Berry Global Group, Inc.

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

Thank you, and good morning, everyone. Welcome to BERI's second fiscal quarter 2022 earnings call. Throughout this call, we will refer to the second fiscal quarter as the March 2022 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 Barrie'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, 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 the reconciliation of the differences between the GAAP and non-GAAP financial measures are available on 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, 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. 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. I'd like to refer everyone to slide four to the quarterly presentation materials. First, I'm pleased to report that we exceeded our adjusted earnings per share expectation for the quarter and delivered record net sales of $3.8 billion with organic volumes, EBITDA, and free cash flow finishing in line with our expectations despite additional inflationary pressure and macroeconomic challenges. We are reaffirming both our adjusted earnings per share and free cash flow ranges for the full fiscal year. Additionally, we increased our cash return to shareholders as we repurchased $300 million of shares, or 4% of our outstanding total shares in the quarter. As we stated on our last call, we are committed to repurchasing at least $350 million in fiscal 22, and we've already achieved that threshold during the first two quarters. Given our top priority of driving shareholder value, we were fortunate to be able to repurchase our shares in and take advantage of the attractive return opportunity at prevailing prices. If current valuations persist, we would expect to continue to repurchase shares at a similar pace in the back half of the fiscal year. We have approximately $700 million remaining on our recent authorized $1 billion share repurchase program, with the majority of our cash flow generated in our fiscal second half. Next, we've seen continued inflation since our last earnings call we are taking aggressive price action to offset these costs across our businesses. While we continue to navigate through this dynamic operating environment, our teams are executing exceptionally well. We continue to prioritize our customers and our scale and operational agility have enabled us to service our customer demand and continue to focus on growth while also recovering higher input costs at the same time. And finally, Our portfolio offering is unlike any other in our industry. Our ability to provide a one-stop shop for our customers on a global basis is unique and differentiated. We are investing for the long-term growth with a focus on faster-growing product categories, growth-oriented geographies, and innovations that drive growth along with sustainability-led opportunities for additional growth and value creation. We've made great strides towards our sustainability goals, and we will continue to be ambitious with our commitments, which are being driven and led by the needs and demands of our extensive global customer base. Next, let me turn to our number one core value on slide five, and that is safety. Keeping all of our 47,000 teammates healthy and safe is our highest priority. We have an ongoing commitment to identifying, managing, and minimizing safety risks. Our teams have continued to make great progress on safety despite a challenging environment. Our safety performance speaks for itself, and as you can see, has continued to improve. We are very proud of our industry leadership delivering an OSHA incident rate below one for fiscal 2021, which is significantly better than the industry average of 3.7. Our entire global team's emphasis on working safely and servicing our customers in a challenging environment has made us a stronger and better company today, giving us great optimism on the company's future success. As you can see on the slide, we have a strong commitment to ensuring that we are providing better opportunities and bringing innovation to provide multiple lives to natural resources while heading many initiatives with industry and external partners to improve circularity and our carbon footprint. And lastly, I'd be remiss not to mention how extremely proud I am of our company and employees who continue to generously assist refugees from Ukraine during this extremely volatile and challenging period, providing both shelter and financial support. Now, I'll turn the call to Mark, who will review Barry's financial results. Mark?

Thank you, Tom. Before we move ahead in the details for the quarter, please note that consistent with last quarter, we will compare the current period quarter to that of two years ago. the March 2020 quarter, as COVID had yet to meaningfully impact our businesses, and we'll refer to this on a two-year basis. We believe this comparison provides meaningful and useful information to investors about the longer-term trends in our businesses and mitigates the impact of COVID, which has both benefited and negatively impacted portions of our business. I would like to refer everyone to slide six now. For the quarter, we delivered record net sales of $3.8 billion, which is 12% higher than the prior year and up 31% on a two-year basis. Organic volumes were 2% lower than last year, in line with our expectations as we recorded 5% organic volume growth a year ago. When compared to the pre-COVID levels on a two-year basis, organic volumes were up 3%. From an earnings perspective, operating EBITDA was down 6% from the prior year quarter, as expected, with the estimated $25 million product mix benefit realized a year ago. On a two-year basis, operating EBITDA increased 4% and adjusted earnings per share increased by 21%. These strong results over the past two years are driven by our focused strategy to invest organically in each of our businesses and strong execution in the face of significant cost increases in our primary raw material resin, as well as inflation in other raw materials, freight, energy, and labor. As we have demonstrated historically and well again throughout fiscal 2022, we remain committed to passing through these cost increases and believe we are well positioned given our scale, along with our ability to service customers from our facilities in close proximity to their locations, which provides both cost and sustainability advantages. Our ability to efficiently pass through inflation was demonstrated again as our selling prices were nearly $600 million higher than the prior year quarter, and up a substantial $2.5 billion over the last four quarters. Now I'd like to turn to the quarterly performance by each of our four segments, starting on slide seven. For the quarter, our Consumer Packaging International Division delivered a 7% increase in revenue over the prior year and a 17% improvement on a two-year basis, including organic volume growth of 4%. Our food, beverage, and healthcare markets recorded solid volume growth while some industrial markets continue to experience modest headwinds. Operating EPA on a two-year basis was up 8%, driven by the organic volume growth and cost productivity, partially offset by the timing lag of recovering higher costs. Next, our Consumer Packaging North America Division delivered a 20% increase in revenue over the prior year and a 39% improvement on a two-year basis, including organic volume growth of 5%. Selling prices increased by over 21% versus the prior year from the pass-through of higher costs. Flat volume in the quarter exceeded our expectation coming off the strong 5% organic volume growth delivered in the prior year. From a market perspective, we continue to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable drink cups used by quick service restaurants and convenience stores. Operating the FDA on a year-over-year and two-year basis was up 7% driven by the strong organic volume growth. On slide eight, our Health Hygiene and Specialties Division delivered a 30% increase in revenue on a two-year basis, including organic volume growth of 5% over the same period. In the quarter, similar to our other divisions, we saw selling prices increase significantly from the past year of higher costs. As expected, volumes were lower in the prior year quarter as a result of strong year-over-year comparisons in our hygiene and healthcare markets from the pandemic. On a two-year basis, the segment benefited from organic customer-committed capital investment, supporting our customers in healthcare, hygiene, and specialty products. Operating EBITDA on a two-year basis was up, primarily attributed to strong organic volume growth, partially offset by the timing lag of recovering higher costs. And lastly, our engineer materials division delivered a 17% increase in revenue over the prior year and a 36% increase on a two-year basis with a modest volume decline over the same period. In the quarter, we saw selling prices increase by 24% from the past year of higher costs. Volumes were down modestly as the recovery in business was negatively impacted by COVID along with the onboarding of new business were more than offset by supply chain challenges. Operating EBITDA was up 4% compared to the prior year from cost reduction projects, and capital investments supporting productivity, but modestly down on a two-year basis related to the volume weakness from supply chain challenges. Next, as you can see on slide nine, we are reaffirming our adjusted earnings per share of $7.20 to $7.70. The range assumes lower EVDA primarily from divested businesses, foreign currency headwind from the strengthening U.S. dollar, and the timing lag of recovering higher costs offset by a lower tax rate and the benefit from share repurchases. As referenced on our last call, we remain committed to recovering the significant inflation we have incurred starting in fiscal 21. We continue to anticipate from both an earnings and volume perspective an improved second half of the year as we continue to recover inflation along with the startup of new business and capital investments. Further, as we communicated at the beginning of the year, we expect organic volume growth to sequentially improve as the year progresses and anticipate low single-digit growth in the second half of the year. For the full year, we expect volumes to be flat to up 1%, coming off 4% organic volume growth in fiscal 21. This is modestly lower than our prior guidance because of the timing of new business startups and continued supply chain challenges. On slide 10, we are reaffirming our free cash flow guidance of $900 million to $1 billion. This includes cash from operations of $1.65 to $1.75 billion, plus capital expenditures of $750 million, as we continue to see a strong pipeline of growth and cost reduction projects, which returns well above our cost of capital. I'm extremely proud of our ability to deliver on our cash flow guidance every single year since we started providing guidance nine years ago. We have a clear and flexible capital allocation strategy which includes funding organic growth projects, opportunistic share repurchases, debt pay down, and strategic portfolio management. We intend to use a portion of our strong, dependable, and consistent free cash flow to fund customer-supported investments that drive sustainable, long-term organic growth. We have also historically generated significant value through active portfolio management, including both strategic acquisitions and divestitures. As we continue executing our portfolio management strategy, we believe we are well positioned for continued value creation this year, having already executed three divestitures expected to deliver proceeds of around $150 million. And as Tom noted, if the market continues to present us the opportunity to drive attractive shareholder returns through share buybacks, we will continue to use a portion of our cash flow to buy back shares at prevailing market prices. This concludes my financial review. I'll turn it back to Tom.

Thank you, Mark. As you can see on slide 11, we have consistently driven top-tier results in nearly all key financial metrics, generating strong compound annual growth rates for revenue, earnings, and free cash flow, and grown our adjusted earnings per share every year as a publicly traded company. Our business model is extremely resilient through any economic cycle and includes the dependable and stable free cash flows to allow us the flexibility to drive the greatest returns. We are well positioned to continue to deliver significant value for our customers and shareholders. The strategic choices we've made guide how we prioritize our investments in our business, which is why we're investing in several areas that we expect to drive long-term organic growth, including the initiatives highlighted on slide 12. We continue to invest in each of our businesses, build and maintain our world-class, low-cost manufacturing base with an emphasis on key end markets which offer greater potential and differentiation in growth like e-commerce, healthcare, and pharmaceutical. I'm very confident in our team's ability to meet our near-term and long-term expectations and execute on our commitments to provide sustainable, profitable growth. Additionally, We will continue to invest and expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster-growing end markets along with continuing to invest into emerging market regions, we will further enhance our ability to provide consistent, dependable, and sustainable long-term growth. We will continue to focus on global megatrends, and we believe there will be a considerable demand for our protection products and regions with rapidly increasing populations. And lastly, innovation and sustainability are increasingly embedded in everything we do, and we continue to believe this represents a great opportunity for growth and differentiation. We remain uniquely positioned to provide a consistent pipeline of innovative new packaging solutions. We also continue to believe responsible packaging is the answer to addressing consumer concerns around packaging waste, and by responsible packaging, We mean the combination of packaging design, recycling infrastructure, and consumer participation. We continue to invest in global innovation capabilities and centers of excellence to capitalize on what we believe is one of our strongest opportunities, that being the overwhelming demand for sustainable packaging solutions. For example, as you can see on slide 13, we recently introduced an environmentally friendly dispensing solution for retail and e-commerce applications. We've become one of the first packaging manufacturers to develop a fully recyclable dispenser, Wave 2 CC, part of our B-Circular product range. Our plan is to invest over $100 million globally over the next several years in our new Wave product line with the goal of reinforcing our presence across the dispensing market by focusing on solutions that deliver a strong, sustainable benefit to our customers. Enabled by our internal post-consumer recycling capabilities in the UK, the Wave product line is the FDA approved, made of 100% plastic, and can utilize 70% PCR content. Additionally, as you can see on the right-hand side of the slide, in order to help some of our non-food customers increase the sustainability of their packaging, we are now able to offer 50% post-consumer recycled material as a standard in several of our existing and most popular industrial packaging products. Importantly, these containers also offer a monomaterial solution as they are made solely of polypropylene. These solutions are space-saving, user-friendly packaging solutions for non-food products for business-to-business use, as well as for consumer applications. In line with these initiatives, as you can see on slide 14, we have committed to minimizing product impact by enabling 100% of our fast-moving consumer packaging products to be reusable, recyclable, or compostable by 2025. Furthermore, Berry has received an A- rating for our leadership action on climate change from the Carbon Disclosure Project, which is a not-for-profit organization that runs global disclosure systems for investors, companies, cities, states, and regions to manage their environmental impacts. Barry is among over 12% of companies in the plastic product manufacturing group who have reached this leadership position. We are continuously innovating and investing to work toward the global goal of a net zero economy. Through our Impact 2025 strategy, we are dedicated to delivering sustainable innovations for our customers and within our own operations. In conjunction with a multitude of sustainability initiatives earlier in the year, We announced our most ambitious sustainability packaging goal to date, as you can see on slide 15. 30% circular content used across our fast-moving consumer goods packaging by 2030. Our new 30 by 30 goal aims to give natural resources multiple lives and introduce alternative renewable options as the industry continues to pivot towards recycled and renewable resources. We look forward to continuing to lead the way in driving innovation and sustainability-based growth and announcing many more opportunities over the next several years. In summary, we are very pleased with the hard work of our 47,000 employees delivering solid quarterly results in the face of persistently higher costs and tough year-over-year comparisons. As Mark stated earlier, we are confident we will continue to recover inflation, continue to see supply chain improvements, and see new business and capital investments ramp up in the back half of this year. Additionally, if current valuations persist, we expect to continue to opportunistically repurchase shares in the back half of the year, just as we did in the first half. And furthermore, we will continue to focus on driving organic growth, supplemented by inorganic opportunities, if available, while providing more consistent return of capital to create maximum value for shareholders, I thank you for your continued interest in Barry. At this time, Mark and I will be glad to take any of your questions. Operator?

Thank you. Again, as a reminder, to ask a question, you will need to press star, then the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ganshan Panjabi from RW Barrett. Your line is open.

Thank you. Good morning, everybody. I know you called out supply chain challenges for the EM segments, but as you think about the rest of the portfolio, are there any major constraints that are impacting your service levels for your customers and any significance? I guess I'm referring to resident constraints, labor, freight. And if you could also touch on current operating conditions in Europe, just given the sequence of events there. Thank you.

Good morning, Gansham. Clearly, I think in general, you know, we are seeing some improvement in supply chains. Specific to EM, it was really tied around certain specialty chemicals and resin formats that help support extended shelf life. As a result, you know, during the quarter, you know, we had to prioritize, you know, the allocation of that, you know, to some of our higher margin business in the space. freight in general continues to get better. And I think we'll continue to see that improvement into the back half of the fiscal year. No doubt in Europe, the war in Ukraine has created energy instability, causing the cost of those inputs to rise dramatically. They are actively being passed through from an inflationary perspective. And in general, I would say the industrial complex in Europe has recovered at a slower rate than what we've seen in the United States, though we expect that to continue to improve in the back half of 22 and into calendar 23 as well. Thank you.

Thank you. Our next question comes from the line of Mike Lithead from Barclays. Your line is now open.

Great. Thanks. Good morning, guys. Just one on my end on the capital deployment side of things. I think as of quarter end, you're maybe a little bit above four times leverage. So I guess, A, where would you expect net leverage to be by year end? And does that kind of impact your way at all in your pace of buybacks? Obviously, you picked it up a bit in your term, but just how should we think about that balance between net leverage and buybacks this year?

We continue to believe after the full year we'll be able to operate the company within our targeted range. And it's reinforced by the fact that the majority of our cash flow generation typically occurs in the fourth quarter. Third, fourth quarter.

Thank you.

Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Great. Sorry about that. Yeah, I just wanted to go back to the volume question. So, you know, it does appear that, you know, obviously you have the tough comps. But when you look kind of structurally, you have some new product initiatives, you know, across the portfolio. Maybe if you could just help us understand how we get back to kind of low single-digit growth in each of the segments. CP&A, is it, you know, a requirement that we have some new product wins? EM, I guess that would probably be an industrial recovery. And I guess what would you cite in HHS and CP International, you know, if anything? Thanks.

Sure. I'll kind of take them in order. We actually believe that given the success of the Wendy's program and the strong interest on our all-clear, fully recyclable drink cup program, that that will provide a lift for us in the back half of the fiscal year for CP&A. You know, I'll also remind you that this will be the fifth consecutive year of organic volume growth in that business, and I clearly believe that the following year will be the sixth year of growth. So that business continues to be strong. We continue to provide innovative, sustainable solutions that are winning, and the portfolio is comprised as well of products that people consume every day. And, you know, very similar to what we have in our CPI business as well. So things like food service, you know, beverage, the success, you know, that we've had in investor-owned areas will carry the day for those two specific businesses. In HHS, no doubt about it, in the back half of the year, the fourth fiscal quarter, the comparable in the prior year mathematically creates a nice windfall of opportunity inside HHS. Now, I'll also remind you that even though that business has components of the portfolio that were benefited from the pandemic, they continue, even though they might be negative on a year-over-year basis, they continue to trade at an elevated level versus 2019, which you know, is encouraging for us. And that business continues to see strong femcare and baby business, you know, for that portfolio. And then lastly, inside engineer materials, no doubt that business was impacted by really three things in the quarter that we believe, you know, will moderate. One, you know, was tied to the fact that, you know, we had some softening of demand given by destocking that was done, given that the primary channel to market for engineered materials is distribution. So it's very typical to increase and decrease stock based on anticipated inflation. Secondly, many of the converted customers that we were working on new business, they too had supply chain issues that we believe will moderate supporting the closure of new business in the back half of the year. And thirdly, in that business, you know, really there were some supply chain challenges, specifically around EVOH as a product that caused us to have to prioritize, you know, that precious commodity, you know, in the prior quarters that, you know, we're working with our suppliers to increase that supply demand. So that's what gives us the confidence in the back half of the year.

Great. Thanks for that comprehensive answer, Tom. And then, yeah, I guess just also wanted to ask about capital allocation. So, you know, you've indicated, you know, potentially an increase for share of purchase activity. And I guess how you're thinking about that, you know, longer term, you know, I know, you know, maybe if you could just kind of reiterate if you'd like to keep leverage below, you know, in the low threes, say, and what you're seeing in the M&A market, is there anything peaking your interest that would potentially cause you to rise above those levels? Thanks.

The plan is to continue to operate the company in our targeted range between 3 and 3.9 times. Given the current dislocation we saw in the share price, it was a unique opportunity. And I think, as you mentioned, M&A, we have a long history of creating shareholder value through mergers and acquisitions. And as such, when we look at the value of repurchasing our shares in the period, we it was an extraordinary value for us. So we were happy to take advantage of that dislocation, and as we committed, should we continue to see that going forward, we'll continue to act similarly as we did in the front half of the year in the back half of the year. Time will tell on that, though.

Thanks.

Thank you. Our next question comes from the line of Anoja Shah from Bima Capital Markets. Your line is now open.

Hi, everyone. Good morning. You talk about your plans to expand in emerging markets, which you've been talking about for many quarters now. But I just want to know how you balance that with what seems like more geopolitical issues in many parts of the world and the strengthening of the U.S. dollar and upheaval in international supply chains. How do you balance both of those?

Yeah, the majority of our business today continues to be in the developing geographies of the world, specifically the United States. and Europe, our ability to complement that in faster-growing geographies where we have stable customer bases, stable management teams, you know, is where we would prioritize our time. We've been thrilled, you know, with the most recent announcement that we've had with our healthcare market expansion in Bangalore, which in spite of the pandemic, in spite of the pandemic, the disruption in the global economy continues to be on track, and we're partnering with global brands serving that local market. So that in and of itself helps de-risk it because we're serving local markets. We're not exporting those goods in most instances outside. Similarly, the investments that we make alongside our customers, like the wave dispensing investment in our CPI business, can have global applications. So, again, any investment opportunity that's done alongside in conjunction with our end customers de-risks some of that volatility that you noted. And we continue to believe it's a tremendous opportunity to complement the significant base of business we have in the two most developed regions of the world.

Great. Thank you.

Thank you. Our next question comes from the line of George Staffis from BAML. Your line is open.

Thanks very much. Hi, everybody. Good morning. Thanks for all the details. Tom, Mark, I was hoping you could give us a bit more color in terms of how the volume and EBITDA projections changed across the segment. So if you could talk about where you saw the decrement to volume across the business's and how the new low single-digit growth applies across the four segments, and similarly, how that allocated, if you will, the decrement across the segments from an EBITDA standpoint. Especially, I'd be interested in HHNS, since you've been putting so much investment there. Thanks, guys.

Male Speaker 1 Yeah, sure, George. Good morning. Yeah, I would say, in terms of the volume portion of your question, you know, relative to our update from last quarter, I'd say, you know, mostly Europe, China. So we've taken a more conservative view with respect to volumes in those regions. With respect to earnings, I think the timing lag in recovering inflation is mostly occurring in our HHS business. So our volume outlook continues to be robust, I would say, in the other businesses. outside of CPI and perhaps a little bit of EM with the supply chain challenges that Tom mentioned lingering here in the back half of the year. As you recall, last quarter when we gave our outlook, we had expected improvement in that area. And while we have seen improvement, it continues to be choppy.

Mark, if I could ask just more clarity. So what are you looking for if it's low single-digit for the whole portfolio? How does that sort of stack rank or, in terms of rough percentages, break out by the segments? Thanks again.

Yeah, we typically don't provide, George, as you know, guidance by segment. I would say, you know, in terms of which businesses we expect to overdrive the low single-digit growth, I think HHS continues to have strong demand in spite of, again, some of the COVID benefit waning. So I'd say HHS stronger. CP&A stronger. And again, back to my last answer, CP&E may be lagging a little bit in terms of the company average for the back half.

Thank you very much.

Thank you. Our next question comes from the line of Mike Roxland from Truist Securities. Your line is open.

Thanks very much. Hi, Tom, Mark, Dustin. Congrats on the quarter. I'm Just wanted to follow along with the question on capital return. Can you just help me understand the approach during the quarter? You mentioned the current dislocation and providing you with a unique opportunity. You only repurchased 300 million shares during the quarter and the stock was down about 20% in the year to date. Why not be more aggressive? You're relatively within your targeted range or maybe slightly higher this quarter. You still expect to generate impressive free cash flow. despite EBITDA being a little more challenged than you originally expected. So why not be more aggressive, buy more shares this quarter, and maybe tone it down a little bit in the back end?

A lot of it has to do with just the cash generation for the company. The majority of our cash is generated in the back half of the year. We realize this is a dynamic marketplace right now with all the variables that play into these valuations, and we want to expose ourselves to as much opportunity throughout the course of the year should the circumstance present itself to take advantage of the repurchase. Frankly, a $300 million purchase met the full year commitment that we made at the beginning of the year. And as we've committed, should we continue to see that dislocation in the back half, we'll act similarly in the back half of the year as well. And the company's cash flow performance allows us to do that. and we believe it's a unique opportunity for us and one of the best investments that we can make in our company right now.

Thank you.

Thank you. Our next question comes from the line of Christopher Parkinson from Musiho. Your line is open.

Good morning. This is Kieran. I'm for Chris. I was just wondering, within health, hygiene, and specialties, can you talk a little bit about what you're seeing in terms of price mix? It seems like you're ahead of the curve in the other segments, but there you're still seeing a little bit of an impact. If you can just parse out how you think about, you know, the price-cost spread trending in the back half of the year, and then any opportunities you see in terms of, you know, I guess improving the product mix over time with some of these new introductions. I appreciate it.

Yeah, we've got a host of investments, you know, that have been outlined in HHS, you know, supporting healthcare, supporting the expansion of compostable white substrates in Europe, you know, an untapped market for us. And, you know, along with investments that bolster our existing base of hygiene and adult incontinence products and film-based substrates. And there have been price actions that are and have been put in place. And frankly, there's just a longer lag associated with our HHS business that you'll continue to see improvement over the next several quarters as an offset. And, you know, clearly the rate of inflation, you know, in that business was, you know, much more significant than we had budgeted for, and the appropriate actions are being taken with our end users. What the current environment has outlined clearly is that, you know, there's a lot of different inputs that go into the cost of our products and to provide those products, and we'll continue to be working in conjunction with our end customers to have as comprehensive pass-through mechanisms, shortening those lags as much as possible, just as we've done in our other businesses. We've made tremendous progress over the years in shortening that lag, as you saw with the success we had in CP&A and engineering materials and CPI.

Very helpful. Thank you.

Thank you. Next question comes from the line of Phil Ng from Jefferies. Your line is open.

Hey, guys. Tom, I guess you addressed some of this already, but your four-year guidance, you're assuming EBITDA comes down. Part of that is a lag on cost pass-through. I'm just curious what kind of progress you're making on passing through non-resident inflation. And just given the amount of energy prices you're seeing move up, particularly in places like Europe, Have you been able to kind of pass it through a little more real time, and are you looking to implement freight surcharges if you haven't yet?

All of the above. We've got different mechanisms. I won't speak on a general basis for competitive reasons what we're doing, but we're addressing every aspect that you noted there, whether it's energy, whether it's freight, whether it's labor. There's a variety of inputs and and dynamics globally now that have changed that are simply too significant to ignore. So the teams are taking aggressive steps in collaboration with our customers to do it in a thoughtful way that ultimately allows us over the long term to do it responsibly for both parties.

The one thing I would add, Phil, that's Mark, is if you look back at the history of the company, we made tremendous progress in passing through inflation. on a more timely manner. So while we still have a lag in some of our businesses, we've made dramatic improvements in accelerating that. I think you can see that in the numbers, right, with the order of magnitude of the inflation we've seen in the last few quarters and the resilience of the company's profits through that kind of unprecedented inflationary cycle we've been in now for several quarters. So really proud of the team's ability to you know, execute more timely price increases. And we're going to continue to work on that going forward. It's an ongoing effort of the company to shorten that lag.

And, Mark, I guess within your guidance, if I understand it correctly, you're assuming resin prices to move from here. You know, how confident are you in hitting your, I think, $50 million headwind price cost? You know, certainly the non-resin piece, curious what kind of inflation assumptions are you baking in? It's a pretty dynamic environment, certainly.

Yeah, no, that's well said. I think, you know, we've obviously only got a couple quarters left and we're part of the way into the third quarter. So those variables become less meaningful, I guess, with respect to the outlook for this year, you know, given the flow through of inventory as well. So you're right, Phil. I mean, we did assume polymer prices, current polymer prices. To the extent those change, you know, it would have an impact in Q4, you know, Again, it could go either direction, obviously, but you're right. That would be both, I guess, a risk and an opportunity depending on the direction they go. But again, I would highlight that I think we've done a nice job in reducing that lag, but we would still have some impact to the extent they move between now and the end of the fiscal year.

You know, I have to piggyback on Mark's comment there, because one thing that we should note is that over the last several years, we've continued to invest heavily in in automation and other investments to improve our efficiency. And that, coupled with the fact that we're fully committed to offsetting the inflation, creates some tailwind opportunities for us as we see that benefit of the price recovery from a margin perspective.

Okay. Thank you. Appreciate the color, guys.

Thank you. Next question comes from the line of Josh Respecto from UBS. Your line is open.

Good morning. This is Lucas Bowman. I'm for Josh. In a similar vein, I just wanted to go back to the volume weakness sort of in Europe and China. So you kind of discussed sort of the factors of what's going on there. I mean, it's obviously very volatile as well. But I mean, what are you guys assuming in your guide in that sense? Are you assuming things get better from here or they stay the same or are you assuming any deterioration?

We have some modest deterioration. I mean, it's about call it a third of our business is in Western Europe. And as we discussed earlier, that's a dragging on the plus low single-digit outlook for the back half of the year. So we do have some deceleration. We're fortunate in that the majority of our products are everyday consumer products, but we do have some exposure in Europe to industrial categories like chemicals, paints, automotive, et cetera, some more industrial-type businesses. And we do have some deceleration built in for the back half of the year in those categories.

Great. Thanks. And then in terms of HHNS and the sort of demand declines there, I was just wondering if you could talk about wipes material specifically. Is that seeing a headwind year on year? And just given that's an area where you've added some capacity over the past two years, Just wondering how capacity utilization is going there on those assets. Are they sort of above or below sort of where they were a year ago? Thanks.

Yeah, sure. Our wipes business is mostly focused in disinfecting categories, whether or not it's consumer or food service as an example. So we have both retail presence with our customers as well as a more, again, industrial type applications. I'd say that business we expect to continue to grow in the long term, you know, in the mid single digit category. I think that's pretty much what all industry outlets would suggest and what our customers anticipate growth in that category to be long term. You know, in the very near term, like last quarter as an example, we did have some destocking in that category. As you can imagine, demand was way outpacing supply for a period of time through the pandemic. And so there was some inventory buildup in the chain where we did see some destocking last quarter, but we do expect that to reverse over the next several quarters.

I think it's notable that in that product line, when you contrast that versus 2019 levels, it continued to be a growth category for us. And given what was exceptional performance from that business in totality, to be up 5% on a two-year basis, much of which driven by strength in fem care, in baby, adult incontinence. Those are areas that we strategically chose to pivot to and toward. We're partnered with the right end users that are winning the marketplace, and it gives us great confidence in that division for the long term.

Great. Thank you.

Thank you. Next question comes from the line of Kyle White from Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking the question. Good to see some of the divestitures that you made more recently. I guess I'm just curious, how much more opportunity do you believe there is for more pruning of non-core assets, and should we expect any incremental proceeds to be used towards share repurchases?

Unfortunately, I'd love to be able to give you specific details, but it continues to be something we review on a regular basis. We review it both internally as a management team as well as with our board of directors. It will continue to be an area of opportunity for us to take advantage of, and as soon as we have information that we can share, we'll do so. We're going to make certain that whatever we consider, we do it thoughtfully, where it makes sense for us, makes sense for the portfolio, and it certainly gives us more flexibility to you know, in the capital allocation program that we've outlined in the presentation.

Sounds good. I'll leave it to one question. Thank you.

Thank you. Next question comes from the line of Anthony Pettinari from Citi. Your line is open.

Hi. This is actually Brian Bergmeier sitting in for Anthony. Can you discuss the impact from China that you mentioned in the press release? In the past, we've seen a step up in demand around a COVID outbreak, especially in health and hygiene markets. So why is it different this time? And have you seen an impact to your manufacturing capacity due to absenteeism?

In China, like anybody producing over there, that is a for China market for us today. And yes, certain geographies had absenteeism. in-plant confinements, upwards of 370 individuals at our Shanghai site, as an example. Amazingly proud of how the team navigated through that scenario and continues to navigate through it. We continue to be bullish on our opportunities there, targeting local demand both inside of China as well as Southeast Asia. I can't speak to the nuanced difference in terms of the heart of the pandemic versus now. Suffice to say, the projects continue to be being developed on time, which I'm really pleased with because of the availability of labor and such. Very impressed with the team's ability to execute in that regard, and we're bullish that both from a premium hygiene perspective as well as our notice investment, which will be to serve healthcare for China and Southeast Asia that it will be a growth vehicle for the company going forward.

Great. Thanks. I'll turn it over.

Thank you. Next question is from Angel Garcia from Morgan Stanley. Your line is open.

Hi, this is actually Sebastian Rivera speaking on behalf of Angel here. A lot of ground covered. Just wanted to quickly circle back on price-cost assumptions and make sure I'm thinking of this correctly. So holding polymer prices constant in April, you currently are expecting a $50 million headwind for the year.

Is that the right way to think about it? The second half is about a $50 million positive. overall price cost, which would include the polymer portion.

Understood. Okay, that's helpful. And apologies if this was covered already, but just talking about the reduction in capex on the guide, is that kind of just more kind of a near-term being more prudent situation given the backdrop, or is that kind of an appropriate benchmark to model off of long-term?

Yeah, I would characterize it as just timing, right, timing of payments and projects. As you can imagine, you know, the challenges you've heard in the macro environment have affected our suppliers not only on raw materials but also capital expenditures. And so, you know, that has resulted in some delays. And so, you know, I would characterize it as just timing at this point.

Thank you. I'll turn it over.

Thank you. Our next question comes from the line of George Stafas from BAML. Your line is open.

Hi, guys. Thanks for taking the follow-on. And that last question sort of piggybacked or segued well into this one. So what opportunity do you have to maybe further reduce CapEx without damaging your intermediate-term volume and longer-term volume projections and growth plans Again, given the opportunity you have both for buyback and relatedly, how do you think, if at all, Tom and Mark, on dividend relative buyback, it would seem like, you know, given where valuations are, buyback seems to be more the priority. So CapEx, any ability to trim it back to buy back more stock without damaging growth and dividends? Thanks, guys.

On any capital expenditures, no, we are committed. focused on being as prudent, making certain we're finding the lowest cost assets for, you know, the opportunities that we have in front of us that not only can serve a short-term but long-term. So that'll be an ongoing process, continues to be an opportunity. Obviously, working like we do on terms and conditions of any purchases will continue to be an opportunity in terms of CapEx. But I have to tell you, I'm actually thrilled that, you know, we have the pipeline of opportunity, especially in areas like sustainability and areas like um, healthcare and pharmaceutical. Um, and you know, today we just put out a press release with a collaboration with, uh, Yum! Brands and Taco Bell with their 30 ounce drink cup, which, you know, I think just reinforces that, you know, Barry has been not just, we're not talking about sustainability. We're demonstrating how sustainability is a competitive advantage for our company, how it's a growth vehicle for our company. We'll continue to invest in those kinds of opportunities. Um, relative to capital allocation, clearly, um, And, George, you know, we have a long-storied history of identifying acquisitions and opportunities and seeking great valuations. And right now, there's no better valuation than very global. So it's a great opportunity for us, just as we took advantage of in the first half. If we continue to see the dislocation in the back half, we'll do the same.

Thanks. Good thoughts, Tom. Good luck in the quarter.

Listen, I want to thank everybody for your time today. Continue to stay safe. We'll talk to you next quarter. Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.