. Given the seasonal swings, will we kind of expect a similar cadence, given the initiation of the dividend and things like that?
Or Would you guys kind of be more, I'll say, programmatic about it over the course of the year?
Speaker 3
Yes. Thanks, Gabe. Our guidance has the share repurchase It's fairly ratable over the year. It's slightly front loaded to your point given the current share valuation It's hopefully very temporary. But I would say pretty ratable to slightly front loaded Just the way we've laid out the share repurchases for fiscal 2023.
Speaker 11
Great. Thank you, guys. Good luck.
Speaker 13
Thanks,
Speaker 0
David. Our next question comes from the line of Arun Viswanathan with RBC D Capital Markets, your line is now open.
Speaker 15
Great. Thanks for taking my questions. I guess first off, When you look at the FY 2023 guidance, you're pointing to about $2,100,000,000 of EBITDA, $800,000,000 to $900,000,000 of free cash flow. Just wanted to see what would push you to the upper end of that range. Is it maybe price mix or price cost or volume growth above the 2% or maybe just elaborate on your guidance as well?
Thanks.
Speaker 3
Yes. Sure, Arun. I would say, certainly deflation wouldn't hurt relative to getting to the higher end of the range. 'twenty two It was a year of inflation, and we did a great job in spite of that. Our markets as we've talked about are much more stable, given food and beverage, personal care, hygiene being So the reality is demand volatility, as you know, doesn't have a large impact on our earnings.
The larger impact It is price cost spread. And to the extent we can get some tailwinds from other markets Decreasing, which puts downward pressure on our commodity prices, that would be a tailwind for us. And same thing on cash, right? To the extent we have some deflation, That would help, as I mentioned earlier, the working capital being a 0 target, that would create a tailwind on working capital And obviously, FX, who knows, we assumed end of October, as we sit here today, we've got a slight tailwind there, but Obviously,
Speaker 2
that could reverse tomorrow, but FX is another factor to consider. I'd also this is kind of a Keep an eye on energy. For sure, the footprint of plastic converters is considerably lower than other substrates From an energy consumption perspective, so that will create an opportunity as you see continued pressure in certain geographies around energy inflation, Where the economic feasibility of the pivot to plastics will be a value proposition that I speculate end users will begin to consider.
Speaker 15
And thanks for that. And when you think about the leverage, you noted that you're 3.7 now, so the lowest fiscal year end. Where do you see that kind of evolving over the next A year, couple of years, would you want to move that down into the lower 3s? I think in the past you've commented 3 to 3.9. So How should we think about that?
Thanks.
Speaker 2
It's all around shareholder value creation. We want to deploy and maintain a leverage level that's ultimately consistent maximizing shareholder value. As we said right now, we think the share price is a very compelling value and that The company is very undervalued and as a result, we're taking the actions that we are coupled with attracting both addressing existing shareholders' Interest in dividends as well as looking to attract new shareholders that may not have been attracted to the company by initiating this dividend. We're very We're happy that we have the type of resiliency and stability of this portfolio that generates the kind of Cash that it does to allow us to do this. So we're very pleased with this Evolution in our company and paying this first dividend and re upping the share repurchase authorization.
We're pleased where we're at.
Speaker 7
Thanks.
Speaker 0
Our next question comes from the line of Kieran de Bruin with Mizuho. Your line is now open.
Speaker 16
Hi, good morning. Just had a quick follow-up on the mechanical recycling side. It seems like there's a lot of demand From customers for mechanical recycling, there's even potential for molecular recycling. How do you think about those investments Forming part of your portfolio and what kind of percentage of CapEx you might focus on those going forward? Thank you.
Speaker 2
I'd say this, there's not going to be one solution that solves all the problems. That said, we're the 5th largest Mechanic recycler, if you will, in Europe. We're excited about our new Leamington Spa site That ostensibly is fully committed by our end customers. And this will be the first of its kind ultimately Allowing us to have Food Safety Association approved material coming off that line, which is an FDA like equivalent. So we're excited and this could certainly be models for us going forward, to drive more circularity, to address Some of our carbon goals and objectives, all while not impacting both customer as well as our end customer expectations In terms of quality, and we're very bullish on it.
And I'm proud. This team has continued to quietly lead in this space. And we believe this continues to be a growth opportunity for our company globally, and our teams have been doing a great job and couldn't be proud of the team Ultimately implementing our Lamington Spa investment as part of our CPI group, and the alignment we have with end customers is Really encouraging in that regard. It's one of those when you think about true value propositions that we can bring, this is a true value proposition that we can bring that's unique to our company.
Speaker 16
Great. Thank you. And then maybe just a really quick follow-up. When you mentioned bolt on acquisitions, now that you're In that 3 to 3.9 times range, is there any area where you'd be focused on adding capabilities or any regions where you would want to be more focused on when
Speaker 2
I'd answer it generally. We've been very clear that the Areas of interest are in faster growing markets or geographies that ultimately can support our organic growth objectives. Company has done a great job in terms of both Both increasing its exposure to emerging markets, but also increasing exposure to faster going markets. And we didn't have a chance to speak of it today, but The expansion that we have in Bangalore, India to support healthcare and pharmaceutical is on track. It will become fully commissioned this fiscal year For our company and we're very excited about it.
So those types of investments aligned with customers in faster growing markets and geographies Are always of interest, healthcare, pharmaceutical, dispensing solutions are some core areas that we've been very prominent in our
Speaker 0
Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets. Your line is now open.
Speaker 10
Tom and Mark, thanks very much for taking my questions. Mark, I think you mentioned you're thinking EBITDA will be a similar split First half versus second half as it was in fiscal 'twenty two, call it $48,52,000 Just want to confirm that. And it just it sounds like Volume you're thinking will get better throughout the year and I would think currency would be a bigger drag in the first half that perhaps It would be more heavily weighted to the fiscal second half unless price cost will be a bigger benefit in the first half. So can you just help me with those, How you're thinking about those components, Mark?
Speaker 3
Yes. No, I think, Adam, the way you laid it out was accurate. I would say to the extent to your point to the extent demand does not improve. We're fully prepared and We'll take the appropriate cost actions to achieve the earnings outlook for the company. With respect to FX, we haven't Made any assumption changes there.
We just assumed flat over the course of the year. So to your point, on the front half, it will have a bigger headwind Then the back half as the dollar strengthened over the course of fiscal 2022.
Speaker 10
And I appreciate that, Mark. And just one other one, it seems like you'll pay out the vast majority of your Cash flow in the form of buybacks and dividends next year and then you've got I think $800,000,000 of notes coming up in February of 2024. To the extent that you're planning on refinancing those, can you give us just some sense of, I think you're paying 1% on those, what at current rates, What you might refinance those at? I'm just wondering how much higher your interest rate is likely to be on those notes.
Speaker 3
Sure. Yes, I mean in 2022, obviously, we're real pleased that we were able to return $700,000,000 of capital As well as delever the company. So, we'll see how 'twenty three plays out, but we've certainly proven that we can do both. With respect to capital markets and refinancing, our debt, I think today's rates, You can go check me on this, but I think it would be in 6% to 7%, depending on the tenor
Speaker 10
Of the note, but
Speaker 3
I think looking at something in 7% to 8 year would be somewhere in that 6% to 7% coupon area.
Speaker 10
Thanks so much, Mark.
Speaker 3
You
Speaker 0
are. Our next question comes from the line of Jeff Zekauskas with JPMorgan, your line is now open.
Speaker 7
Thanks very much. In the cash flow statement, there was a $200,000,000 benefit from the settlement of derivatives. What is that? And What would be the number for next year if there is 1?
Speaker 3
Sure. Yes, thanks for the question. As we've talked about, we have a number of levers Polio is one of those levers similar to other working capital levers we have such as discounted terms with customers and suppliers. And so just depending on market conditions, those opportunities have different considerations that you evaluate. And last Thanks to growing interest rates that present an opportunity that was more attractive than some of our other opportunities.
So Hard for me to predict what the markets will do in 2023, but again the company has many levers to deliver consistent cash flow And mitigate the impact of different items such as inflation on its cash flows. So my base case assumption would be 0 to answer your question, but we'll see how the year plays out.
Speaker 7
For the year, your price cost, you had a price cost benefit of 95,000,000 On EBITDA, in the scheme of things, is that a number that you aim to Try to get to a positive number each year? Or is it the case that in the ebb and flow of your business That under normal circumstances, the positive numbers are followed by negative numbers and it levels out to about 0.
Speaker 2
Mark may have a view on this, but price versus cost is positive in a normal inflationary environment, Frankly, it's probably greater than $100,000,000 over the last 10 years.
Speaker 3
Yes. I would say in 80% of the years, That relationship is positive. Thanks to our efforts to continue to focus on cost efforts improving our material usage, internal productivity improvements, the net of price Costs are again an 80% of the year is a positive relationship. The toughest years are the ones actually Like last year, where you have just significant inflation, those are usually create the most pressure. And usually, we have the most KON in deflationary environments.
Speaker 7
Great. Thank you so much.
Speaker 2
That concludes Any other callers, operator?
Speaker 0
No further questions.
Speaker 2
Well, I want to thank everybody today for joining us for our fiscal Q4 call. We look forward to talking to you to report out on