Berry Global Group, Inc.

Good day, and thank you for standing by. Welcome to the Berry Global Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Dustin Stilwell. Please go ahead.

Thank you and good morning, everyone. Welcome to Barry's third fiscal quarter 2021 earnings call. Throughout this call, we refer to the third fiscal quarter as the June 2021 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'll 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 and then fall back into the queue for any additional follow-ups. As referenced on slide two, during this call, we'll be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and the reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release our annual report on Form 10-K, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company differ materially from those expressed or implied in our forward-looking statements. And now, I'd like to turn the call over to Barry's CEO, Tom Salmon.

Thank you, Dustin. Welcome, everyone, and thank you for being with us today. Let's begin this morning on slide four, where we've laid out our key takeaways for today. First, Our fiscal third quarter results came in strong, right in line with our expectations, with continued organic volume growth of 5%, including all four segments. Again, delivering organic volume growth on top of very strong results from one year ago. Our teams have worked diligently to offset inflation and supply chain challenges through much of the year, demonstrating an exceptional ability to remain focused on driving long-term sustainable growth and delivering these results you see today. Barry's resilience is a continued reminder of the diverse and robust global portfolio we have built. The second key takeaway is our commitment to improve our strong balance sheet and drive our leverage lower. I'm proud to say that as a result of our strong and stable earnings and cash flow, we've been able to reduce our leverage by four-tenths since the beginning of the fiscal year, ending the period at 3.9 times net debt to adjust the EBITDA. Getting below four times is a key milestone for us, as we previously stated, and we anticipate operating our company in a leveraged range of 3 to 3.9 times. We believe here in the near term that continued execution of our organic volume growth strategy and strengthening our balance sheet will deliver significant shareholder value. And lastly, as most of you are aware, throughout fiscal 2021, we have seen significant cost increases in our primary raw material, that being resins. Additionally, we've experienced inflation in other raw material and other costs, such as corrugate and freight. With the strong volume growth momentum in the businesses, along with our efforts to improve the timing lag of the pass-through of this inflation in our customer contracts, we've seen solid progress towards this objective and continue to actively pass these costs through. Although there is a timing lag in passing through some of these inflationary costs, we remain committed to passing through all cost inflation, just as we've demonstrated historically. As we stand today, with only two months remaining in the fiscal year, and despite the persistent inflationary environment during the year, we are increasing our operating EBITDA target to $2.26 billion and reaffirming our organic volume growth assumption of 5% for fiscal 2021. We began fiscal 2021 with confidence in our ability to grow organically, as we've demonstrated over the past several years. 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. Next, let me turn to our number one core value on slide five, and that's safety. Everything we do at Barry starts with safety in mind. As you can see on the slide, we have an ongoing commitment to identifying, managing, and eliminating safety risk. We are proud of our industry leadership and safety by keeping our team members safe as evidenced by our OSHA incident rate of one at the end of 2020, significantly better than the industry average of just below four. During the past year and a half, the pandemic presented many challenges across our global footprint. Our GlobalBerry team stepped up, took on the challenge, implemented and maintained new protocols while keeping each other safe. Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This has made us stronger and a better company, giving us great optimism on the company's future success. We have a strong commitment to caring not only for the communities where we have operations, but to ensure that we are providing better opportunities and bringing innovations to provide multiple lives to the natural resources we use. Earlier, we announced science-based targets reinforcing our commitment to a circular economy in alignment with the worldwide goal of a net zero economy by 2050. In June, we announced our investment in renewable energy through a long-term virtual solar power repurchase program for our Spanish operations. This is one example of the many steps we are taking to lower the carbon emissions of our operations. We are continually working toward our goal of 100% of our fast-moving consumer packaging to be reusable, recyclable, or compostable by 2025, and I'm happy to report that we are ahead of plan. Our teams have been heading many initiatives with industry and external partners to expedite the sorting and recycling rates to support the supply needs of recycled content. Now I'll turn the call to Mark. We'll review various financial results in more detail. Mark? Thank you, Tom.

I would like to refer you to slide six now. For the third fiscal quarter, revenue was up over 26% to a quarterly record of $3.7 billion. We had organic volume growth of 5%. including all four segments showing positive organic volume growth on top of 2% volume growth a year ago. Demand for our products remains strong, and certain markets which previously experienced pandemic headwinds have continued to improve. The quarter also included higher selling prices from the past year of cost inflation that increased revenue by 18%, along with a 5% increase related to foreign currency translation. These increases were partially offset by a few divested businesses over the last year. From an earnings perspective, our operating EBITDA at $565 million was slightly lower than the prior year quarter when adjusted for divested businesses. The 5% increase in organic volume was offset by the timing lag of passing through inflation. Adjusted earnings per share increased to $1.53 in the quarter, marking the sixth consecutive quarter of organic volume and earnings per share growth. These financial results are the byproduct of our entire global team's focus on organic growth opportunities and driving cost productivity while managing the increased demand from our customers, human resource challenges related to the pandemic, and significant cost inflation. Now looking at our year-to-date highlights on slide seven, revenue is up over 17% to a company record $10.2 billion. The three-quarters ended revenue included organic volume growth of 5%, including all four segments showing positive 4% or more organic volume growth. From an earnings perspective, our operating EBDA increased by 8% when adjusted for divestitures in the additional days this year to $1,694,000,000. Adjusted earnings per share increased by an impressive 29% to $4.23 year-to-date. Additionally, we have used our consistent and dependable free cash flow to further strengthen our balance sheet and have reduced net debt nearly $1 billion in the last four quarters. Now looking at the quarterly performance of each of our four operating segments starting on slide eight. For the quarter, our consumer packaging international division delivered a 21% improvement in revenue, including a 10% increase related to foreign currency translation an 8% increase as a result of higher selling prices from the path through inflation, and a 5% increase in organic volumes. Regionally, we had 3% volume growth in developed markets such as Western Europe, with stronger growth in emerging markets such as China and India. From a market perspective, categories such as food service and industrial products, which were negatively impacted at the start of the pandemic over a year ago, continued to improve and generated strong year-over-year growth as countries reopened. Operating EBITDA in the quarter was essentially flat compared to the prior year quarter as increased volume and foreign currency translation benefits were offset by the timing lag of recovering resin and other cost inflation. For the year, operating EBITDA is up 10%, primarily driven by the organic volume growth, foreign currency translation and cost productivity, offset by a timing lag in recovering cost inflation. Next, revenue in our consumer packaging North America division was up 32 percent to $847 million, primarily as a result of higher selling prices of 25 percent in the path to inflation and a 6 percent increase in organic volumes. The organic volume growth in the quarter was primarily attributed to continued strength in our core consumer businesses for markets such as food and beverage. This quarter marks the 13th consecutive quarter or over three years of positive growth for the division, primarily driven by their strategy of focusing on advantage products and targeted markets with strong customer linkage. Operating EVDA was down 6% for the quarter due to the timing lag of passing through cost inflation and is up 2% for the year with the strong volume growth. On slide nine, our Health, Hygiene, and Specialties Division delivered revenue of $828 million. The 24% increase included higher selling prices of 20% from the past year of inflation and organic volume growth of 1% in the quarter and an impressive 8% year to date. The organic volume in the quarter came off an impressive 14% growth a year ago and was primarily attributed to recovery in the building and construction market, partially offset by the strong comparisons in our hygiene and healthcare markets in the June 2020 quarter. Operating EBITDA increased by $15 million, or 11%, primarily driven by the organic volume growth, favorable product mix, and cost productivity. We continue to see a benefit during the quarter of approximately $25 million in EBITDA from favorable product mix associated with pivoting our assets to produce products related to COVID-19 protection. And lastly, revenue for our engineered materials division was 39% higher on a comparable basis adjusted for divestitures at $905 million. The increase was primarily attributed to higher selling prices of 24% from the path through inflation, along with organic volume growth of 8%. Volume growth in the quarter was primarily driven by partial recovery of our industrial businesses in the United States and Europe that were negatively impacted by the pandemic in the prior June quarter. Operating EBDA was $105 million in the quarter, which was $13 million below the prior year on a comparable basis as a result of a timing lag and passing through cost inflation. Next, our updated fiscal year 2021 operating and EBDA free cash flow guidance is shown on slide 10. Given our continued strength and stable demand outlook across our business, we are increasing our operating EBDA guidance to $2.26 billion and reaffirming our organic volume growth assumption for fiscal 2021 of 5%, which assumes low single-digit volume growth in the September 2021 quarter, building on last year's strong performance, all 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. While we remain committed to recovering cost inflation, we have assumed some timing lag of recovery continuing in the September quarter. Our expected free cash flow for fiscal 2021 is in line with our prior guidance at $875 million in a period of significant cost inflation, which is expected to negatively impact working capital. The targeted free cash flow includes $1.575 billion of cash flow from operations partially offset by capital expenditures of $700 million. We also continue to anticipate further strengthening our balance sheet and expect to be further inside our targeted range at the end of fiscal 2021. This concludes my financial review, and now I'll turn it back to Tom.

Thank you, Mark. Before we close our prepared remarks today and open the call-up for questions, I want to reiterate what we've been focused on and what's driving our strong results and our plan to keep this momentum going forward. 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 and continue to see incremental opportunity to invest organically in support of our unwavering commitment to global growth. Overall, the diversity of our end markets and product offerings, as well as the essential nature and demand consistency of our products, have been core to the underlying performance of the business. I'm very confident in our team's ability to meet our near and long-term expectations and commitments to provide sustainable, profitable growth. We have multiple drivers that we've highlighted in previous calls for organic growth shown on slides 11 and 12, including our focus on both fast-growth end markets and emerging markets along with sustainability-led packaging. We believe that by increasing our presence and making gradual moves into faster-growing markets along with continuing to invest into emerging markets, we will be well positioned to provide consistent, dependable, and sustainable long-term growth. We will continue to focus on global megatrends as we expect emerging markets to grow faster than advanced economies, and we believe there will be a considerable need for our protection products in regions with rapidly increasing populations. This has allowed us to increase revenue in emerging markets from $100 million in 2013 to now over $1.5 billion. In line with our focus on increasing our presence in health and wellness, we've recently announced over $100 million of capital investments in both rigid and flexible solutions in the United States, India, and China. As part of this investment, we just announced our plans to open another manufacturing facility and global healthcare center in Bangalore, India. Additionally, we believe the continued focus on sustainable solutions will be a powerful growth driver for us in the years ahead. For example, We believe our polypropylene drink cup is the most widely recyclable cup for quick-serve restaurants and convenience stores, having the ability to incorporate recycled content while not diminishing performance or clarity attributes. Our demand and growth pipeline for these products, including other beverage and spirits products, has been strong, and we expect further opportunities to continue to grow these products. We are committed to remaining at the forefront of innovation necessary to meet customer sustainability goals through investments in the latest equipment technology, advantage film development, and design for circularity. As a global leader, we are driven to innovate. On slide 13, we've highlighted just a couple of the amazing products we've designed and manufactured with sustainability in mind. On the left, you can see our partnership with Boomi. The bottle made 100% of sugarcane offers a range of environmental benefits, including significant reductions in greenhouse gas emissions, and reduce water use when compared to other substrate alternatives. On the right, our CPI segment launched a range of premium jars that enable cosmetic and beauty products to create a strong on-shelf presence and brand image while meeting consumer demands for more responsible packaging. The Infinity Quartz range of products can be selected from a range of materials, including post-consumer recycled plastic, as well as various finishes and decoration options. At the same time, The jars offer the benefit of being refillable or reusable. We remain steadfast in our commitment to lead and collaborate to drive innovation and acceptance of products targeted toward improving recyclability, reuse, and reduction of virgin plastics, all with the goal to promote a more circular economy. Turning now to slide 14, we are very excited about the game-changing technology of advanced or molecular recycling. This revolutionary technology can convert all forms of plastics into feedstocks, including many considered to be unrecyclable. You can see the sizable industry investments that are being made in infrastructure to lower the cost of post-consumer recycled material, increase the capacity worldwide, and attract future value-add investments. We believe, as already a global leader with scale, we will have unparalleled access to recycled content, affording us the opportunity provides sustainable packaging worldwide to ensure and aid our global CPG customers to meet their commitments around sustainability. As a company, we've made very strong progress in introducing specifically advanced recycling material to our food-based customers. We have over 25% of our CPI food-based customers working on specific projects are already having committed to advanced recycling material as it continues to become more readily available. Additionally, we think advanced recycling is ultimately a virgin alternative. This is another reason we're so excited about this technology and believe it has such ability to help address the plastic waste goals and objectives of the industry and our end users. We believe on a large scale basis, it will be a key solution to increase plastics recycling rates. Ultimately, plastics are the most advanced, versatile material It's hard to imagine any state-of-the-art solution that will help us achieve net zero without the use of plastics. We believe plastics are a critical part of the transition to a net zero economy by 2050. Internally, we have both film and rigid mechanical recycling annual capacity of over 300 million pounds worldwide. We are continuing our support of circularity through our ability to manufacture recyclable resins or films and incorporate sustainable materials into the solutions we provide our customers. We've made several partnership agreements and expansions to enhance our availability of circular resins. Just recently, we partnered with local materials reclamation facilities to implement robotic sortation, which will allow greater recovery of polypropylene containers. As you may recall, just last quarter, we announced a $70 million investment to support growth opportunities, which will enhance our ability and capability for more use of recycled content and PHA resins, supporting bio-use resins. Bioresin use, excuse me. Berry along with many of our customers have dedicated sustainability goals, many of which specify the increased use of recycled or recyclable materials. This and similar investments will further enhance Berry's portfolio of fully recyclable, biodegradable, or compostable films to support our customer needs. We are committed to remaining at the forefront of innovation necessary to meet customer needs around sustainability through investments in the latest equipment technologies, advantage film development, and design for circularity. In summary, on slide 15, we have delivered strong results across all of our operating segments during the quarter, leading to an outstanding set of year-to-date metrics. We again have delivered on our strategic goals of driving organic growth and improving our balance sheet on top of a prior year quarter that was very strong. These results are the byproduct of our continued focus on growth, improving our strong balance sheet, in designing products with sustainability in mind, and have led to another offer in EBITDA guidance raised and achievement of our goal to reduce our leverage below four times. And finally, with our consistent and dependable end markets, a leading cost position, along with sustainable capacity, substantial capacity to invest in long-term steady growth, we are confident in our ability to achieve consistent, low single-digit growth through our customer-linked capital investments, that target continued expansion into both faster-growing end markets and regions. We continue to seek incremental opportunity to invest organically in support of our unwavering commitment to global growth. In addition to growth, we will continue to improve our balance sheet, giving us greater long-term ability to execute a comprehensive capital allocation strategy. Barry's resilience is a continued reminder of the diverse and global portfolio we have built. Thank you for your continued interest in Barry, and at this time, Mark and I will be glad to answer any questions you may have.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please send by while we compile the Q&A roster. And your first question comes from Anthony Pedinari with Citi.

Good morning. Price-cost was obviously a headwind in the quarter, and I'm just wondering, based on current prices and the price increases you've already announced, When would you expect to get back to kind of neutral on price cost? And is it possible to say how much unrecovered cost you might have at the end of fiscal 21 that you could potentially get back in fiscal 22?

Yeah, sure. Good morning, Anthony. It's Mark. Really proud of the teams. I mean, as you probably saw in the prepared comments and the release, you know, prices were up dramatically year over year in the quarter, over $500 million. So, You know our achievement of This to me just validates again our ability to pass through cost inflation our recovery was 93% On a year-over-year basis, so we're fully committed to recovering it just as we've stated in the past there is a slight timing lag on resin as well as other costs that are We're experiencing inflation on so we're going to make up some ground this quarter the quarter ran in the September quarter It's still going to be unfavorable and we'll continue to progress. As a reminder, you know, most years we're positive on price cost. Obviously, right now we're just in an unusual period of more significant inflation. So we'll catch up, and we're committed to doing that.

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

Your next question comes from Grinch Champ, Punjabi, with Baird.

Thank you. Good morning, everybody. You know, given that your COVID disadvantage in markets such as food service and industrial is starting to recover, are we sort of at a point now where the advantage portion of your portfolio will also start to moderate? I'm asking because, you know, you're going to be facing tougher comms 4Q onwards and several major CPG companies have called out moderations in volumes, et cetera. And then also you got it towards low single-digit volumes 4Q. Is that the right sort of run rate to think about at this point for fiscal year 22? Thanks.

Yeah, we're not guiding on 22, but it's fair enough to say, you know, our strategy has been to make capital investments aligned with customers to deliver consistent low single digit growth. And the assumption, you know, can be made for 22. You know, in your earlier part of your question, the diversity of our portfolio is such that some of the disadvantaged segments are actually now recovering to be more advantaged that can offset any softness we might see in other areas. But each of the businesses throughout the pandemic, we've continued to invest organically. along with our customers, and new opportunities to innovate. We've pivoted more strongly to emerging markets and certain categories that ultimately will continue to benefit us post-pandemic. As you might imagine, it's a very dynamic environment right now, but I'm really pleased that the team has remained steadfast in aligning with customers toward organic growth investments geographies that can provide longer-term growth for us. And again, all aligned with customers that are real excited as we come out of this pandemic. So those single-digit growth is a strong assumption. Thanks, Tom.

Your next question comes from Aran Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. I guess I wanted to first ask about the free cash flow guidance. Obviously, you've provided some metrics in the past. I guess each penny change in resin is maybe $10 million on working capital on an annualized basis. Is that the main driver of your updated free cash flow outlook?

Hey, everyone. Good morning. It's Mark. That's exactly right. And that metric is accurate. That assumes all grades globally. And so they're not obviously all moving at the same level, not only between grades, but also between regions. And so there are some puts and takes amongst that, but that's exactly what's driving the working capital is just increased inflation. So we're passing it through, but obviously that results in higher working capital needs, which are obviously temporary and one time in nature.

Great. And then... Maybe you can just give us an update. I know that you've reiterated your volume guidance, but as you look into next year, you know, the last two years have been kind of choppy with, you know, two-thirds of the portfolio doing really well last year, and then now you're one-third kind of recovering this year. When you step back, you also have some new initiatives and inhalation and some other areas. How are you thinking about growth now going forward? I know you've kind of indicated low single digits, but... are you still feeling confident in that and what are some things that you're, you're, you're looking for as far as still areas that still are yet to recover?

Thanks. Listen, we believe the long-term fundamentals that we've invested around mega trends like health and wellness, e-commerce, food safety, all combined with sustainability leadership, you know, are the right investments, you know, coupled with, you know, greater penetrations that we've made to the emerging markets now being over a billion and a half dollars of, of, our revenue base. So, you know, each of the businesses, as I said, you know, earlier, we've continued to invest organically alongside our customers. And we're very confident that, you know, going forward and we're building the business around long-term, consistent, low single-digit growth aligned with customer opportunities. As you said, the business most negatively impacted by the recovery or the pandemic, I should say, was Engineer Materials. And we expect that as the economy continues to further open and recover, you'll see improvements in businesses like Engineer Materials and CPI that were probably most disadvantaged during the pandemic. But the breadth of products that we make are essential, as we've seen throughout the pandemic. And I think the track record of Berry growing before the pandemic, during the pandemic, and after the pandemic will continue to sustain itself over the long haul. Thanks.

Your next question comes from Jeff Sakakis with JPMorgan.

Thanks very much. I want to understand your price-cost dynamic a little bit better. So you were negative $42 million in the quarter roughly. All things being equal, do you capture all of that back in the September quarter But then you have a negative price cost spread in the September quarter that you think will be less than the negative price cost spread in the June quarter. Is that why it improves? And then secondly, what's growing faster for you, polyethylene or polypropylene? And is it meaningfully different and why?

Hey, Jeff, it's Mark. Thanks for the questions there. I mean, with respect to pass-throughs, you know, resin is our largest cost category, and we have very strong pass-throughs. You know, there is a slight timing lag. So the majority of the, you know, the majority of the $42 million is related to that. There's contractual pass-through, but there's a lag. You know, the other costs, some of which are indexed with customers, but many of which we have to go out with price increase to recover. and we're continuing to do that. But I would characterize it the same as resin. There's a lag, we recover it, and we're continuing to do that. So it's an ongoing effort across all four segments. We do expect still some unfavorability in the September quarter, but again, it will be less so than the June quarter as we continue to make progress in recovering both elements of that. With respect to different types of resins and which grades are doing maybe better than others. I would say all are doing well and there's no, I'm not aware of any significant move between material types relative to the, you know, polyethylene versus polypropylene.

Great.

I would call our mix dramatically changing in those grades.

Okay, great. Thank you.

Your next question comes from Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. On HHS, you said the 25 million favorable mix still occurred this quarter. Just wondering what kind of visibility do you have on this favorable mix continuing into the next quarter and even into fiscal 2022? Thanks.

Yeah, so for the September quarter, you know, we expect it to moderate somewhat in the current quarter. In 22, you know, it's still too early. Obviously, the pandemic is... very dynamic and changing. So we'll continue to update, provide updates on our calls. But at this point, we have some modest moderation assumed in our guide for the September quarter.

Got it. Thank you.

Your next question comes from Mike Lighthead with Barclays.

Great. Thanks. Good morning, guys. I wanted to circle back on the free cash flow conversation. I appreciate you aren't giving a formal 22 look yet. But just as we start looking at cash generation next year, are there any meaningful changes in the cash flow bridge next year versus this year? And I guess what I'm getting at is, do you think greater than $1 billion free cash flow still feels like a reasonable target for next year? I assume resin prices hopefully don't take another steep hike up from here. Just trying to understand some of the moving pieces there. Thanks.

Yeah, no, good question. I mean, you know, the inflation impact on working capital is the big one this year. You know, hopefully next year we don't have the same level of inflation. That certainly wouldn't be, I think, what people are expecting. So that's really the big one. You know, we've got over $100 million negative impact in 21 related to working capital that That is unusual, and we would not expect in a normal environment for that to repeat next year. But that's definitely the big one.

Got it. Thank you.

Your next question comes from Josh Spector with UPS.

Yeah. Hey, guys. Thanks for taking my question. I guess on the circular feedstock side of the equation, you know, you continue to highlight your access to 600 million pounds plus the material by 2025. I guess I'm curious if we should assume that number increases over the next couple of years as you add new agreements. And related with that, should we think about any cash being used to either secure these supplies or co-invest with producers to make sure you have more access to those materials as customers demand it?

I do anticipate that we'll increase our access through agreements that we form with resin suppliers as they increase their capacity of advanced recycling substrates. Barry's primary role is making certain that we can educate our customers and give them access to these unique materials that we think are especially advantage to help solve the world's problem relative to plastic waste. And as such, we're going to do everything we can do to make certain that we've got balance between both mechanical as well as the advanced recycling substrate. We've recently made a capital investment to support and increase our capacity of Mechanically recycled material in Europe. I have nothing further to announce beyond that at this stage. Nonetheless, we want to create the opportunity for our customers to meet their sustainability goals and have Barry be the primary source to do that. Whether that's mechanically recycled, advanced recycled, bio-based materials, or the likes, demand isn't growing and it's increasing. We're pleased that we took a leadership position relative to the technology and the material to be in a position to offer our customers and commercialize new applications.

I would just add, Josh, with respect to costs, our equipment, our converting assets do not require capital to use different types of materials. So whether or not it's virgin, mechanically recycled, or advanced recycled material, our converting assets are capable of doing that conversion without capital investment necessary.

Thanks. If I could just quickly follow up on that. Just on the chemical recycling side, the 300 million pounds, is there any dollar amount you could share in terms of what you've had to put towards securing those agreements? That might be a helpful benchmark for us.

No, there's not a dollar amount. It's more of our letters of intent to consume that material over a given period of time. That's about all I'll say to it.

Okay. Thank you.

Your next question comes from Adam Samuelson. with Goldman Sachs.

Yes, thanks. Good morning, everyone. So two quick ones, if I may, just trying to think about both the fourth quarter and then into 22, given kind of some of the different demand dynamics happening in different parts of the business, then that impact of mix as we look forward for the next couple of quarters, if there's any, kind of material benefit that you see just in terms of certain parts of the business continuing to perform stronger than others. And then secondly, just with the balance sheet now inside the leverage target range, can you help us prioritize uses of cash in terms of further deleveraging to the low end, thoughts around the common dividend, share repurchases into 22? Thank you.

Yeah, in terms of performance, we expect similar performance going into our fiscal fourth quarter as we saw in Q3. So there's no significant differentiation that we would call out for quarter four. In terms of capital allocation, we continue to see incremental opportunity for us to invest organically in the growth commitments that we've made globally. But in addition to growth, you know, we're going to continue to improve our balance sheet. And, you know, that in turn, you know, gives us greater flexibility, you know, going forward. We were pleased to get to the high end of our range that we've communicated of operating the company between three and 3.9 times. But right now, we believe that further investing in the resiliency of this portfolio globally aligned with customers while paying down debt, is a great opportunity to create shareholder value, and that's what we plan on doing near term.

Great. Thank you.

Your next question comes from George Staffos with Bank of America.

Hi, everyone. Good morning. Thanks for the details. I wanted to ask a broad question, if you will, on growth and the investments that you've been making, Tom. Is there a way that you could quantify for us the amount of investment that you made in HHNS and what that should mean for revenue growth for the segment holding pricing constant over the next couple of years. Relatedly, you mentioned that you have broad confidence in 2022 EBITDA growth. I recognize you're not going to guide there, but could you give us some qualitative beyond broad confidence in terms of what we should take away from that and what we should assume in terms of margin and return on capital based on the investments that you've made. So quantify HHNS if you can and give us a bit more quantification on the broad confidence for next year, throwing in margin and return on capital if you can. Thanks, guys, and good luck in the quarter.

Thanks, George. Listen, we've had really a multi-year strategy in HHS. We've continued to pivot more of that portfolio to areas with faster growth and geographies that are faster growing. So hygiene and healthcare continue to be areas of importance inside HHS. We've increased our presence around adult incontinence, premium hygiene, femcare. We've announced an additional investment to support the healthcare space in China that will be operational at the end of next year. We've invested in areas like biopharma, flexible packaging in our healthcare space. We just announced a new nine-layer line clean room facility to support higher-end flexible packaging requirements. the level and pace of investment in that business has been brisk. Mark, do you want to comment on the size of the investment?

Yeah, I think, I mean, George, I guess I would aggregate it for the company. You know, the metrics we've provided in the past, although they can swing around with resin a little bit, right, in terms of the top line numbers. But the dollar for dollar, I think, is still a good general rule of thumb. Dollar of revenue for every dollar at CapEx on growth. And those are 20%-ish IRRs or EBITDA margin, which would be the same in this case, given the dollar for dollar. But that holds true for our portfolio. I don't think we want to comment on individual investments, but I think in the aggregate, that still holds true and would also hold true for the HHS category. And Tom mentioned a couple of big ones. We got a $70 million investment. in China that we're in the process of. We've got several film-related investments for our healthcare film business. We've got some specialty investments that are also being invested in globally across Europe, Asia, and the U.S. So there's multiple assets that are being invested. In total, about half of our $700 million of capital is related to growth, so about $350-ish or so. of CapEx this year that we would expect to drive both top line and bottom line as we go into 22 and beyond.

I think also what's important to note is that every capital investment that we make, we tie it to an anchor customer to ultimately help pull through the success of those investments. And there's a lot of confidence in the strategy that we've deployed over the last several years now and continuing that forward in each of our four businesses, all with its own unique value proposition and creating the kind of diversity in our portfolio that gives us the resiliency regardless of the economic environment.

So those contracts are the reason you feel you can grow off tough comps, correct?

In all cases, yeah. And in general, we're going to continue to invest, you know, in our company, you know, for the long term that we can consistently deliver that low single-digit growth and excited about those prospects. And in HHS, it's a global business. in a market category that we're very excited about and a business that has performed incredibly well over the last couple of years for sure. Thank you very much, guys. Good luck in the quarter.

Your next question comes from Phil Ng with Jefferies.

Hey, guys. The investments you guys are making are obviously very exciting. You're seeing good growth. Perhaps a question for Mark. Do you think you can sustain that with $700 million of CapEx? And when we think about that bridge for free cash flow for 2022 outside of working capital, should we see some tailwinds from restructuring costs reversing now that RPC is behind? Are you just trying to get a better sense of what to take on the cash flow side next year?

Yeah, sure, Phil. On CapEx, I mean, we're really fortunate. I think we had some comments about the pipeline. It continues to be very strong across all four segments. We've got nice growth opportunities that are continuing to come into the pipe. We're excited to bring those home and spend money to drive more growth in the business. As Tom said, that's outside of safety. That's our top priority is organic growth. With respect to restructuring costs, the second part, we really didn't have much this year. Credit to the teams in getting that integration done. We came in right on top of our cost energy estimate and are going to come in below the cost to achieve those. I wouldn't expect much restructuring next year, and we didn't have much this year, really. It wound up coming in a pretty low number. I wouldn't call that a huge variance just because we did such a great job here in 21 not having significant costs.

As Mark said, it's a high-quality problem for us to have more customers to align with to support our organic growth objectives. The pandemic only reinforced and I think made more pronounced the strength of our relationships and the value of doing business with Barry, whether it's innovation, agility, supply chain, resiliency, capital investment. In fact, we've got local value delivery capability, material science, what have you. It's become more pronounced, and that pipeline is what gives us that long-term confidence that we can deliver for the company low single-digit growth. Okay, super. Thank you, guys.

Your next question comes from Mark Wilde with Bank of Montreal.

Thanks. Morning, Tom. Good morning, Mark. I have just a couple of real quick ones. Just following on that question Kyle asked earlier about mixture version and HHNS, Mark, you suggested you didn't see any in the third quarter based on that $25 million benefit. You pointed to a little bit more in the fourth quarter. Has your view of that trajectory, that mixed reversion, has that changed at all over the last, say, three to six months, where you're a little more confident, perhaps, in holding on to some of that benefit for longer?

I mean, I would say, you know, it's very dynamic, right? I mean, obviously things continue to change with respect to the pandemic. So I think, you know, proud of the team and what they've done continuing to keep going. you know, product in customers' hands. But I think this is one of those things where it's going to be fluid and we're going to continue to update the market as we can. But, you know, again, in our Q4 guide, we've got some modest moderation. How that ultimately winds up unwinding if and when, I think it's still all to be determined at this stage.

Okay. And if I could, just one other one, Mark. Can you remind us about how you're measuring organic volume growth, just broad brush?

Yeah, it's each business. We try to use the primary metric that's the most accurate. Some of our businesses sell widgets. Some of them sell on tonnage, weight. Some of them sell on surface area, so square meters, for example. So in each business, we use the best metric for that business based on how we sell the product, whether or not, again, it's widgets, weight, or surface area. So each is going to be a little different. Like most of our consumer businesses, for example, are widget-based.

Yeah, and you're clearly, you're driving some of this with, you know, capital dollars in new projects and things. Have you also changed kind of incentive comp structures at Barry to, you know, push your sales force to, you know, sell more incremental volume or more new products? volume?

Well, we're always tweaking your incentive comp plan to drive the behavior you want, but it's more, I think, a change that we've made in terms of the focus of our management team. It becomes the primary objective of what we review every month. It's what we talk about inside the businesses relative to the commitments we ask them to ultimately meet relative to growth. We have modified our views in terms of increasing the probability of success by making certain that capital investments are aligned with customers. And I would say, Mark, if you came into our company right now and you asked people other than safety what the number one priority is, they would tell you profitable organic growth across the entire global organization. And, you know, that's powerful, and that's what's driving, you know, the kind of – passion that we have and belief that we have, as we've demonstrated, as I said, before the pandemic, during and now after, that will deliver predictable growth.

And we're very confident in that. Okay. Sounds good. Thanks, Tom. Good luck in the last quarter of the year.

Thanks.

Your next question comes from Neil Kumar.

Thanks for taking my question. In HH&S, could you just break down for us how the 1% volume growth looked across the portfolio, so for wipes, masks, and gowns versus diapers and AI? And you mentioned earlier pivoting your portfolio in HH&S. Will you just put any numbers on the percent exposure to each of these categories now versus how the portfolio looked pre-COVID?

Not something, so I think the question was, what is the percentage breakout of the portfolio? What was it pre-COVID and what will it be post-COVID inside HHS? Is that correct?

Yeah, that and also just any color on the 1% volume growth during the quarter across the portfolio.

Yeah, I don't, you know, in terms of the last part of that question or the breakdown, I mean, as we said in the prepared comments, you know, we had stronger growth in items that were negatively impacted by the pandemic. You know, we're laughing kind of the biggest impact from the pandemic now, right? The June 2020 quarter, you saw obviously the largest impact from the pandemic. So some of our businesses, as we said back then, were very negatively impacted by the pandemic. And vice versa, we had some businesses that benefited. And so this quarter kind of just had the fourth of that. So building and construction, again, being one in HHS that was hit really hard at the beginning of the pandemic, that has recovered somewhat. And so, you know, it was obviously up year over year and vice versa in some of the other categories like hygiene, for example. With respect to the splits, you know, as Tom said, we've pivoted the business. We've continued to pivot the business towards healthcare, premium hygiene, adult incontinence. So those areas of the percentage have While I don't have the exact numbers right in front of me, I would expect we're going to make up a larger percentage of the total portfolio on a post-pandemic basis than they were pre-pandemic. Not only because of the impact of the pandemic around safety, but also just that was what we were driving towards. We were driving towards that even before the pandemic. So I think the combination of the two I will certainly make those categories larger as a percentage of the total pie, but again, I don't have the exact numbers right in front of me.

In aggregate, you're going to see continued growth and expansion around the healthcare space. One dynamic that we've seen is that the pivot that we had forecasted many years ago from reusable surgical drapes and gowns to disposable continues to build. And as people choose to have more elective surgeries, that's going to continue to be a dynamic that will benefit that business. But suffice to say, those areas that we've continued to make capital investments will begin to make up larger percentages of the portfolio in addition to our footprint in the emerging markets around the world, specifically China, Southeast Asia, And the latest investment, as Mark noted, you know, a $70 million healthcare line, you know, that will, you know, be commissioned around toward the end of next year.

Great. Thank you.

Your next question comes from the line of Gabe. Heidi? from Wells Fargo. You may now ask your question.

Tom, Mark, good morning. Congrats on the quarter. I had a question. I'm just thinking about, I guess, risk mitigation or things that could potentially go wrong as we sit in hurricane season. I suspect you guys haven't had an ability to build up any kind of safety stock or anything like that, given elevated resident prices and or availability. So I'm just curious, other than that, unless you want to expand on that, Are there other areas within the supply chain where there's risk right now or just where you feel like you're against pressure points, I guess, that we should be mindful of?

Yeah, I mean, I think, you know, as I said in an earlier comment, this is one of the areas I'm probably most pleased with our teams, and that is how they've actually demonstrated in this environment strong supply chain resiliency on a global basis and taking advantage of what now is a global platform for us to draw from to risk mitigate where we can. Clearly, we can't predict or anticipate what might happen relative to a hurricane season, but we take the necessary steps as we always do in preparation for things like that. And it's the cadence that we follow literally for the last 50 years inside the company. The benefit we have today is we now have more of a global footprint take advantage of. Let's hope that's not needed, but I will tell you the team's sourcing organization and supply chain group have performed very well in a difficult environment, as you've heard others comment on and around.

Thanks for that, Tom. And I guess the other question, a lot of ground has been covered, but private market valuations have come in a little bit. And again, I know you've highlighted, I think number two priority is continuing to de-lever, but just curious, anything on the add or delete side of the equation? I know you're not announcing anything today, but just when you look across the portfolio, businesses that may not fit or areas where, again, you might want to build out.

Yeah, nothing we'd comment on now, but suffice to say you're going to continue to see us invest organically around those megatrends we've noted before, health and wellness, food safety, as well as e-commerce. And what we're starting to see now is an intersection where a lot of our capital investments that are supporting growth are also sustainability-related investments that allow our end customers to meet their goals and objectives relative to sustainability and circularity. So you'll see more investments along those lines, coupled with our continued focus on accessing faster-growing regions of the world.

Thank you, Tom.

And at this time, you have no further questions. I'll turn the call back over to the company for any closing remarks.

We thank you all for your interest in Berry Global. Look forward to reporting our next quarter and having further discussion. Thanks, everybody. Have a safe week.

Ladies and gentlemen, thank you again for joining us today. This concludes today's conference call. You may now disconnect.