Berry Global Group, Inc.

Good day, and thank you for standing by. Welcome to the second quarter 2023 Berry Global Group 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 this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, press star 1-1 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Dustin Stilwell. Please go ahead.

Thank you, and good morning, everyone. Welcome to Barry's second fiscal quarter 2023 earnings call. Throughout this call, we will refer to the second fiscal quarter as the March 2023 quarter. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website at barryglobal.com under our investor relations section. Joining me from the company, I have Barry's Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question and answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time and then fall back into the queue for any additional questions. 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 a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. Please note that in our commentary today and within our presentation, when we compare our results to the prior year quarter or four year, we have adjusted to present on a constant currency basis and remove the impact of divested businesses to provide the appropriate comparable results. Reconciliations to reported results have been provided in our earnings release and in the appendix of our presentation. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release and report on Form 10-K and other filings within 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 statement. And now I would 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. Turning to our key takeaways for the quarter on slide four. Our visit delivered solid second quarter and first half results with adjusted earnings per share growth of 4% and 7% respectively. For the past several quarters, we have seen supply chain constraints continue to ease and have prioritized structural cost reductions and improved our mix of high-value growth products. Throughout the last several years, we've made concentrated investments to pivot our portfolio into higher growth markets in several areas, such as food service, health and beauty, dispensing, and pharmaceutical markets, including sustainability-focused, customer-linked projects. Furthermore, we continue our focus on returning capital to shareholders In the first half of this fiscal year, we have repurchased over 5.5 million shares, or 4.4% of our total shares outstanding, and continue to expect share repurchases of $600 million or more in fiscal 2023. As we stated last call, we have continued our commitment to strengthening our balance sheet by further lowering our long-term leverage target to 2.5 to 3.5 times. We expect to be at 3.7 times at the end of fiscal 23 and within our new targeted range by the end of fiscal 24. And finally, we believe 2023 will see challenging overall market demand. In turn, we're making long-lasting structural cost improvements while advancing our strategic initiatives to exit 2023 a much stronger and more focused company. We remain confident in our ability to sustain earnings growth and are reaffirming our earnings and cash flow guidance for the year. Turning now to the financial highlights on slide 5. The March 2023 quarter performance for both earnings per share and EBITDA were ahead of our expectations, including strong price-cost spread from inflation recovery, cost reduction, and mixed improvements. These internally driven actions were partially offset by a 6% volume decline from weaker end market demand, which was in line with what our global customers have reported thus far. Demand in the quarter has been negatively impacted by price inflation on consumer purchases, destocking, and small pockets of continued supply chain issues. From an earnings perspective, for the comparable prior year quarter and half, EBIT was up 1% and 2% respectfully. and EPS increased 4% and 7% respectively. Additionally, we delivered sequential EBIT improvement from Q1 of over $100 million, with three of our four segments generating significant improvement, while EPS grew 50% sequentially. As we've demonstrated historically and during the most recent quarter, we remain committed to driving cost improvements, passing through inflation, and believe we are well-positioned given our scale, along with our ability to service our customers from our facilities in close proximity to their locations, providing both cost and sustainability advantages. During the quarter, we performed well, delivering strong operational performance and took additional actions to reduce our cost structure, optimize our assets, and further automate our facility, which will bring our total annual savings from recent cost initiatives to $115 million, $70 million of which will be realized in fiscal 23. In line with our long-term strategy to provide strong capital returns for our shareholders, we have returned nearly $400 million to shareholders through both share repurchases and dividends in the first half of fiscal 23. Before I hand over to Mark, I want to review slide 6 and what we continue to focus on in both the near and long term. We remain focused on driving consistent, dependable, and sustainable organic growth and continue investing in each of our businesses to build and maintain our world-class, low-cost manufacturing base with an emphasis on key end markets which offer greater potential for differentiation and long-term growth, such as healthcare, personal care, beauty, and food service markets. We've grown these select markets over the past 10 years from 20% to now more than 30% of our portfolio. Additionally, we will continue to invest and expand our emerging market position in support of our commitment to global growth. Longer term, we are committed to growing our businesses in these regions and believe our emerging market presence can be 25% or more of our total company revenues. And lastly, Innovation and sustainability are increasingly embedded in everything we do, and we continue to believe this represents a great opportunity for growth and differentiation. We continue to grow the number of sustainability-focused products, meeting our customers' needs and expectations. We have grown our total sustainable polymer purchases by nearly 70% over the past several years, with the expected growth rate of 20% to get us to 30% circular materials by 2030. These drivers, when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capability, gives us great confidence we will continue to consistently deliver solid earnings growth from our stable portfolio of businesses. Now I'll turn the call over to Mark. We'll review Barry's financial results. Mark?

Thank you, Tom. Our businesses continue to perform well and focus on price recovery and generating cost productivity while driving long-term sustainable revenue and earnings growth. Overall, as Tom referenced earlier, we delivered sequential EPA improvement in Q2 from Q1 of approximately $100 million, with three out of four segments generating significant improvement. I'd like to refer everyone to slide seven for our quarterly performance by each of our four operating segments. The segment review will focus on the year-over-year changes for Q2. Our Consumer Packaging International Division reported 2% higher revenue dollars driven by higher pricing from the pass-through of inflation in Europe and improved product mix to higher value products partially offset by softer demand. EBDA was up 5% driven by our cost reduction efforts along with improved product mix by increasing our presence in healthcare packaging, pharmaceutical devices, and dispensing systems. We continue to recover cost inflation through pricing actions and cost reduction initiatives while driving revenue growth from our sustainability leadership. Next, on slide eight, revenue in our consumer packaging North America division was down 10% from the prior year quarter, primarily from lower selling prices as a result of the pass-through of lower resin costs in the U.S. and softer overall demand, mainly in our industrial markets. We continue to deliver strong mid-single-digit growth in our food service market as we continue to see conversion from other substrates to our clear polypropylene cup and lid. We continue to add incremental supply for cups and lids, including an additional manufacturing location in Florida for this technology as demand for our product continues to outpace our ability to add supply. EBDA increased by 10% over the prior year quarter driven by improved cost productivity from structural cost reductions and our focus to higher value products such as food service closures, and dispensing systems. On slide nine, revenue in our engineered materials division was down 15% for the quarter, due primarily to lower selling prices from the pass-through of lower resin costs in the U.S., and volume softness primarily in European industrial markets, along with customer destocking. Volumes were impacted by our focused effort to mix up in certain categories, like consumer and transportation films. Consequently, our sales and advantage to higher value products has moved from around 25% of engineer materials portfolio in 2018 to now 45%. And for the quarter, these categories grew 2%. As a result of these actions, the EPA was up 9% over the prior year quarter from our focused effort on improving sales mix to higher value product categories and structural cost reduction initiatives. On slide 10, revenue in our health hygiene and specialty division was down 17% due to volume declines along with lower selling prices from the pass-through of lower resin costs. The business has continued to see inventory destocking along with softer demand inside many of our specialty markets, such as building and construction. EPA was down 24% for the quarter, which was roughly in line with our expectation as our improvement initiatives were offset with weaker demand in some of our higher value specialty markets. Outside of contractual pass-throughs in the quarter, our selling price has improved sequentially as we continue to recapture inflation on costs other than resin. Overall for the company through the first half of 23, demand was modestly below expectations. As we stated from the beginning of the year, we will take proactive structural cost reduction actions to help offset. As part of this initiative, we are in the process of rationalizing 15 facilities across the world, moving the business to more efficient cost facilities in addition to other labor cost reductions from improved productivity. As Tom mentioned, these cost-saving initiatives are expected to provide annualized cost savings of $115 million, and we expect to realize $70 million of these savings in fiscal 23. Our fiscal 23 guidance and assumptions are shown on slide 11. Today we are reaffirming our guidance for both adjusted EPS and free cash flow. We have a strong record of EPS growth improving every single year as a public company and continue to expect between $7.30 to $7.80 of adjusted earnings per share, which at the midpoint would be another fiscal year record in our 10th consecutive year of delivering EPS growth. We continue to expect free cash flow to be in the range of $800 to $900 million with cash from operations of $1.4 to $1.5 billion, less capital expenditures of $600 million. We are reaffirming our free cash guidance in spite of higher interest rates as we took action to increase our fixed rate debt to over 90%. Over the last four quarters, we generated record free cash flow of $1.1 billion. At the close of the quarter, we completed a bolt-on acquisition of Pro Western Plastics for $88 million. which will be part of our consumer North America segment. We believe this will provide us growth opportunities from geographical expansion in Canada, where we can further penetrate the market with complimentary Berry products. And the pro-Western product portfolio will create additional opportunities within Berry's existing customer base across North America. In turn, we are focused on strategic investment opportunities, and while we do not have details to share today, We expect this full-time opportunity will be fully offset by divestiture proceeds by the end of the calendar year. Our cash flow year in and year out has been a dependable core strength and core value of our company. It provides us the opportunity to invest in our businesses to grow and become more efficient while returning capital to shareholders. As you can see on slide 12, our capital allocation strategy is return-based. includes continued investment in growth markets, share repurchases, debt repayment, and a growing quarterly cash dividend. In fiscal 23, we expect to return $700 million or more to shareholders via share repurchases and dividends, including further reducing our shares by 8% at current valuation levels. During the quarter, we repurchased another $155 million of shares, or 2.1% of shares outstanding, and paid our quarterly dividends. thus returning $187 million back to our shareholders in the second fiscal quarter. As Tom mentioned earlier, given our strong dependable cash flow and earnings, we have moved our long-term leverage range down to 2.5 to 3.5 times as we continue to focus on driving long-term value for our shareholders. We expect leverage at the end of this fiscal year and within our long-term range by the end of fiscal 24. We believe we are well positioned for continued value creation through both our resilient business model and strategic portfolio management opportunities. Concluding my command for you, now I'll turn it back to Tom.

Thank you, Mark. Our business model has proven resilient, including a broad portfolio of consumer-stable and industrial package solutions with strong, dependable, and stable cash flows to allow us the flexibility to drive strong returns for our shareholders. Our in-house design centers, footprint, and ability to serve local and regional customers and markets, all while being both a top five global toolmaker and a top five recycler in Europe, provides us with scale advantages and differentiation capabilities unmatched by our competitors. As Mark mentioned, we will focus on our internal cost reduction efforts and inflation recovery while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint. We believe Barry's stable and dependable portfolio will allow us the ability to provide earnings growth and demand stability as we've historically demonstrated. As you can see on slide 13, we have consistently driven top-tier results in nearly all key financial metrics, including strong compounded annual growth rate for revenue, earnings, and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company. Our annual adjusted EPS CAGR of 23%, from 2015 to 22, holds the leading position amongst our peer set and well above the average CAGR of 10%. We are proud of our consistency to grow annual adjusted EPS every single year through that period. The targets we've set over the past several years, including our focus on driving shareholder value, continues to be our top priority. starting several years ago in each of our four segments we began investing more heavily in growth with the emphasis in faster growing markets and regions while working to improve the mix of our product portfolio as you can see in slide 14 we have delivered results at or above the peer average from our strategies historically we have used the majority of our cash to reduce our debt and improve our balance sheet post an attractive acquisition opportunity now We chose to make a concentrated effort to keep our leverage in a lower range while also returning cash to shareholders via share repurchases and a growing quarterly dividend. We believe our new long-term leverage range of 2.5 to 3.5 times will further strengthen our balance sheet and be rewarded in the equity market over time, and believe these strategies will continue to close our valuation gap, which provides a very attractive opportunity for investment. Next on slide 15. Since the RPC acquisition in mid-2019, over the past three years, and including our expected use of cash in fiscal 23, we've reduced our net debt by nearly $3 billion. Furthermore, in fiscal 2022 and 23, we have returned over $1.3 billion to shareholders via share repurchases, while also paying our first ever quarterly dividend. These uses of cash from debt reduction, share repurchases and dividends will total $4.3 billion of value returned to shareholders while growing our adjusted earnings per share more than 70% since the RPC acquisition. We believe our capital return model underscores our commitment to enhancing long-term value for our stakeholders and the stability and consistency of our portfolio. The RPC acquisition has provided substantial cost and revenue synergies over the past several years, and we believe there are additional attractive opportunities ahead. The ability to leverage our combined know-how, including sustainability and innovation, product development technologies, has created significant value for shareholders. On slide 16, we are excited to announce the recent opening of our Leamington SPI UK facility. At this new Berry circular polymer facility, we will deliver Europe's first approved recycled material at scale for contact-sensitive applications. Our proprietary CleanStream technology process will be the world's first closed-loop system to mechanically process recovered household waste polypropylene back into food-grade packaging. Similarly, as you can see on slide 17, We cut the ribbon on our new state-of-the-art healthcare manufacturing facility and global center of excellence in Bangalore, India. Our investment in the second factory in Bangalore further strengthens our ability to support healthcare companies with both regional expertise and global capabilities in the development of modern healthcare solutions. This will help meet demand throughout Asia and beyond for patient-centric healthcare products. Among the latest innovations that will be manufactured at the factory is a new Berry breath-actuated inhaler with dose indicator that helps reduce asthma and COPD patient coordination errors and breathing variability. And the award-winning activated RiskPharm recyclable multi-dose antimicrobial dropper that is designed to help prevent eye infections. These two new locations, Leamington Spa and Bangalore, along with our incremental savings in our food service business located in Florida, gives us confidence and excitement in our growth pipeline heading into 2024. Next on slide 18, we've provided our key investment highlights along with long-term targets for our key metrics. We are a global leader for consumer-stable products with a proven history of earnings growth with a sustainability leadership role as one of the largest packaging manufacturers in the world. Our long-term targets further validate the consistency and dependability of our model, which includes EBITDA growth of 4% to 6%, EPS growth of 7% to 12%, and total shareholder returns of 10% to 15%. As you can see, over the past several years, we have met or exceeded these long-term growth targets and expect to similarly do so going forward. Additionally, we expect our newly initiated dividend to grow annually and we have updated our long-term leverage target to be in the range of 2.5 to 3.5 times, which we expect to achieve by the end of fiscal 24. We believe we can achieve these similar metrics while operating the business with lower leverage and providing consistent capital returns to shareholders. In summary, in the near term, our entire global team's emphasis on working safely and servicing our customers remains our number one priority has made us a stronger, better, and safer company. We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth while recapturing inflation. The recent creation of our Capital Allocation Committee has been a positive addition to our board and enlists the full participation of all our directors. As a board, we continue to evaluate our entire portfolio for ways to maximize shareholder value. As we consider various options, we remain committed to deleveraging our balance sheet, returning cash to shareholder, and pursuing attractive growth opportunities across our entire portfolio. And finally, as you can see on slide 19, our business model is predicated on consistent and dependable free cash flow. We believe our strong cash generation provides us the ability to continue to drive strong returns for our shareholders through four key areas, including first, utilizing our broad global portfolio, which provides us access to large global companies and faster-growing emerging markets. Second, we have an abundance of investment opportunities in high-value attractive end markets, such as healthcare, food service, and beauty, along with a leadership position in sustainability-led product offerings. Thirdly, we have demonstrated historically we have an ongoing opportunity to consolidate a fragment set of high-value end markets, to drive significant revenue and cost synergies, and fourth, all while returning ample capital to shareholders. These strategies focus on driving long-term shareholder value, expanding our competitive advantages, and delivering on our financial priorities to position Barrie for long-term success. And finally, we are improving our cost structure and day-to-day operations along with advancing our strategic priorities by taking the necessary actions to move Barrie forward. We are dedicated to building on our progress, delivering greater value for our customers and shareholders, and exiting 2023 a stronger, more focused Barry. I want to close with how pleased I am with the hard work of our employees, delivering solid results in the face of persistent higher costs and a dynamic global economy. Thank you all for your continued interest in Barry. With that, Mark, and I'd be glad to answer any of your questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Our first question comes from Anthony Pettinari from Citi.

Your line is open.

Good morning. Tom, in consumer, you sell into a lot of different markets, but I'm just wondering, when you look at the volume declines in the quarter, do you have a sense of how much of it was driven by sort of destocking versus real underlying demand weakness? And then without slicing it too thin, when you look back at the kind of three quarters or three months of the quarter and then into April, May, do you get a sense that trends have you know, worsened or stabilized or improved? Just any kind of commentary you can give there.

There's been a lot of discussion, you know, relative to the stickiness of this destocking phenomena. We would estimate that approximately 50% is tied to destocking initiatives right now. And clearly, you know, with the focus on working capital, many of our end customers are putting huge priorities on the inventory levels that they're carrying right now. So for Berry, given the proximity of our sites to key end users around the world, it could be an advantage, but it certainly puts more pressure on us to turn the products faster. I would say this, in terms of our consumer packaging space, food and beverage continue to be what I would describe as relatively stable. There's certainly been offset by some weaknesses in our industrial businesses, but I would also concur that this phenomenon of destocking can't last forever, but in our guide, we are assuming no real change in that market growth dynamic in the back half of the year, with the exception of us benefiting from some more favorable costs in quarters three and quarter four.

Okay, that's very helpful. And then just in April, May, kind of any stabilization, improvement, further weakening, just any comment there?

Nothing we'd comment other than in the prior quarter, just completed, You know, we clearly saw a degradation in the back half of the quarter versus the front half. But again, our guide is basically assuming no real change. We chose to take that path given the lack of transparency in terms of that longer term outlook.

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

Thank you. And we have a question from Adam Samuelson with Goldman Sachs. Your line's open.

Yes, thank you. Good morning, everyone. I guess maybe first, I think today, from thinking about the moving pieces of the quarter and then the outlook, is it fair to calibrate that volume expectations for the back half of the year have moderated and imagined as well the second quarter volumes themselves were softer? You're mitigating that with the cost actions that you've kind of announced and expect to realize decent chunk of the savings from this year. And as well, price cost has maybe proven stickier and a little bit more of a tailwind than you'd previously calibrated to get to the full year outlook on change. I just want to make sure I've got the key moving pieces there kind of balanced properly.

Yeah, I think, you know, from a demand perspective, you saw this in the quarter just completed. You know, overall, our demand is going to look very similar to the large TPG global customers we serve. And we saw that, you know, in the quarter just recently completed. And as Anthony just shared with Anthony, we expect similar customer demand, you know, in the back half of the year, you know, with the exception, again, of the more favorable comps and some startup of new assets that we'll benefit from in the last quarter, last two quarters. Relative to price and inflation, there's still more work to do. Clearly, the majority of our resin is tied to escalator de-escalators, but on the other raw material side, you know, there continues to be opportunities. We have taken the PRO Act with Stanso earlier on in the year, as we noted, relative to sharpening our pencil in terms of our overall footprint with a shutting of 15 facilities, continuing to invest further in automation, and then our ongoing focus and attention as a company, you know, on continuous improvements in all things, especially service cost, quality, and the like, to optimize those. So I think you've got it right.

Okay, that's very helpful. And then just by region, as we think about that demand and points taken on your matching your customers, any maybe distinction between some of your consumer CPG requirements oriented businesses versus more industrial cyclical areas and changes in order patterns or distinctions on growth and demand between some of the different channels that you have?

So what we saw in the first half of the year and what we're anticipating in the back half of the year is, again, relatively more stable food and beverage demand offset by weaknesses and what would be described as more of the industrial market, if you will.

Okay. All right. That's all helpful. I'll pass it on. Thank you. Thank you.

Our next question comes from Kieran DeBroom with Mizuho Securities. Your line is open.

Hey, good morning. Maybe just on EM, it seems like the pricing to value and improving mix is starting to flow through the portfolio now. Maybe you could just talk a little bit more about that. I think you mentioned the growth from 25% to 45% of higher value products. But as we think forward to the back half of the year, understanding that there is destocking and some volume weakness there. But as we think about the back half of the year and maybe it's preliminary, but 2024, how do you perceive that growing and trending over the next year? 12 to 18 months. Thank you.

Well, first, we're very proud of the work Engineering Materials has done with a concentrated effort, both commercially as well as through capital investments, to pivot more of our products to be, quote, higher valued. And that moved from around 25% to now 45%. It is significant. It's interesting. When you break out Engineering Materials, the North American base of the business performed very similar to our CP North America business in terms of demand. The European business was more pressure tied to, you know, what is ongoing restructuring that we're doing, you know, and the pairing off of lower margin business that we serve in that geography. We'll continue our investment focus around higher performance films, mixed improvement, and the business has demonstrated a fantastic ability to offset inflation price. And remember, this is one of our more transactional businesses. So we talk about the destocking phenomena. It plays a role in this business because 60 plus percent is served through distribution. Again, similarly, our customers put a little more burden on us to make certain that we can have quicker turnarounds so that they can focus on their working capital. We've been able to do that well. And as you saw both from our cash outlook as well as our earnings outlook for the full year, I'm very comfortable with Engineer Materials and the areas of focus that they're making to change the mix of business to a greater percentage of higher performance films, smaller component of more commoditized transactional products. And they've made great progress, as you can see, from the move from 25 to now 45% since 2018.

Great. Thank you.

Thank you. And it looks like our next question comes from Michael Roxland from Truist Securities, your line is open.

Thanks for that, Tom, Miles, and congrats on a very good corner. Thanks. Just want to get your thoughts on, you know, this weaker demand environment. And obviously that's led you to become more aggressive with your cost reductions and closing facilities. How much more runaway do you think? How many more similar types of opportunities do you exist in the current portfolio, similar to what you just did with those 15 facilities?

Yeah, we have an additional pipeline of facilities that we're giving consideration to, some of which we'll be able to execute on here in 2016. But we're a large portfolio, and as I stated in our prepared comments, I couldn't be more excited about actually the addition of our capital allocation committee and to our board of directors. Our company's always had an intense focus on shareholder value creation, and it's even that much more intense now with the full boards participating on that committee, exploring opportunities across our portfolio to do what we've talked about, which is if there's aspects of our portfolio that we ultimately see less value in as varied, but perceive there may be more value elsewhere. And if we could use those proceeds to drive our capital allocation strategy relative to either deleveraging, accessing faster growing end markets or geography, that's all ahead of us. And I have nothing to report today in terms of where we're at with that that I can share. But suffice to say, it's a focus. We just completed our last board meeting and I'm confident that This will be an area of opportunity for our company that, again, exponentially supports our objectives around consistent, predictable growth, earnings, and free cash flow generation for Barry.

Got it. And just one quick question on revenue costs. Obviously, they increased during the last quarter, but you guys did a good job of saying that's the cost. wondering, you know, there was a larger acceleration in resin during the end of the quarter, so I'm just trying to help explain how resin should flow through the P&L for the duration of the year.

Flow through of the resin increase.

Oh, yeah, yeah. No, in the U.S., right, we saw one of our primary raw materials, that being polypropylene, went up pretty dramatically, you know, over the last several months. You know, still early to assess that, but, you know, it appears as though that that increase is going to come back out pretty quickly, just as quickly as it went in. But needless to say, that will move a little bit of our earnings quarter to quarter. All of that is assumed in our guide that we just provided, but certainly it might provide some timing from Q3 into Q4, positively into Q4, and a little bit of headwind just from timing a pass through here, as we said in Q3. You know, typically Q3 is our seasonally strongest quarter. Q4 is usually a close second. This year, you know, I think they'll be very similarly, but could be a little bit inverted where Q4 is a little stronger. From an earnings perspective, just given that dynamic that you just asked about.

Got it. Thanks very much, and good luck in the balance of the year. Thank you.

Thank you. And our next question. It comes from Arun Viswanathan with RBC Capital Markets. Your line is open.

Yeah, great. Thanks for taking my question. Good quarter this quarter. Just wondering, you know, you weren't necessarily able to raise that much. So is the volume still on track for the rest of the quarter? Do you see a recovery in the second half? Thanks.

We budgeted and our outlook assumes relatively consistent volume from the front half to the back half with the exception of the benefit of a comparable in prior year that will benefit us in the back half coupled with the introduction of new capital investments that will become commercial benefiting us. But yes, we are comfortable in the outlook and the guide. It's We chose the path to not assume anything changes significantly from a market dynamic perspective, that which we can't control. We're going to look and we're going to perform a lot like our global brand that we have up to this point. And I'm confident both in that we'll execute here in 23. And I think what's probably more encouraging for me is just the setup we have in terms of 24 and beyond, both in terms of our structure, our capital investment, capital allocation priorities, what we've done and what we're doing, what we're executing against. And I think, as you saw Mark reference, the consistency of the deliverable on our key metrics, both in terms of EPS over the last 10 years, as well as what we're doing around earnings and free cash flow generation, as we have consistently, should give investors great confidence that regardless of the economic environment, Barry delivers, and we've delivered it consistently as a publicly traded company.

Thank you. And just as a quick follow-up. Go ahead. One moment. Sorry.

Are you in a position to return to low single-digit volume growth next year? Thanks.

We're going to return to low single-digit growth. We're making the capital investments associated with it. Our performance is completely aligned with our brands, and we're doing business with the brands around the world. The value proposition we're bringing in terms of our geographic presence, our increased exposure to emerging markets, the increased level of capital expenditures that we've been deploying puts us in a fantastic position to change and to ultimately grow consistently in the low single digits.

Thanks. Thank you.

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

Hi, good morning and congrats on the strong quarter. Thanks for taking my question. Just maybe I want to start out on price-cost. I just wanted to double-check. I guess you have two strong quarters of price-cost performance. I think on one cue you indicated $125 million was kind of the expectation for the year. Could you just, I guess, update us? I don't know if I missed it earlier, but what that stands at in terms of kind of the assumption for the year will be now for price-cost?

Yeah, sure. Thanks. Thanks for the question. Yeah, we've increased that roughly $50 million to about $170 million as a result of additional cost actions that the company's taken since the last earnings call. And as Tom said, a big part of our cost save will hit here in 2023, but there will also be a $40 million or so carryover into 2024.

That's very helpful. Thank you. And then I just wanted to follow up on the discussion around volumes for the year and destocking. I just want to clarify if I'm understanding this correctly. I guess the assumption is that you don't anticipate destocking to abate just given maybe similar second half to first half market conditions. One, did I hear that correctly? And then I guess what are you hearing from your customers? I guess that maybe doesn't indicate that destocking abates. And then kind of as a follow-up to that, just a lot more color on the commentary around operating, perhaps needing to be more real-time, just given the proximity with the customers and maybe what, you know, the pressures are on the business and kind of implications of that. That would be helpful. Thank you.

Thank you. You were right. We anticipate little change in the behavior relative to destocking. But, you know, frankly, we also realize it can't continue forever. You know, we'll get to a normalized demand environment. So I think as that happens, you'll see more of an order inventory balance. That said, we're a short cycle business. We deliver with short lead times today. And we do believe clearly that the benefit of our plants being in close proximity to our customers is an advantage both from a service perspective and frankly, as well as a sustainability perspective. The whole dynamic on deep docking has changed, right? Through the pandemic, it was more is better to give me what I need when I need it. And you know, shortages drove those overstock. And today it's more around, you know, uh, fickle customers and understanding, you know, by our brands, what exactly they're going to want, what's going to have to sell through, what's going to be promoted. Um, and in some instances, you know, people just were having a very heavy focus on, on working capital, uh, to folks under inventory levels. And, you know, it ultimately is, uh, it's something we've seen before and we'll manage through comfortably. Um, but I wouldn't describe it as a pressure. It's, uh, Just an elevated, heightened awareness of that being a requirement to delight our customers, which we'll do.

Very helpful. Thank you. Thank you.

Our next question comes from Philip Ng with Jefferies LLC. Your line is open.

Good morning, Mark. Good morning, Tom. This is John Dunn again. I'm for Phil. I appreciate the insight and congrats on a solid quarter. I just want to first go back to your comments about the new business wins that are going to be flowing through in the second half on the buying side. Are you able to quantify the impact of that and provide some more details on what segments those will be flowing through? And then maybe you can just comment on confirming if those new business wins are locked in and have firm customer commitment and maybe what kind of level those are sold out at, what kind of percentage that is. Thank you.

Sure. Yeah, I think Tom referenced a couple of those in his prepared comments, but as a reminder, we've got a new site for healthcare packaging in India, in Bangalore, that is commercial now. We have a new healthcare nonwovens line in China, also commercialized recently. Food service capacity is going in over the balance of calendar 23. So it's coming on in increments as opposed to, you know, on a more aggregate basis. Our new recycling facility in the UK also recently commercialized. So, you know, unfortunately, we're already halfway through 23, hard to believe. These investments are commercializing now, but obviously the impact on 23 will not be significant and will be more substantial in 24 and 25. But we're excited. We've got a lot of great new assets coming online literally now and over the next couple of months and quarters. And so, yeah, those are going to all be significant contributors to both our top lane and bottom line as we look forward.

You could see in the presentation materials just a snapshot of some of the customers that we'll be supporting at these facilities. With Leamington Spa in Bangalore, I would frankly anticipate over the next several quarters early on in the next year that our board will be asked to consider additional circular facilities in Europe. And frankly, and potentially in the United States as well, the success of Lemmington Spot, the customer receptivity, the ability to link with those customers to provide them circular solutions real time with premium quality has exceeded our expectations. Similarly, the pipeline of opportunity in India, a recently opened facility in Bangalore to support healthcare and pharmaceutical primarily. is likely to similarly require consideration for additional expansion on that site where we have the facility and capability to do that. And as Mark said, we continue to have just exceptional performance inside our food service space. And with our new facility in Sarasota opened up at the end of our fiscal year, it'll give us more capacity to fulfill our demand on polypropylene cups, lids, but I similarly believe that you know, additional capacity will probably be warranted there as well. So it's an exciting time. You know, we've got structural changes that we're making in 23. We've got a pipeline of business that we're enjoying that's consistent with the performance of our key brands in 23. We've got opportunities to expand our footprint geographically. We're making the necessary capital investments that are customer-linked to ultimately, again, support that objective of that consistent predictable organic growth that we are firmly committed to. And again, it supports that resiliency we talk about and that proven track record of revenue, operating EBITDA, adjusted EPS, adjusted free cash flow of the company that is enjoyed for some time. And it gives us the confidence that we'll execute against it.

Great. Thanks very much. I'll turn it over.

Thank you.

Our next question comes from Gansham Tanabi with Baird. Your line is open.

Yeah, thanks. Good morning, everybody. I guess first off, you know, Tom, maybe you can expand on the structural cost reduction initiatives you're executing on. You know, how are the 15 plans weighted towards the various segments? And also, what is the commonality behind the plans that you're rationalizing?

we you know we review and you know the various one thing has a great benefit of tons of data if we have opportunities based on productivity and potentially more modern facilities to consolidate business under under rooftops it's an active part of the review that we do on a regular basis and again this was this has been part of our you know our longer term plan we were fortunate to execute against 15 sites we've got additional plans that we're considering and it's all about what puts us in the best position geographically and from a cost perspective to serve our customer bases most effectively. So for example, our benefit of the footprint we have in Europe, the ability to load more business in Eastern Europe, a lower cost geography, to serve Western Europe is a great opportunity. An opportunity to load more business in India to serve Central Asia is simply a great opportunity for us. And using plants in Mexico to serve parts of North America is simply our benefit for us. We're taking advantage of that global footprint for Barry, finding what makes best sense in terms of return, service, quality, and the modernization of the infrastructure that's investable to give us these opportunities to shrink that overall footprint without compromising cost or service.

Okay, just as a follow-up to that, when was the last time the company went through such a rationalization initiative? And then lastly, you know, as you think about volumes based on your own expectations for fiscal year 23, where do you think volumes by segment will end up relative to the pre-COVID baseline? There's just so much noise the last three years. Just curious as to how you're thinking about that.

Wow. Yeah, I got some. I think you're testing my memory, I guess, on both of those. Pre-pandemic was a long time ago. I guess on the footprint consolidation, I'd say it's something we've done typically associated with acquisitions. We've bought businesses that maybe have six locations, one of which is close to one of Barry's existing facilities. We're able to combine those facilities to take advantage of a lower cost structure going forward. We've certainly done it many times in my tenure, but again, they tend to be more associated with acquisitions, which certainly in this case has that same dynamic with the RPC combination. And back to your earlier question, all four segments are participating in this opportunity to reduce our cost structure. And relative to volumes pre-pandemic, which I think was another part of your question, I probably need to think about that a little bit. I mean, my quick reaction is probably pretty similar in the aggregate. But by business, you know, it could look a little different when you peel the onion back a little bit. But my gut would be pretty similar.

Okay, fantastic. Thank you.

Thank you. And our next question. One moment.

Our next question comes from George Stoffels from Bank of America Securities. Your line is open.

Hi, everyone. Good morning. Thanks for the details and congratulations on the progress. Hey, Tom, Mark, you talked a lot about on this call, rightly, on focus and the new Capital Allocation Committee and the benefits you hope to get from that and that focus. Can you talk to us and perhaps reaffirm some things I thought I heard you say about the areas of the portfolio that may over time move out of Berry? One, is it your anticipation that your divestitures, if you will, or disinvestment in some of these areas is able to fund your growth elsewhere? Relatedly, if you can quantify to the extent possible, What are some of the metrics that you're looking at, either in terms of volume growth, margin, return? How are you trying to evaluate your portfolio to see what stays and what goes? Again, to the extent that you can quantify that would be great. And as you go through that process, as I look at slide 18 and those growth charts that you have that we really appreciate that you've put back, that you've put into the deck over the last couple quarters, what do you think that focus is? And that approach on the portfolio is going to add incrementally to your growth, to your margin, to your return. Any quantification would be great. Thanks. And I'll turn it over.

Yeah, I think, George, from a metric perspective, I mean, I think you hit a lot of the key ones. I mean, I would summarize it as growth, returns, and synergies. And by synergies, I guess I connect to how they tie into the rest of the portfolio. We have various products, markets, et cetera, that have various connectivity and therefore are more valuable as part of our company. I'd say all three of those things are things you certainly look at as we evaluate our portfolio and always have.

And are there any sort of hurdle rates or threshold quantification, Mark, you could throw there, recognizing it's a broad portfolio and it's hard to be single point, but how would you help us think about the numbers in terms of guardrails on that? Sorry.

Yeah, no, I mean, I don't think we want to be too objective, right, in terms of, you know, communicating that. But, look, we've got a lot of metrics we look at. We've got goals that we want to achieve as a company. You know, we just on our last call communicated some very broad goals around, you know, EBITDA growth, EPS growth, and we've achieved those historically, and we're going to make sure we keep making the decisions to achieve those going forward.

And I think, George, one of your questions, you know, was, Will the proceeds of some of these divestitures ultimately fund growth elsewhere? And I'd answer absolutely. This provides that vehicle for us to look at our entire capital allocation wheel, determine what's going to bring and maximize shareholder value creation, and apply those proceeds against that wheel. And that's something that's really exciting for us. And you talked about you know, the influence of our board and the creation of our capital allocation committee and, you know, the intensity we've always had around return of shareholder value creation and this heightened focus around, you know, we talk about investing in factory-grade markets, fully supported by our board, fully supported by our capital allocation committee, increasing our emerging markets presence to ultimately make our growth more consistent, more further support from the capital allocation committee and from our board of directors. The investments we've made in sustainability innovation, the fact that we're queuing up these investments to prime the pump, if you will, to make certain that the portfolio is best aligned to support our metrics that we measure ourselves against and that we've consistently delivered against well into the future has been critical. I think it's been a very strong part of and a new addition to our very team.

So it should add to your growth then, would you say?

Pardon me?

So that wheel, that process should add to the growth rate that you have on your wheel?

It should support it. Absolutely. It should drive that consistency, George, for sure.

Very good. Thank you, guys. Good luck in the quarter.

Thank you. Our next question comes from Michael Lighthead from Barclays. Your line is open.

Chris, thanks. Good morning, guys. Just two quick ones on HHNS. First, it looks like volume in the first half is down about 8% or 9% on negative comps. So is there still some COVID normalization or what else is going on there? And then second, why was that the only segment that had negative price-cost spread? Is that because of the business's consumption of polypropylene or just what else is moving?

So the HHNS business was primarily driven by the fact that the specialty markets, some of which is tied to building construction, as well as things like filtration, have been negatively impacted, both from a pandemic surge perspective to a more normalized rate, and then a softening based on interest rates in terms of the building dynamics, in terms of new homes and construction for housecraft. Those are high-margin businesses, and it's impacted the profitability inside HHS I'd also say that HHS of all of our business as you know it enjoyed two and a half years of historic success both in terms of growth and profitability and we all knew that at some point we would return to a norm or normalized level of demand that was in a non quote recessionary high interest rate environment now that's been exacerbated by the fact that you've got a return of a more normalized level, and the dynamics around these documents we've talked about that have impacted the other segments that we enjoy. Just to give you a sense, during the pandemic, pool filtration, that business in terms of residential pools being built was up 533%. That's obviously going to come to a more normalized level. The system will work through. We'll get to a more normalized rate.

and uh and then you will get back to a more demand cycle for that business but those are some of the factors that that played into it yeah so big piece of this concept was the comparable we've got one more quarter of a of a tough comparable and then that that business will be more uh apples to apples uh the prior year as we approach as we get into q4 great thank you

Thank you. Our next question comes from Josh Spector with UBS. Your line is open.

Yeah, hi, thanks. Just a couple quick ones. So just with the acquisition you guys mentioned, can you comment how much EBITDA you're getting, and is that in the guidance? And just when you talked about divestment funding acquisitions, was that this one, or did you mention that you expected to close another acquisition in the next couple of quarters?

Yeah, on the last part it was this particular acquisition that we expect to fund with proceeds from divestitures here in calendar 23. It was an $88 million purchase price. The returns were in line with what we communicated to the market. So in the teens, from an EVDA perspective, obviously this year we're only going to benefit from less than half the year or about half the year. You can do the math on that. So not significant relative to the overall company and didn't warrant changing our guidance range for fiscal 23, just given the small nature of it.

Got it. And just given your comments on volumes and your planning basis, do you anticipate any need to cut CapEx, or do you plan to reduce some of that growth spend if volumes don't improve?

Yeah, I mean, at this point, as you know, we've reaffirmed our $600 million CapEx guide. We've got a pipeline of projects, both on new opportunities like some of the ones we mentioned in categories like distensing, healthcare, et cetera. We've also got a large pipeline of cost reductions that the company continues to evaluate. Thankfully, we executed on those over the last two years. It's giving us the opportunity to they get the cost benefits that we're realizing here in 23 and, well, again, in 24. So we've still got a big pipeline. So I don't expect a big change to our CapEx number as we look forward.

Okay. Thank you.

Thank you.

And it looks like our last question comes from Kyle White with Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking the question. On the drink cups business, a lot of dynamics happening here. You're talking about adding capacity for this business. At the same time, some of the major QSRs talk about consumers potentially pulling back and visiting less frequently. And then another dynamic is you have some of your fiber-based peers really looking at this market as a large opportunity. And so can you just talk about some of the moving dynamics there, maybe what you're seeing currently that gives you confidence to continue to have to be here?

Yeah, the strategy we've been executing against for some time now is making customer-linked investments. So all the investments that we're making are linked to specific customers and committed demand. And we believe, and we're very comfortable, that that capacity will meet and partially meet an existing need, but the likelihood of additional investment may be required. When you mentioned the fiber-based substrate, the unique nuance in our application, it is an all cup and lid, fully recyclable. There is nothing that can replace a clear cup and lid relative to the value add that's given when you can see the contents of what you're consuming. Our QSRs have recognized that. They see the value of that. And the fact that it's fully recyclable is an ongoing advantage. And I'm comfortable with the outline of the investments that we're making in the new opening of our new capacity in Florida. So very much looking forward to that. And again, as with all our CapExes, they are customer-linked.

That's helpful. And then on leverage, this year you obviously stepped up the return to shareholders and leverage is going to be maintained or close about that year-end. As you think about capital allocation longer term and into fiscal 2024, how do we think about that balance between buybacks and leverage? Should we expect, you know, leverage any excess cash to go to buybacks? Are you keeping the leverage at this rate or do you see a need to prioritize the leveraging?

We will be by the end of 24 within our leverage range of two and a half to three and a half times. We'll finish this year at 3.7. And then relative to prioritization, 100 based on what's going to maximize shareholder value creation whatever is going to maximize and be the best return on our investment given that particular time got it thank you thank you and i'm showing no further questions in the queue i'd like to turn the call back to management for any closing remarks well i want to thank everybody uh for joining us today appreciate the time you spent the interest you've taken in barry We're cognizant that these are challenging markets. We feel as a company we're taking the necessary steps to put us in a position to meet and deliver against our commitments. And the resiliency and the proven track record of our portfolio we believe speaks for itself and it will going forward. We continue to believe this is an amazing opportunity for investment given the entry point and the valuation for our shares today. Thanks, everybody. Look forward to the next call.

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