Berry Global Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the very 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. To ask a question during this time, you will need to press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I'd like to turn it over to Mr. Dustin Stilwell. You may begin the conference, sir.

Thank you, and good morning, everyone. Welcome to Barry's first fiscal quarter 2021 earnings call. Throughout this call, we will refer to the first fiscal quarter as the December 2020 quarter. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website at barryglobal.com under our investor relations section. Joining me from the company, I have Barry's Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question and answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time with a brief follow-up and then fall back into the queue for any additional questions. As referenced on slide two during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to that those described in our earnings release, annual report on Form 10-K, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And now I will turn the call over to Barry's CEO, Tom Salmon.

Thank you, Dustin. Welcome, everyone, and thank you for being with us today. First, let me start with our number one core value on slide three, and that is safety. We fully understand that what we do here at Berry is a valuable part of the supply chain, making and supplying products that are protecting each other, our friends, our families, and our neighbors and communities around the globe. Our number one priority is the health and safety of our team members. We believe safety doesn't happen by accident, and everything we do at Berry starts with safety. Our employees' commitment to show up and perform their work in a safe and professional manner makes me incredibly proud. but it doesn't end when they walk out of the plant or their office. The safety and health outside of work is just as important. They have demonstrated respect for their colleagues and their communities in this aspect as well. As you can see on the slide, we have an ongoing commitment to identifying, managing, and eliminating risk, and are very proud of our safety record with an OSHA incident rate significantly better than the industry average. Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This work has resulted in our strong start to the fiscal year and the numbers speak for themselves. First quarter results for revenue, organic volumes, EBITDA and earnings per share all came in significantly better than we anticipated with strong demand across every division. Strong momentum we've created over the past several years delivered again record first quarter results on the top line, bottom line, and free cash flow. Once again, we are proving our resilience across various economic cycles. The diversity of our portfolio across various end markets and regions continues to provide the consistency and dependability we've demonstrated for decades. On slide four, we said coming into the year that the key focus for the company was to grow organic volumes and improve our balance sheet. We're off to an exceptional start to deliver on those promises. Organic volume growth came in at an outstanding quarterly record of 7%, with all four segments delivering volume growth. Stay-at-home food, health and wellness, along with personal protective products, continue to see solid growth in the quarter. Industrial, automotive, distribution and building and construction end markets, while still facing some softness related to COVID-19, improved moderately. resulting in smaller headwinds to our respective segment volumes. Additionally, our strong results on earnings and cash flow allowed us to reduce our leverage by two-tenths, ending the period at 4.1 times net debt to adjusted EBITDA. We are well on our way to meeting our objective of getting our leverage below four times. After we have achieved this target, we anticipate operating our company while maintaining our leverage in a range of three 3.9 times on a go-forward basis. To be very clear, we believe our top two drivers now in delivering significant shareholder value is consistently growing our business organically and strengthening our balance sheet. And lastly, as most of you are aware, we've seen significant cost increases in our primary raw material, that being resin. along with some modest inflation and other raw materials and other costs over the past several months, including anticipated February increases. With a strong volume growth momentum in the business, along with our efforts to improve the timing lag of the pass-through of inflation in our customer contracts, we are active and fully intend on passing these transitory increases through. Our updated guidance includes an incremental timing lag of $50 million over the next three-quarters related to this incremental inflation. Despite this timing headwind, and with the exceptional start to the year, we are raising our fiscal year operating EBITDA guidance range by $25 million and increasing our organic volume growth assumption from the original 2% to now 4% for the full year. We began fiscal 2021 with enthusiasm and confidence in our ability to grow organically, as we've demonstrated over the past year. And I believe we are well-positioned to continue to see long-term, predictable, and sustainable growth with customer-linked capital investments that target continued expansion into both faster-growing segments and emerging markets. Now I'll turn the call to Mark, who will review Barry's financial results in more detail. Mark?

Thank you, Tom. Before we move ahead into the highlights for the quarter, please note that the December 2020 quarter contained additional shipping days for our U.S.-based businesses compared to our prior year period. When we discussed volumes, we have made the necessary adjustment to exclude these additional days, and have provided normalized data for proper comparison. I would like to refer you to slide five now. For the first fiscal quarter, reported sales were up over 11% to a record $3.1 billion. The quarter revenue included reported organic volume growth of 11%, of which 4% is attributed to the additional shipping days, resulting in comparable organic volume growth in the quarter of 7%. As Tom noted, demand for our products remained consistent, and certain markets, which previously experienced COVID-19-related headwinds, have recovered sooner than we expected. The quarter included a modest foreign currency impact that increased sales by 2%, which was partially offset by slightly lower selling prices and the sale of the U.S. flexible packaging converting business that closed at the end of November. From an earnings perspective, the December quarter operating EBITDA increased by 20% to a December quarterly record of $539 million, primarily driven by strong volumes and realized cost synergies. Adjusted earnings per share increased by 100% to $1.12 in the quarter, which included benefits just referenced relating to EBITDA along with interest expense savings from debt reduction of over $1 billion in fiscal 2020. Free cash flow for the last four quarters ended with over $1 billion. These strong financial results are the byproduct for entire global teams' focus on organic growth and driving cost productivity, while managing the increased demand from our customers and the human resource challenges related to COVID-19. The results are yet another example, as you can see on slide six, of our proven performance over many different economic cycles. As referenced on prior calls, we have consistently driven top-tier results in key financial metrics, including 20 percent or more compounded annual growth rates for both free cash flow and adjusted earnings per share. Now, looking at the quarterly performance by each of our four operating segments on slide seven. For the quarter, our Consumer Packaging International Division delivered sales of just under $1 billion and EBDA of $170 million. In the quarter, comparable organic volumes were up 4%, driven by strength in consumer markets such as food and hygiene, as well as a partial recovery of certain industrial markets that had previously been facing pandemic-related headwinds. Regionally, we had 2% volume growth in developed markets such as Western Europe, with robust growth in emerging markets such as China and India. The CPI team produced an impressive 21 percent increase in EBITDA, primarily driven by its strong volume, cost synergy realization, and cost productivity. Next, sales in our consumer packaging North America division were up 12 percent to $686 million, primarily as a result of the 8 percent increase in comparable organic volumes. The organic volume growth in the quarter was ahead of our expectation provided on our last earnings call, as we saw continued strength in our four businesses from products such as closures, bottles, and containers. Our facilities extended operating schedules to meet the additional demands of our customers in November and December, where we commonly see downtime within Barry and at our customers. EBITDA was $121 million compared to $107 million in the prior year quarter, This 13% increase was primarily driven by the strong volumes in the quarter and cost productivity, including some acquisition synergies. Our health hygiene and specialties division delivered sales of $740 million. The 21% increase included comparable organic volume growth of 15%, with growth in all four regions globally. We estimate segment volumes were up high single digits, primarily related to organic growth investments, with the balance benefiting from the additional COVID-19 demand for healthcare, hygiene, and other PPE-related products. EBITDA increased by $45 million, or 45%, primarily driven by the organic volume growth, favorable product mix, and cost productivity. As expected and consistent with the September quarter, the December quarter continued to benefit approximately $25 million in EBITDA from favorable product mix associated with pivoting our assets to products related to COVID-19 protection. And lastly, sales for our engineered materials division were 9% higher at $722 million. The increase was primarily attributed to volumes in the additional days of just over 5% and comparable organic volume growth of 2%. Volume growth was primarily driven by our consumer-facing products and some of our industrial businesses, along with a modest recovery of certain markets that were negatively impacted by the pandemic. such as our can liner business that serves away-from-home waste disposal. EBDA was flat versus the prior year quarter as organic volume growth was offset by a modest timing lag in recovering cost inflation. Next, on slide 8, free cash flow for the last four quarters ended December 20, totaled $1.3 billion. Our free cash flow continues to be utilized to reduce our outstanding debt. and we have paid down over $1.2 billion over the last five quarters, which has lowered our annual interest expense and reduced our debt leverage from 4.8 times to now 4.1 times. We remain committed to maintaining a strong balance sheet, and our consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically. We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile. We recently issued two sets of investment grade rated first priority senior secured notes with fixed interest rates of 1.57% and 0.95%. We used the proceeds to replace existing variable rate term loans, which will reduce our annual interest expense by over $10 million, and also extended our weighted average debt maturity profile. The investment grade debt market represents a new market opportunity for our company, and we intend to continue our efforts to further strengthen our balance sheet. Next, our updated fiscal 21 operating EBITDA and free cash flow guidance is shown on slide nine. Given the stronger beginning to the fiscal year and improved demand outlook across our business, we are increasing the range of operating EBITDA by $25 million to a new range of $2.175 to $2.225 billion. We are increasing our organic volume growth assumption by 2% and now anticipate volume growth of 4% for the full fiscal year, which is supported by our robust and growing pipeline, increased level of capital expenditures, and the positive trends and momentum we are seeing in each of our businesses. We have included a modest incremental negative from inflation and the associated timing lag in passing these higher costs over the next few quarters. Expected free cash flow will remain in the range of $875 to $975 million. The range of free cash flow includes $1.2525 to $1.625 billion of cash flow from operations, partially offset by capital expenditures of $650 million. Excluding incremental growth capital, our fiscal 21 free cash flow is expected to exceed $1 billion. We also continue to anticipate further strengthening our balance sheet, and I expect our leverage ratio to be 3.8 to 3.9 times at the end of fiscal 21. This concludes my financial review, and I'll turn it back to Tom.

Thank you, Mark. 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 growth markets and regions. We made these investments for a specific purpose. to be competitive regardless of any economic cycle. Those investments set the stage for what you're seeing now. 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 and long-term expectations and commitments to provide sustainable, profitable growth. Across our company, our teams are performing at a very high level with an exceptional sense of urgency to demonstrate consistent organic volume growth by providing advantage products in targeted markets as evidenced in our recent quarterly results. As we've stated on slide 10, the key drivers for organic growth and why we feel confident in our continued trajectory are our focus on both faster growth end markets and emerging markets along with sustainability-led packaging. We expect emerging markets to grow considerably faster than advanced economies with increasing populations and the need for protection products. We've increased the revenue in faster growing regions from $100 million in 2013 to now over $1.5 billion. We will continue to pivot our portfolio and center investments on faster growing end markets and global megatrends in regions with stronger growth patterns. Over the past several years, we've made internal business realignments in order to further accelerate organic growth across our global footprint. The transition of our tapes business to HHS and the legacy RPC films business into our engineer materials segment are proceeding well and providing great commercial opportunities we would not have had otherwise. Additionally, these changes allowed us to create a global rigid healthcare packaging and device business And our total healthcare portfolio has grown from $500 million in 2015 to now over a billion dollars in revenue. Furthermore, as you can see on slide 11, we are a leader in healthcare primary packaging and device markets, including our global inhalation product portfolio. With over 330 million asthma sufferers and 250 million COPD sufferers globally, we are highly focused on ways to improve the lives of those with these conditions. Long-term growth for the inhalation market over the next five to ten years is expected to be high single digits, where we have a primary focus on growth in our Asia-Pacific region. On the sustainability front, which we have long considered to be core to Barry's operating philosophy, the industry has taken tremendous steps forward in the journey to eliminate plastic waste while continuously innovating to meet desired performance requirements of consumers. We continue to invest in both new products as well as qualifying existing products against recognized sustainability standards in the market so customers and end users can make informed decisions. On slide 12, we've highlighted just a few of the new amazing products we have designed and manufactured with sustainability in mind. On the top right, you can see our BioVantage BioResin Bakery Films. This film is made from renewable feedstock with lower carbon footprint than conventional-based polyethylene. This line of film is made from up to 89% biosource polyethylene, which enables our customers to protect their products in a material made from the earth. And one other terrific example includes the innovation and sustainability capabilities created by our global team of experts. As you can see on the bottom left of the slide, we continue to be a leader in dispensing solutions where we've created lighter weight, sustainable dispensing trigger pump sprayer that includes a modern design, improved ergonomics, made from 100% plastic components, allowing it to be easily recycled. Barry remains steadfast in its commitment to lead and collaborate to drive innovation and acceptance of products targeted towards improving recyclability, reuse, and reduction of virgin plastics, all with a goal to promote a more circular economy Further demonstration of our efforts and commitments to promote a more circular economy, we've taken a leadership role in developing markets for recycled content made from waste and helping our customers achieve the growing needs of their consumers. Slide 13 highlights Barry's capability using in-house mechanical recycling process. We have installed capacity of over 300 million pounds per year after our latest expansion. This new expansion is targeted for personal care and household care applications. Similarly, over the last several months, Barry has partnered with our suppliers to procure another 300 million pounds annually of advanced recycling resin by 2025 in Europe and the United States. We've been partnering with leading brands to bring products made from recycled content material to the shelf in late 21 or early 22. To enable this, Barry has 14 sites globally that are ISCC Plus certified to ensure we bring transparency and accountability to the recycled content process. Our teams globally are working to grow our supply and expertise to introduce recycled content in our products to provide the same functional benefits while solving the plastic waste problem. In summary, on slide 14, building upon our solid start in 2020, we delivered outstanding results across all of our operating segments. We again, including the first fiscal quarter, have delivered on our strategic goals of driving organic growth and improving our balance sheet, all while setting financial records for any December quarterly period EBITDA, free cash flow, revenue, or earnings per share. And finally, I want to remind you that we believe the Berry investment case has never been stronger. With consistent and dependable end markets, a leading cost position, along with substantial capacity to invest in long-term, steady growth, allows us to be well-positioned to continue this momentum through our customer-linked capital investments that target continued expansion in both faster-growing end markets and regions. I thank you for your continued interest in Barry, and at this time, Mark and I will be glad to answer any questions.

At this time, I would like to remind everyone, if you would like to ask a question, press then the number one on your telephone keypad. First question is coming from the line of Anthony Petinari from CIVI.

Good morning. Good morning, Anthony. Tom, you referenced increased efforts to tighten raw material pass-throughs, and I was wondering if that was a comment on resin as well as non-resin costs. And can you give any color on how you've been able to maybe shorten lags or improve pass-throughs, you know, relative to previous years or previous periods when you've seen this really sharp cost inflation?

Well, listen, it's a fair question. We've really attempted to, and we're working with end users on not only resin, but non-resin, freight, and other items as well. And during this period, I noted in my prepared comments, we are active, you know, right now in passing this inflation through. And we feel confident that while there'll be a lag, we'll see full recoveries. I can't comment it generically, but certainly on a case-by-case basis, we're making improvements both in reducing the lag and covering some other nontraditional items where we can build indices that can regulate up movements in cost and down as well. So it's a working process, but we feel good and feel confident in our ability to recover here, what we're seeing through February.

Got it. Got it. And then you obviously saw really remarkable growth in consumer North America and HH&S. Just wondering if that's continued into January and February. And can you remind us how much visibility you typically have into customer demand in those businesses? Is there anything you can say about customer order patterns or customer inventories?

I can't really give you any inter-quarter guidance, but suffice to say, you know, the The expectation and the rate that we made an organic volume from 2% to 4% was really driven by the current robustness of our pipeline, which on average is about 20% better than what we've seen in previous years right now, the close rate of existing applications that teams were working on, and the sell-through and ongoing demand from our end users. But we do have a clear line of sight. I would say decent visibility to demand. It's a relatively short cycle business. and feel comfortable with our new outlook at 4% organic volume growth. Okay.

That's helpful. I'll turn it over.

Next question is from Gansham Punjabi from Beard.

Thank you. Good morning, everyone. You know, I'm just trying to reconcile the 4% volume growth, organic volume growth increase from your 4Q versus your fiscal 1Q, which was up 7. And if you can kind of, you know, as you think back to the December quarter, you know, a lot happened in terms of expanded lockdowns in Europe. A lot of your peers that reported have talked about, you know, increasing sequential volumes during the calendar year 4Q, just based on the expanded lockdowns and consumers, you know, staying at home, et cetera. So how much of that boost do you think you benefited from specific to year 1Q in terms of volumes? Maybe the evolution of the quarter would be helpful in terms of volumes.

Yeah, hey, Gonchome. So, you know, December is always a little bit of a tough quarter. I think I had a comment in my prepared remarks about holidays and, you know, what customers do over holidays certainly impacts what we do over holidays, obviously. So December quarter always tough, but given the robust nature, as we discussed, of the start to the year, the outlook from our customers and our businesses, you know, we're comfortable certainly going from two to four. We expect all businesses to grow low to mid-single digits in fiscal 21, with some upside to that in our HHS business. HHS will likely be, you know, mid to high single digits, as we're going to lap some of the comps the back half of the year related to the benefit in PPE. Now, obviously, some of that will depend on how long, you know, the pandemic lasts. We've got it lasting specifically for that business – is where the biggest impact is. And we've got that lasting through the March quarter to the extent that it continues beyond that, you know, that would be upside relative to our outlook.

You're gone, Jim. I think the other two pieces I'd mentioned is just, as we talked about some of the industrial markets that we serve, you know, clearly have, have improved. They're not, they're not at a post pandemic level right now, but the continued progression in those businesses as well. coupled with what has been really strong execution from the teams in terms of deployment of capital, investments that we've made targeted specific customers, and the sell-through that we're seeing in some of those opportunities give us a lot of confidence in the back half of the year. As a reminder, all the capital investments that we make as a company are tied and linked to specific customers. They're customer-linked. As a result, we have a lot of confidence in terms of predictability of that demand, giving us confidence in the race.

That's very helpful. And then the $15 million of additional raw material inflation you're now embedding in guidance, how does that phase in over the next three quarters? And just for us to calibrate against, are you assuming just the February price increases that are out there, which are pretty substantial for resin, or are you assuming incremental cost inflation beyond that specific to resin? Thanks so much.

What we've got incorporating guidance is the February increases, nothing beyond February.

Perfect. Thank you.

Again, to ask a question, please press star, then the number one on your telephone keypad. Next question is from George Staffos from Bank of America.

Hi, everyone. Good morning. I hope you're doing well. Thanks for the details, and congratulations on the progress so far, guys. I want to come back to the question on value creation, Tom, and you had mentioned in your remarks, and we would agree, as we've talked about in our research, that good organic growth and deleveraging help create value. One of the other things that also, from our research over the years, helps create value is elimination of volatility. And one of the ways that that's accomplished is by, on the one hand, improving your margins And on the other hand, improving the predictability of the return to the shareholder. So one, what do you think is likely to be seen from a mix standpoint and a margin improvement standpoint from some of the new product areas that you're pursuing, either within HHNS or maybe even within sustainability? And on the other hand, how should we think about improving value return to shareholders you know, over time, obviously not this quarter, but as the leverage gets to where you'd like it to be, should we expect something of a dividend, which again, put that together with higher margins would also take out volatility, lower your cost of capital, and ultimately improve your valuation. What are your thoughts on that, and add a follow-on?

Let me answer the first one that comes to mind, I think, relative to growth and new business. I think if you take a the capital investments that we've made to support organic growth, the profitability of that business, the margins of that business have been at or above the company average. We would expect that to continue to be the case going forward as the primary driver of why we've targeted faster-growing markets where we have advantages in faster-growing regions of the world. And that pipeline of opportunity continues to be robust. And the unique thing about Barry, George, is that we didn't stop. We continued that pace of capital investment to support our growth throughout the pandemic, based on the dependability and predictability of the business that we serve. So we feel very comfortable, and that'll be the ongoing strategy going forward. Relative to the leverage of the company, I'm thrilled with the progress that the team has made. And we intend to operate our company with leverage between 3 and 3.9 times, we generate substantial cash flows of around $1 billion. We're going to allocate 100% of that debt until we're in the range. Then, when we're in the range, we anticipate a balanced approach, which will include cash return to shareholders, both on acquisitions and further debt reduction, while staying within the targeted range.

Understood, and appreciate you reaffirming the value return. I wanted to just piggyback off the first question then. To the extent that you continue to push on sustainability and you're getting new products from sustainability, one, are those products typically higher margin, higher mix relative to the overall portfolio? And if you polled all your customers right now, and said, here is the Berry suite of sustainable products. What would you say, and how much of their portfolio would you be able to sort of satisfy or fulfill? You know, how much of their metrics would you be able to hit right now, and what would you say your percentage of overall businesses would be typified as sustainable by your customers? Thanks, guys, and good luck in the quarter.

Clearly, what we walked you through, during our prepared remarks was the fact that between advanced recycling materials and mechanical recycling materials, that's about 600 million pounds of material. And it's just, it's a tip of the iceberg, George, if you will. It's clearly not enough to fulfill and satisfy all the requirements of all of our end users. But I don't know of anybody in our space that has the breadth of offerings that Barry does to begin that process. I'll also note relative to advanced recycling materials, I'm really pleased to report the kind of work that our teams have done. The first two years of capacity that we're receiving from advanced recycling is sold out. It's sold out. So we're doing a good job in terms of being able to demonstrate the value, getting people comfortable with the technology. So certainly as the demand for those products grows, we'll be in a very good position. You know, what we find is that all of our end users have strong publicly communicated sustainability objectives. And so they're keen to partner with us to help understand how we can help them meet those needs. I would say still the number one opportunity across the chain remains around weight reduction. And companies that have the design prowess and know-how to reduce the weight of substrates while not impacting physical properties using both design and material science know-how are going to benefit. And we certainly at Bay Area are in that position given that it's been a core capability for us for some time. And you've also seen that over the last year or so, we've made a lot of advances both in terms of commercializing fully recyclable, flexible pouches made of polyethylene, bio-based materials supporting our tubes business, real examples of circular solutions with the likes of Georgia Pacific and others. And I feel really good about the progress that our team's making. Again, this is a large component of what we do. We anticipate that this will be a business that we monetize and has similar profitability to what we enjoy for the remainder of the portfolio. And frankly, it's a value attribute that we think is going to be unique to Barry because not everyone's going to have this ability to help solve some of those end customer problems. So we're pleased. And again, I'm excited about this investment. But more importantly, we're excited about the progress we'll make here. Thank you very much. Good luck in the quarter, guys. Thank you, Tom.

Next question is from Neil Kumar from Morgan Stanley.

Hi, good morning. Thanks for taking my question. You recently announced another capital investment into the wipes and mask space, which I think should come in early 2023. What are you seeing in terms of customer conversations that gives you confidence for additional investments in the space with a fairly long time horizon?

Yeah, you know, it's interesting. All our investments, you know, certainly on the HHS side, you know, typically have long lead times associated with them. And, you know, the investment in additional wipes capacity in North America is strategic to us. You know, we're a leader in North America. We were very fortunate given that we, you know, maintained our regimen of targeted investment in that space so that we were able to take advantage and help serve, you know, the nation's needs for hard surface disinfectant wipes. What we're seeing is that there continues to be growing demand for that substrate. And frankly, as we see increased openings of the country, we think there'll be exponential demand because you'll see the wipes being used in more settings that were not typical, as well as wipes being provided in packaging offerings that make it easier to carry on the go, if you will. Every investment that Barry makes is, again, customer-linked. So you should assume that if we're making an investment in a business, that there's ultimately customer alignment relative to that capacity and that demand outlook. So we're bullish. We're a leader in that space. We're going to continue to lead. And we're very confident that the demand will continue to support the capital investment and the return that we're assuming.

Great, that's very helpful. And then in terms of your EBITDA guidance, could you just talk about what assumptions you have embedded for price cost and how you expect that to evolve through the year?

Yeah, so we had a, in the first quarter, Neil, we had a modest benefit on price cost, primarily driven by the mixed benefit we got in HHS, as well as cost synergies that were still lapping from the RPC acquisition. With the incremental inflation we've seen from the last call, we actually have that now coming in as a headwind for the full year, which will predominantly be experienced in Q2 and Q3. There's obviously a lag in getting that passed through, but Q2, Q3 is where I would expect most of the negative price costs to persist.

All right, thank you.

Next question is from Mike Lighthead from Barclays.

Thanks. Good morning, guys. I guess first I wanted to circle back to something similar to Neil's first question. On HHNS, I think last quarter you highlighted some mixed headwinds you'd expect as we worked through fiscal 21. Can you just update us? Obviously, HHS demand has remained quite strong. Has the mixed component or the timing of that changed at all in your thinking?

Yeah, when we started the year, we had only assumed the mixed benefits would be in the December quarter, and now we've extended that to include the March quarter. We'll continue to monitor that and update the market as the quarter's move forward. But at this point, we've only assumed that benefit continues into the March quarter.

Got it. That's helpful. And then maybe a question for Tom around sustainability. Obviously, there's been a lot of focus and investment lately in greener resin, whether that's biosource plastic, recycled plastic. When you kind of sort through all of these headlines, when you talk to your customer, what at the end of the day do you think is driving their decision process there? Why do they choose Berry versus some of your competitors' offerings? And have you noticed any changes in their willingness to pay premiums for recycled or greener resin?

Listen, it's partly a learning exercise right now by a lot of the global brands out there. There's an array of ways that they can meet their sustainability objectives. There is a sincere interest to make an informed scientific-based decision. And they realize there's a number of ways to accomplish that. And What we chose to do at Barrie is have access to a wider range of solutions. And then as the market ultimately determines what the ideal substrate will be going forward or one that makes most sense, we ultimately can leverage our global supply chain and scale to get behind those particular types of innovation. I don't think you're going to see the plastic waste problem solved by one solution. I think it's going to be a variety of solutions, and we feel really comfortable with where we're at right now. The 300 million pounds of mechanically recycled material that we have, that we own, again, we learn more about the industry. We learn more about the collection processes, the sorting processes. It makes us a more valuable supplier. Similarly, with the advanced recycled materials, taking the proactive stance that we did, to secure and commit to that kind of capacity is simply going to grow the knowledge of our end users to get them comfortable around this substrate so that as it scales, we'll ultimately be able to take advantage of that opportunity and transition them into those materials where it makes sense. There is an understanding that as products are ultimately new and initial, there can be higher costs associated with those. And again, the evaluation is, What's going to be the change that disrupts my end customer the least, addresses their concerns, and allows our company to continue to generate the growth and profitability that they've always become accustomed to? And that's a lot of discussion. I feel that really during the pandemic, we've made an amazing amount of progress, further penetrating our key accounts globally. We have a pretty strong passion in finding ways to help them meet their growth objectives and we continue to bring that to bear relative to sustainability. We will take advantage of our global scale, our material science know-how, and the intimacy we have with those end users, you know, to ultimately put ourselves in a growth position. And that's why it truly is a growth opportunity for Barry. It's not, you know, this is something not only that we're talking about, but we're investing in, and we're seeing the actual results play out. And it's... It's encouraging. I think you're only going to see the pace of this improvement, this evolution around sustainability and circularity. It's only going to grow. And I think it's going to grow in a collaborative way.

Great. Thank you.

Next one is from Kyle White from Deutsche Bank.

Hope everyone's doing well. I think you mentioned on your healthcare portfolios over a billion in sales now, and you referenced asthma opportunity. Just kind of wondering here on the billion in sales, how much of this has to go through kind of increased regulatory approvals or be produced in kind of clean rooms, and maybe what the returns here are relative to the broader portfolio?

It's a mixed bag in terms of the type of manufacturing environment, but, you know, clearly to support healthcare, we'll be investing in those types of capabilities. with the appropriate lead times taken into consideration so that there's no disruption. So it's going to be an as-you-go depending on what we close and where we close it. We clearly believe on the asthma front and metered dose inhalers that Asia presents a really significant opportunity for us. We're encouraged by that because we already have a leading position in that space. There's mid- to high-single-digit demand for it, and the margins in those businesses are at or above the company average.

Okay. And then focusing in on one of your other organic growth drivers in terms of emerging markets, just kind of wondering how you think about emerging markets in terms of your overall capital allocation process when analyzing investments relative to investing in developed markets. Do you look for similar return profiles or are you mostly following your large multinational customers when looking to invest in these kinds of emerging market regions?

We have similar return profiles regardless of where we operate. So, um, That's one. Two, anything we do from an investment is going to be linked to a customer, so it's going to be supported and aligned around that partnership, which increases the likelihood of success. We've clearly made significant investments in China over the last several years, which have paid huge dividends for us. We've announced a recent new non-moving capability at an Anhai site in China that will serve Southeast Asia for the healthcare space, dedicated for the healthcare space, and we're excited about it. We are going to align ourselves, again, around market segments that are growing faster and geographies that are growing faster and do it all in a customer-linked way. Our position with global brands around the world and the type of investment that dry powder that we have to invest alongside our customers is part of the driver for this confidence that we have in this and the predictability of our growth. Because it's with leaders and brands that can pull that demand through. And the trust and confidence that we build by already having existing positions as they expand their business to similarly match those growth geographies creates a lot of confidence in execution, in commitment, in quality, and that continues to be built as we continue to vertically penetrate these accounts so that strategically we're aligned with our customer.

All right. Thank you. Good luck in the year.

Next one is from Josh Spector from UBS.

Yeah. Hey, guys. Good morning. Just in your prepared remarks, you mentioned some of the segment realignments resulted in growth that you wouldn't have otherwise achieved. I was wondering if you could give us some examples of what that is and why the segment alignment was required to achieve that.

It really helped us create somewhat of a pure play. When we moved the tapes business into HHS, we also have a component of our HHS business that's tied to construction, you know, through the house wrap business. having tapes that ultimately can be applied to house-wrapped substrates created somewhat of a pure play, right? It's a logical combination. We're serving similar markets, and it made good sense. And that has been an area that we've seen success that we wouldn't have had with those businesses being separate. Inside the engineer materials business, we brought the BPI business to be part of the engineer materials. You have two groups of people speaking the same language, running similar equipment, and it's provided in that business not only commercial opportunities to globalize some of our North American business, similarly in agricultural products, but also in terms of best practice sharing and productivity improvements based on the manufacturing processes being like for like. And this, frankly, has been something that we've seen you know, with our CPI and CP North American business as well. So it was a no-brainer for us to make the move because we'd already seen the benefit that we were enjoying between our international consumer packaging business and North America.

Thanks. That's helpful. And just in terms of the assumptions in your free cash flow guidance now, I mean, obviously the first quarter being better helped offset some of the resin price issues. But just wondering if you could provide some context in terms of how you're thinking about working capital, cash interest, some of the other line items between EBITDA and free cash flow.

Yeah, not a lot of changes with respect to the individual line items. You know, interest, we've obviously benefited from some refinancings in the market, but that's been offset by FX. So there's been some incremental increase in interest from FX that have offset some of those savings. I would say all the other lines are generally in line. Slight increase with respect to working capital, just to account for the inflation that we talked about in our primary raw material resin, mostly in the U.S. with polypropylene followed by polyethylene. So that's probably the biggest change is really higher working capital needs from inflation. We've also had part of that with our restructuring and one-time costs related to the acquisition. We're actually coming in lower than we had expected, which is helping offset some of that inflation.

Next one is from, yes, we do have a next question from Arun Viswanathan from RBC Capital Markets.

Thanks. Good morning. Congrats on the strong performance. And I guess, yeah, so first off on resin, could you just remind us, you know, I think in the past you've mentioned a statement that resident really hasn't affected your P&L by more than a couple million on the EBITDA line in any one particular quarter. There's obviously been quite a bit of resident inflation here in the back half of 20, and it looks like it potentially could be sustained through the first half of 21. So do you still feel that statement is accurate? And is it mainly a function of, of the pass-through, or is it a function of the robust volume growth that you're seeing now, which makes it a little bit easier to pass through these increases?

Yeah, I mean, certainly the volume is helping us hold the overall earnings, but with respect to resin, we have very efficient pass-throughs. You can look at our results historically as resin goes up and down dramatically. You know, you just don't see the volatility in our earnings. And we've continued to do a good job, as Tom mentioned earlier, of working with our customers to shorten that timing lag. But overall, I would call it pretty modest. But to your point, these increases are coming rapidly and in large increments. So to the extent there is a lag, it's just larger due to the magnitude of these changes. So we felt it prudent to reflect a little larger balance as a timing lag. Again, it's just timing. It gets passed through. It's just timing. When it goes down, by the way, it works the other way. When it goes up, it'll come down. So we'll see how ultimately the resident environment plays out. But we're, just as we have in the past, efficiently working with customers to pass that through.

OK. Thanks for that, Mark. And then I guess on the growth side, it does appear that there's maybe some structural growth that has materialized post-COVID. If I go back to 2019, there was definitely some challenges on the volume side. And maybe we could refer to sustainability and the war on plastics. But on the one end, it seems like many of that, some of those dynamics have subsided. Or is it that you've just made some great progress in increasing the sustainability profile of your products? well maybe maybe you can just offer your thoughts on that is is it at the case that there isn't really as much focus on you know the the negative aspects of plastics or is it that you know generally there's been you know increased sustainability attributes with with your products I think the pandemic has proven that you know plastics is an indispensable part of our lives

I believe that the discussions with our end users have been more balanced, more data-driven, and they're looking for the best holistic decision that they can make to address their sustainability objectives. That, coupled with the fact that we have been making very targeted investments, and frankly, committing to and delivering on when certain businesses would actually pivot to growth. If you recall, we made a specific commitment in our engineering materials business on when it would recover to growth, and it did. And the pandemic hit right after that. We made a commitment when our HHS business would pivot to growth before the pandemic, and it did a full quarter early. And then the pandemic hit there. So, yes, we think we've made smart, targeted investments. We've prioritized our capital investment. Sustainability is a value proposition for our company, and it's not gone away, and it's not going to go away. We're going to have to address the number one issue that we have for our substrate, which is plastic waste. Plastic is not the problem. Plastic waste is the issue. And what we've got to do is continue to find ways to reuse, recycle, recycle, products and optimizer design to ultimately improve the likelihood and ability for those to be recycled. And ultimately, infrastructure will be required, but it will get done and built based on demand that we expect from our end users.

Great. Thanks for that. And just real quickly, if I could follow up on that. So maybe this is also related to your new capital allocation strategy. So uh, is it the case that you, you now have a little bit more organic growth runway and that's why, um, you feel, uh, that you could operate in a, in a below four times leverage area, maybe even approach three over time and pivot towards capital return and maybe the focus on M&A reduces. Um, is that, is that part of the strategy that maybe a reduced focus on M&A and maybe a little bit more focused on organic growth and, and capital return?

It's just, it's just balance. You know, we, um, The company, over the last 32 years, did 47 acquisitions. Acquisitions have created an amazing amount of shareholder value for the company. We simply provide an additional leg to our stool, which is organic growth, and we're very comfortable that we're going to be able to consistently, dependably, and predictably provide that organic growth that we've committed to. The cash flows of the company at around $1 billion. gives us an amazing amount of flexibility, whether that's returning cash to shareholders in the form of a dividend or share repurchase, or ultimately doing both on acquisitions or further reducing our debt. So we have an amazing amount of flexibility right now, driven by the robustness of this business and the cash generation that it has. That's supported with a proven track record on delivering for shareholders, whether it's the commitments we make on growth, acquisitions or otherwise. We're going to do what's best and makes best returns for our shareholders. And we're excited about the position we're in and where we're entering. Barrie doesn't really have to do, quote, anything, right? We're a strong company. We're a leader. We've got a global footprint. And I think we're in the right markets growing around the world with the right partnerships. So we'll be prudent. We'll be very conservative, as we've always been in the past. But We intend to operate between that leverage range of 3 to 3.9 times going forward.

Thanks.

Next question is from Phil Nung from Jefferies.

Good morning, everyone. Tom, congrats. Historically, I've always thought of CP in North America being more flattish, maybe a little growth. So it's pretty impressive. You've seen this nice acceleration in certainly the last few quarters. Can you highlight what's driving the strength in any of these wins you've had? And just given the growth opportunities that you see in front of yourself over the medium term, how are you thinking about it? And do you need to deploy a little more growth capital going forward?

We're really pleased with our CP North America business as we are with how all our businesses perform in the quarter. But nonetheless, CP North America, really going on almost two years now, has been able to deliver that low growth. Single-digit growth, we've made targeted investments, similar as we've talked about, with advantage products within customers, and the team has executed very, very well. The pipeline is more than adequate to support that low single-digit growth, and we're comfortable, whether that's in bottle holes, bottles, containers, closures. Feel really good about that business and that franchise.

Great. And then within this 4% growth, you guys are guiding for the full year really strong. How are you thinking about, you know, the trends between your more defensive categories versus some of the stuff that might be more cyclical in nature that got hit by the pandemic? Are you assuming those categories kind of bounce back to pre-COVID levels? I'm just trying to get a sense of what you're baking in and maybe some opportunity for upside if it does come back stronger.

We're assuming, you know, modest improvement in the more COVID-related businesses that had to face the headwinds. not returning, you know, back to normal levels in the back half of the year. Okay.

And then on the stable side?

Yeah, we really continue to be bullish in the categories of healthcare, of at-home consumption continues to be strong for those businesses. So, you know, continued steady performance in those categories. Okay. Super helpful, guys.

Next question is from Mark Wilde from Bank of Montreal.

Thanks. Good morning, Tom. Good morning, Mark. Just a couple for you. One, can you parse the 2021 CapEx just by rough categories, you know, kind of growth versus maintenance and then growth by segment?

About half of our capital is What I would define as maintenance. The balance is growth and cost reduction. Some of those projects, many of the projects in that category check both boxes, so they have an element of growth as well as cost reduction as we go to larger tooling, for example, to replace smaller cavitation. I would say in the current environment, we're probably a little more weighted towards growth capital given the momentum we're seeing in the business, so that's Second 50% pie, I would say, is slightly overweighted to growth at the moment. I'd say in most years it's pretty balanced between growth and cost reduction, so 25%. Call it each in those categories. In terms of segments, we're investing in all four businesses. We're getting capital. We have a process here that we go through to approve capital both within the business as well as corporately. depending on the size and scope of the project. And I would say in the current moment, as you would expect, areas that have been really strong volumes where we've tied on capacity are getting some incremental capacity. So HHS is an example. Tom mentioned the investment we've got going in China and healthcare, the wipes investment that we're making in the U.S. So in the very near term, I'd say HHS is probably on a pro rata basis getting slightly more capital given the demand and the tight capacities in some of those markets.

I think you'll see, Mark, in the coming quarters, the investments we've made in our engineer materials business as well, increasing our position both in terms of some of the premium snacking categories as well as e-commerce will bear good results for us.

Okay. And then, Mark, just secondly, on the balance sheet going forward, would you expect kind of to normalize toward the upper end of that 3% to 3.9% range and then go above that on acquisitions? Or do you intend, even with acquisitions, try to operate within that 3% to 3.9% range?

And on the scale of the company, Mark, I mean, I think that's back to an earlier question. I can't remember who asked it, which analyst. But I'd say another difference is just the scale of the company. I mean, acquisitions for us now, You know, to the extent we do anything going forward will be relatively small compared to the overall size of the company, just given the market and the fragmentation. So we would intend to continue to operate in that 3.0 to 3.9 times leverage range, including any bolt-on acquisitions that the company may do. But as Tom said, it's not a must-do. We're very focused on creating value via organic growth. and certainly we'll be looking to other methods to return value to shareholders, including return of capital.

And, Mark, I was remiss in not pointing this out, but in terms of the capital investment, certainly closures to spending solutions has been a cornerstone of where we focus a lot of our growth capex as well, serving a variety of markets.

Okay. And just finally, would you expect that we could see some – some more targeted divestitures in the last nine months of the year?

Not something obviously we can comment on. Obviously, we've got a big portfolio, a lot of businesses. It's something we review on a regular basis. Should something come up, though, we'll get something out there. Nothing I can report now, though. But it's part of a portfolio management process, and you've seen us take some action in various businesses over the last 12 months or so.

Yeah, I really wasn't asking you to get too specific. I was just trying to figure out whether This was still an active part of the strategy. Perhaps accelerate the deleveraging.

We continue to look at the portfolio for opportunities that might have more value elsewhere, yes.

Okay. All right. That's helpful. Thanks, Tom. Good luck in the year.

Thank you. Next question is from Gabe Hodgley from Wells Fargo.

Good morning, Tom, Mark. Real quick, appreciate you waiting to call, too, if you will. The $50 million, and I apologize if I missed it, but the $50 million that kind of came out in the new EBITDA bridge of procurement savings, or I think cost synergies, you guys call it out. If you talked about that, again, I apologize, but can you tell us kind of what's driving a lot of that? And then your ability to kind of, you talked about in the past, leverage kind of a global procurement network. I'm assuming part of that relates to resin, but just your ability to continue to do that given port congestion and ocean freight availability.

Yeah, the first part of your question, Gabe, the $50 million, that was simply we broke it out separately. It was combined in the last call, so that had not come up, so thanks for asking that. So we had volume growth and synergies combined. We simply pulled those out this time. So no change to that. The $50 million is what we had expected on our last call, and we continue to expect $50 million of synergy. Sourcing would be a component of that. There's obviously some other categories that are providing for that $50 million of incremental synergies, and that's simply just getting the full-year benefit of actions that we took in fiscal 2020, or in some cases fiscal 2000, late 2020. With respect to the second part of your question, obviously we've got a global sourcing organization that's always working to minimize the impact of inflation on our company and our customers. RPC brought us, obviously, a lot more scale to be able to move product internationally. We're continuing to look at those opportunities as those markets expand. potentially get disconnected. So I think we're well positioned from a scale and capability perspective to minimize the impact of inflation relative to our competition. I think we're advantaged in that regard.

Okay. And then real quick, somewhat of a housekeeping question. There's an other expense line item of 25 million in the income statement. I think it was 13 million last year. It looks like it's included for EPS purposes, but excluded for EBITDA. I know you guys call out the $21 million that I think is mostly stock option expense, but can you describe what that $25 million is, Mark?

Yeah, it's almost all some non-cash FX movements on intercompany loans, and it has been added back to both EPS and adjusted EBITDA. It's related to the RPC transaction and some of the structuring considerations when we completed that acquisition. But it's all FX on intercompany activity.

Great. Thank you, and good luck in the quarter, guys. Thank you, Gabe.

Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Next question is from Salvador Tiano from Seaport Global.

Another very good quarter. One question on sustainability. You talked a lot about the bioresins and chemical recycling, all these things. One other issue, however, is a lot of the products have to be made to be recycled. I understand this is a challenge for flexibles from a lot of the films that you may make. Can you talk a little bit about initiatives to make a lot of the products that just cannot be recycled, even if they're made with post-consumer resin? What are you doing there to actually make them recyclable in the end?

We've talked about some success stories we've had in pivoting end customers to, for example, all polyethylene solutions to support recycling in stand-up pouches. We've made significant investment in our engineering materials business, and I'm pleased to say that the assets that will support more like products to what we announced previously with the bare-naked product line we expect to be fully committed for by the end of our fiscal year. That gives you the sense of some of the energy and momentum around that space right now. So I think where possible, you're going to see customers look to pivot to those more recyclable materials. In the end, it's kind of also why we're getting behind advanced recycling. Advanced recycling is somewhat of an umbrella, if you will, in the recycle world. It will allow those materials that are typically and traditionally considered difficult to recycle, they ultimately are converted into liquids and ultimately become new petrochemicals in a mass balance process. As such, that's something that I think is going to get a lot more attention going forward You might have a follow-up and say, geez, Tom, how do they ultimately certify that and how do they keep track of that in those mass balances? Barry actually now has 14 sites around the world that are what's called ISCC, International Sustainability and Carbon Certified, which ultimately allows for certification of circular polymers to assure that the mass balance equation is correct. and that claims can be supported by our end users. So when you look at the holistic range of solutions that Barry has in material science to make films thinner while not impacting physical properties, to make substrates that are fully recyclable like the polyethylene pouch, and then ultimately having means like advanced recycling to support difficult to recycle materials, we're in a really good spot. And I think when we talk about this being a growth component for us, you know, the initial interest in the materials is very high. So we're bullish going forward.

Okay, perfect. And very quickly, you talked a little bit about volumes and what has changed. Just from this 2% bump this year, what do you expect to be more transitory and could be reversed in fiscal 2022? And what do you think can actually stick because of, let's say, higher demand for wipes and masks and other products?

Yeah, I think as we said, we've got some incremental benefit in our HHS business related to PPE products. I mean, I think the diversity of our portfolio, you know, we've got things that are doing well and things that have been pressured by certainly the pandemic. So as things normalize, you know, the items that are negatively impacted by the pandemic will improve, like our can liner business that we referenced and engineered materials in our industrial businesses. and vice versa may happen. Some of the products would have been advantaged, but I think net-net should be a pretty small impact on the company. Given the diversity of our product portfolio?

We think the megatrends we're investing around have a lot of legs, if you will, in terms of continuing their ability to deliver that consistent, dependable growth that we're looking for, whether that's health and wellness, whether that's food safety, or whether that's e-commerce. We're well-invested. And, you know, I think the regions that we target to make those investments, you know, will certainly benefit us for years to come. Nonetheless, Barry is committed to be, you know, a consistent, predictable grower. So we're pleased and confident in our outlook for 21.

Thank you very much.

Thank you.

Well, if there's no further questions, I want to thank you all for the interest in Barry. We think the company is at a great point right now in its ability to deliver on its strategic commitments. Its balance sheet has improved. The organic growth is certainly being delivered. And the global footprint that we've enabled through targeted investment as well as transformative acquisitions puts Barry in a very unique spot right now and certainly one that is very confident and poised to continue to grow and deliver the results that we're committed to. Thanks very much.

This concludes today's conference call. Thank you all for participating.