Berry Global Group Inc

NYSE:BERY

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Berry Global Earnings Conference Call. At this time all participants' are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Thank you.

I would like to turn it over to Mr. Dustin Stilwell. You may begin the conference sir.

[Dustin Stilwell, Head, Investor Relations]

Thank you, and good morning, everyone. Welcome to Berry's First Fiscal Quarter 2021 Earnings Call. Throughout this call, we will refer to the first fiscal quarter as the December 2020 quarter.

Before we begin our call, I would like to mention that on our Web site, 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 Web site at berryglobal.com under our Investor Relations section.

Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question-and-answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time with a brief follow-up and then fall back into the queue for any additional questions.

As referenced on Slide 2, during this call we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our Web site.

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'll turn the call over to Berry's CEO, Tom Salmon.

[Tom Salmon, Chief Executive Officer]

Thank you, Dustin. Welcome everyone and thank you for being with us today.

First, let me start with our number one core value on Slide three, and that is safety. We fully understand that what we do here at Berry is a valuable part of the supply chain making and supplying products that are protecting each other, our friends, our families, and our neighbors and communities around the globe.

Our number one priority is the health and safety of our team members. We believe safety doesn't happen by accident. And everything we do at Berry starts with safety. Our employees’ commitment to show up and perform their work in a safe and professional manner makes me incredibly proud. But it doesn't end when they walk out of the plant or their office. The safety and health outside of work is just as important. They've demonstrated respect for their colleagues and their communities in this aspect as well.

As you can see on the Slide, we have an ongoing commitment to identify, managing and eliminating risk and are very proud of our safety record with an OSHA incident rates significantly better than the industry average. Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This work has resulted in our strong start to the fiscal year and the numbers speak for themselves.

First Quarter results for revenue organic volumes. EBITDA and earnings per share all came in significantly better than we anticipated with strong demand across every division. Strong momentum we've created over the past several years delivered again, record first quarter results on the top-line, bottom-line and free cash flow. Once again, we are proving our resilience across various economic cycles. The diversity of our portfolio across various end markets and regions continues to provide the consistency and dependability we've demonstrated for decades.

On Slide four, we said coming into the year that the key focus for the company was to grow organic volumes and improve our balance sheet. We're off to an exceptional start to deliver on those promises. Organic volume growth came in at an outstanding quarterly record of 7% with all four segments delivering volume growth. Stay at home food, health and wellness along with personal protective products continued to see solid growth in the quarter. Industrial, automotive, distribution, building and construction end markets, while still facing some softness related to COVID-19 improved moderately result in smaller headwinds to our respective segment volumes.

Additionally, our strong results on earnings and cash flow allowed us to reduce our leverage by two-tenths and in the period of 4.1x net debt to adjusted EBITDA. We are well on our way to meeting our objective of getting our leverage below 4x.

After we have achieved this target, we anticipate operating our company while maintaining our leverage in a range of 3x to 3.9x on a go forward basis. To be very clear, we believe our top two drivers now in delivering significant shareholder value is consistently growing our business organically and strengthening our balance sheet.

And lastly, as most of you are aware, we've seen significant costs increases in our primary raw material, that being resin, along with some modest inflation and other raw materials and other costs over the past several months including anticipated February increases.

With a strong volume growth momentum in the business along with our efforts to improve the timing lag of the pass through of inflation in our customer contracts, we are active and fully intend on passing these transitory increases through. Our updated guidance includes an incremental timing lag of $50 million over the next three quarters related to this incremental inflation.

Despite this timing headwind and with the exceptional start to the year, we are raising our fiscal year operating EBITDA guidance range by $25 million and increasing our organic volume growth assumption from the original 2% to now 4% for the full year. We began fiscal 2021 with enthusiasm and confidence in our ability to grow organically as we've demonstrated over the past year, and I believe we are well positioned to continue to see long-term predictable and sustainable growth with customer linked capital investments that target continued expansion into both faster growing segments and emerging markets.

Now I'll turn the call over to Mark who will review Berry's financial results in more detail. Mark?

[Mark Miles, Chief Financial Officer]

Thank you, Tom.

Before we move ahead into the highlights for the quarter, please note that the December 2020 quarter contained additional shipping dates for our U.S. based businesses compared to our prior year period. When we discuss volumes, we have made the necessary adjustment to exclude these additional days and have provided normalized data for proper comparison.

I would like to refer you to Slide five now for the first fiscal quarter reported sales were up over 11% to a record $3.1 billion. The Quarter revenue included reported organic volume growth of 11%, of which 4% is attributed to the additional shipping days, resulting in comparable organic volume growth in the quarter of 7%.

As Tom noted, demand for our products remain consistent in certain markets, which previously experienced COVID-19 related headwinds have recovered sooner than we expected.

The quarter included a modest foreign currency impact that increased sales by 2%, which was partially offset by slightly lower selling prices and the sale of the U.S. flexible packaging converting business that closed at the end of November.

From an earnings perspective, the December quarter operating EBITDA increased by 20% to a December quarterly record of $539 million, primarily driven by strong volumes and realized cost synergies.

Adjusted earnings per share increased by 100% to $1.12 in the quarter, which included benefits just referenced relating to EBITDA along with interest expense savings from debt reduction of over $1 billion in fiscal 2020.

Free cash flow for the last four quarters and that was over $1 billion. These strong financial results are the byproduct of our entire global teams focus on organic growth and driving cost productivity while managing the increased demand from our customers and the human resource challenges related to COVID-19. The results are yet another example as you can see on Slide six of our proven performance over many different economic cycles.

As referenced on prior calls, we have consistently driven top-tier results in key financial metrics, including 20%, or more compounded annual growth rates for both free cash flow and adjusted earnings per share.

Now looking at the quarterly performance by each of our four operating segments on Slide seven, for the quarter, our consumer packaging international division delivered sales of just under $1 billion and EBITDA of $170 million.

In the quarter comparable organic volumes were up 4% driven by strength and consumer markets such as food and hygiene, as well as a partial recovery of certain industrial markets that had previously been facing the pandemic-related headwinds.

Regionally, we had 2% volume growth in developed markets such as Western Europe, with robust growth in emerging markets, such as China and India.

The CPI team produced an impressive 21% increase in EBITDA primarily driven by a strong volume cost synergy realization and cost productivity. Net sales in our consumer packaging North American Division where up 12% to $686 million, primarily as a result of the 8% increase in comparable organic volumes. The organic volume growth in the quarter was ahead of our expectation provided on our last earnings call, as we saw continued strength in our four businesses from products such as closures, bottles and containers.

Our facilities extended operating schedules to meet the additional demands of our customers in November and December, where we commonly see downtime within Berry and then our customers. EBITDA was $121 million compared to $107 million in the prior quarter. This 13% increase was primarily driven by the strong volumes in the quarter and cost productivity, including some acquisition synergies.

Our health hygiene and specialties division delivered sales of $740 million. The 21% increase included comparable organic volume growth of 15%, with growth in all four regions globally. We estimate segment volumes were up high-single digits primarily related to organic growth investments, with a balance benefiting from the additional COVID-19 demand for healthcare, hygiene and other PPE related products.

EBITDA increased by $45 million, or 45%, primarily driven by the organic volume growth, favorable product mix and cost productivity. As expected and consistent with the September quarter, the December quarter continued to benefit approximately 25 million in EBITDA from favorable product mix associated with pivoting our assets to products related to COVID-19 protection.

And lastly, sales for our engineer materials division were 9% higher at $722 million. The increase was primarily attributed to volumes and the additional days of just over 5% and comparable organic volume growth of 2%. Volume growth was primarily driven by our consumer facing products and some of our industrial businesses, along with a modest recovery of certain markets that were negatively impacted by the pandemic, such as our canned liner business that serves away from home waste disposal. EBITDA was flat versus the prior quarter as organic growing growth was offset by a modest timing lag in recovering costs inflation.

Next on Slide eight, free cash flow for the last four quarters ended December 20 total of $1.03 billion. Our free cash flow continues to be utilized to reduce our outstanding debt. And we have paid down over $1.2 billion over the last five quarters, which has lowered our annual interest expense and reduced our debt leverage from 4.8x to now 4.1x.

We remain committed to maintaining a strong balance sheet and are consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically. We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile.

We recently issued two sets of investment grade rated first priority senior secured notes with fixed interest rates of 1.57% and 0.95%. We use the proceeds to replace existing variable rate term loans, which will reduce our annual interest expense by over $10 million and also extended our weighted average debt maturity profile.

Investment grade debt market represents a new market opportunity for our company and we intend to continue our efforts to further strengthen our balance sheet.

Next, our updated fiscal '21 operating EBITDA and free cash flow guidance as shown on Slide nine. Given the stronger beginning to the fiscal year and improved demand outlook across our business, we are increasing the range of operating EBITDA by $25 million to a new range of $2.175 billion to $2.225 billion.

We're increasing organic volume growth assumption by 2% and now anticipate volume growth of 4% for the full fiscal year, which is supported by our robust and growing pipeline, increased level of capital expenditures and the positive trends and momentum we are seeing in each of our businesses.

We have included a modest incremental negative from inflation and the associated timing lag and passing these higher costs over the next few quarters.

Expected free cash flow will remain in the range of $875 million to $975 million. The range of free cash flow includes $1.525 billion to $1.625 billion of cash flow from operations partially offset by capital expenditures of $650 million. Excluding incremental growth capital, our fiscal '21, free cash flow is expected to exceed $1 billion.

We also continue to anticipate further strengthening our balance sheet and expect our leverage ratio to be 3.8x to 3.9x at the end of fiscal '21.

This concludes my financial review. And now I'll turn it back to Tom.

[Tom Salmon, Chief Executive Officer]

Thank you, Mark.

We continue to invest in each of our businesses to build and maintain our world class low cost manufacturing base, with an emphasis on key growth markets and regions. We made these investments for a specific purpose to be competitive regardless of any economic cycle. Those investments set the stage for what you're seeing now.

Overall, the diversity of our end markets and product offerings as well as the essential nature and demand consistency of our products have been core to the underlying performance of the business. I'm very confident in our team's ability to meet our near-term and long-term expectations and commitments to provide sustainable, profitable growth.

Across our company, our teams are performing at a very high level with an exceptional sense of urgency to demonstrate consistent organic volume growth by providing advantage products in targeted markets, as evidenced in our recent quarterly results.

As we've stated on Slide 10, the key drivers for organic growth and why we feel confident in our continued trajectory are, our focus on both faster growth end markets and emerging markets along with sustainability lead packaging. We expect emerging markets to grow considerably faster than advanced economies with increasing populations and the need for protection products.

We've increased the revenue in faster growing regions from $100 million in 2013 to now over $1.5 billion. We will continue to pivot our portfolio and center investments on faster growing end markets and global mega trends in regions with stronger growth patterns. Over the past several years, we made internal business realignments in order to further accelerate organic growth across our global footprint. The transition of our tapes business to HHS and the legacy RPC films business into our engineering materials segment are proceeding well and providing great commercial opportunities we would not have had otherwise.

Additionally, these changes allowed us to create a global rigid healthcare packaging and device business. And our total health care portfolio has grown from $500 million in 2015 to now over $1 billion in revenue.

Furthermore, as you can see on Slide 11, we are a leader in healthcare, primary packaging and device markets, including our global inhalation product portfolio with over 330 million asthma sufferers and 250 million COPD sufferers globally. We are highly focused on ways to improve the lives of those with these conditions. Long-term growth for the inhalation market over the next five to 10 years is expected to be high single digits, where we have a primary focus on growth in our Asia Pacific region.

On the sustainability front, which we have long considered to be core to Barry's operating philosophy. The industry has taken tremendous steps forward in the journey to eliminate plastic waste, while continuously innovating to meet desired performance requirements of consumers. We continue to invest in both new products as well as qualifying existing products against recognized sustainability standards in the market, so customers and end users can make informed decisions.

On Slide 12, we've highlighted just a few of the new amazing products we have designed and manufactured with sustainability in mind. On the top right, you can see our Biovantage Bioresin Bakery film, this film is made from renewable feedstock with lower carbon footprint than conventional based polyethylene.

The slide a film is made from up to 89% biosource polyethylene, which enables our customers protect their products in a material made from the earth. And one other terrific example includes the innovation and sustainability capabilities created by our global team of experts. As you can see on the bottom left of the slide, we continue to be a leader in dispensing solutions where we've created lighter weight sustainable dispensing trigger pump sprayer that includes a modern design, improved ergonomics made from 100% plastic components, allowing it to be easily recycled.

Berry remains steadfast in its commitment to lead and collaborate to drive innovation and acceptance of products targeted towards improving recyclability, reuse and reduction of virgin plastics, all with a goal to promote a more circular economy.

Further demonstration of our efforts and commitments to promote a more circular economy, we've taken a leadership role in developing markets for recycled content made from waste and helping our customers achieve the growing needs of their consumers.

Slide 13 highlights various capabilities using in-house mechanical recycling process. We have installed capacity of over 300 million pounds per year after our latest expansion. This new expansion is targeted for personal care and household care applications. Similarly, over the last several months, Berry has partnered with our suppliers to procure another 300 million pounds annually of advanced recycling resin by 2025, in Europe and the United States.

We've been partnering with leading brands to bring products made from recycled content material to the shelf in late '21 or early '22. To enable this Berry has 14 sites globally that are ISCC plus certified to ensure we bring transparency and accountability to the recycled content process. Our teams globally are working to grow our supply and expertise to introduce recycled content in our products to provide the same functional benefits while solving the plastic waste problem.

In summary, on Slide 14, building upon our solid start in 2020, we delivered outstanding results across all of our operating segments. We again including the first fiscal quarter had delivered on our strategic goals of driving organic growth and improving our balance sheet all offsetting financial records for any December quarterly period, EBITDA, free cash flow, revenue or earnings per share.

And finally, I want to remind you that we believe the Berry investment case has never been stronger, with consistent and dependable end markets a leading cost position, along with a substantial capacity to invest in long-term, steady growth allows us to be well positioned to continue this momentum through our customer linked capital investments that target continued expansion in both faster growing end markets and regions.

I thank you for your continued interest in Berry. And at this time, Mark, and I will be glad to answer any questions.

[Operator]

[Operator Instructions] First question is coming from the line of Anthony Pettinari from Citi.

[Anthony Pettinari, Citi]

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

[Tom Salmon, Chief Executive Officer]

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

[Anthony Pettinari, Citi]

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

[Tom Salmon, Chief Executive Officer]

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

[Operator]

Next question is from Ghansham Panjabi from Baird.

[Ghansham Panjabi, Baird]

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

[Mike Miles]

So, December is always a little bit of a tough quarter, I think I had a comment in my prepared remarks about holidays. And what customers do over holidays, certainly impacts what we do over holidays, obviously. So December quarter, always tough. But given the robust nature as we discussed of the start to the year, the outlook from our customers and our businesses, we're comfortable certainly going from two to four. We expect all businesses to grow low to mid single digits in fiscal '21, with some upside to that in our HHS business. HHS will likely be mid-to-high single digits as we're going to lap some of the comps the back half of the year related to the benefit in PPE.

Now, obviously, some of that will depend on how long the pandemic last. We've got it last thing of specifically for that business is where the biggest impact is. And we've got that last thing to the March quarter to the extended, it continues beyond that, that would be upside relative to our outlook.

[Tom Salmon, Chief Executive Officer]

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

[Ghansham Panjabi, Baird]

That's very helpful. And then, the 50 million of additional run through inflation, you're embedding in guidance. How does that phased in over the next three quarters? And just, for us to calibrate against? Are you assuming just the February price increases that are out there, which are pretty substantial for resin? Or are you assuming incremental cost inflation beyond that specific to resin? Thanks so much.

[Tom Salmon, Chief Executive Officer]

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

[Operator]

[Operator Instructions] Next question is from George Staphos from Bank of America.

[George Staphos, Bank of America]

Thanks for the details and congratulations on the progress so far guys. I want to come back to the question on value creation, Tom, and you had mentioned in your remarks. And we would agree, as we've talked about in our research that good organic growth and deleveraging help create value.

One of the other things that also from our research over the years helps create value is elimination of volatility. And one of the ways that that's accomplished is by -- on the one hand, improving your margins and on the other hand improving the predictability of the return to the shareholder. So one, what do you think is likely to be seen from mixed standpoint and a margin improvement standpoint, from some of the new product areas that you're pursuing either with an HH&S or maybe even within sustainability?

And on the other hand, how should we think about improving value return to shareholders? Over time, obviously, not this quarter but as the leverage gets to where you'd like it to be, should we expect something of a dividend, which again stepped together with higher margins would also take out volatility, lower your cost of capital and ultimately improve your evaluation? What are your thoughts on that? And I've a follow on?

[Tom Salmon, Chief Executive Officer]

Let me answer the first one that comes to mind, I think relative to growth and new business, I think if you take into consideration the capital investments that we've made to support organic growth, now the profitability of that business, the margins that business had been at or above the company average. We would expect that to continue to be the case, going forward as the primary driver of why, we've targeted faster growing markets, where we have advantages in faster growing regions of the world. And that continues -- that pipeline of opportunities continues to be robust. And the unique thing about Berry George, is that we didn't stop, we continued that pace of capital investment to support our growth throughout the pandemic based on the dependability and predictability of the business that we serve. So we feel very comfortable, that'll be the ongoing strategy going forward.

Now relative to leverage of the company, I'm thrilled with the progress that the team has made and we intend to operate our company with leverage between 3 and 3.9 times. We bet we generate substantial cash flows of around $1 billion, we're going to allocate 100% of that debt until we're in the range. Then, when we're in the range, we anticipated balanced approach, which will include cash return to shareholders, bolt-on acquisitions, and further debt reduction while staying within the target range.

[George Staphos, Bank of America]

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

[Tom Salmon, Chief Executive Officer]

Clearly, what we walked you through during our prepared remarks was the fact that between advanced recycled materials and mechanical recycled materials, that's about 600 million pounds of material and it's just -- it's a tip of the iceberg, George, if you will. It's clearly not enough to fulfill and satisfy all the requirements of all of our end users. But I don't know of anybody in our space that has the breadth of offerings that Berry does, to begin that process.

I'll also know relative to advanced recycling materials, I'm really pleased to report the kind of work that our teams have done, the first two years of capacity that we're receiving from advanced recycling is sold out. It's sold out. So we're doing a good job in terms of being able to demonstrate the value, getting people comfortable with the technology. So certainly as the demand for those products grow, we'll be in a very good position. What we find is that all of our end users have strong publicly communicated sustainability objectives. And so they're keen to partner with us to help understand how we can help them meet those needs. I would say still, the number one opportunity across the chain remains around weight reduction. And companies that have the design prowess and know-how to reduce the weight of substrates while not impacting physical properties, using both design and material science know-how are going to benefit. And we certainly at Berry are in that position given that it's been a core capability, for us for some time. And you've also seen that, over the last year or so, we've made a lot of advances, both in terms of commercializing fully recyclable flexible pouches made of polyethylene, bio-based materials, supporting our tubes business, real examples of circular solutions, the likes of Georgia Pacific and others. And I feel really good about the progress that our team is making.

Again, this is a, a large component of what we do. We anticipate that, this will be a business that we monetize and has similar profitability to what we enjoy for the remainder of the portfolio. And frankly, it's a value attribute that we think is going to be unique to Berry because not everyone's going to have visibility, to help solve some of those end customer problems. So we're pleased. And again, I'm excited about this investments but more importantly, we're excited about the progress we'll make here.

[Operator]

Next question is from Neel Kumar from Morgan Stanley.

[Neel Kumar, Morgan Stanley]

You recently announced another capital investment into the wipes and mask base, which I think should come in early 2023. What do you seen in terms of customer conversations that gives you confidence for digital investments in the space with a fairly long time horizon?

[Tom Salmon, Chief Executive Officer]

Yes. Essentially, all our investments, certainly in the HHS side typically have long lead times associated with them. And know, the investment in additional wipes capacity in North America is strategic to us, we're a leader in North America, we were very fortunate given that we maintained our regimen of targeted investment in that space, so that we were able to take advantage and help serve, the nation's needs for hard surface disinfectant wipes. What we're seeing is that, there continues to be growing demand for that substrate. And frankly, as we see increased openings of the country, we think there'll be exponential demand, because you'll see the wipes being used in more settings that we know were not typical, as well as wipes being provided in packaging offerings that make it easier to carry on the go, if you will.

The every investment that Berry makes is, again, customer linked. So you should assume that if we're making an investment in a business, that there's ultimately customer alignment relative to that capacity and the demand outlook. So we're bullish, we're a leader in that space, we're going to continue to lead. And we're very confident that the demand will continue to support the capital investment and the return that we're assuming.

[Neel Kumar, Morgan Stanley]

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

[Mark Miles, Chief Financial Officer]

So we had in the first quarter, Neel, we had a modest benefit on price cost, primarily driven by the mix benefit we got in HHS, as well as cost synergies that we're still lapping from the RPC acquisition. With the incremental inflation we've seen from the last call, we actually have that now coming in as a headwind for the full year, which will predominantly be experienced in Q2 and Q3, there's obviously a lag in getting that pass through. But q2, q3 is where I would expect most of the negative price cost to persist.

[Operator]

Next question is from Mike Leithead from Barclays.

[Mike Leithead, Barclays]

I guess first I want to circle back to something similar to Neel's first question, on HHS, I think last quarter, you highlighted some mix headwinds you'd expect as we work through fiscal '21. Can you just update us obviously HHS demand has remained quite strong, has the mix component or the timing of that changed at all in your thinking?

[Mike Miles]

When we started the year, we had only assumed the mix benefits would be in the December quarter. And now we've extended that to include the March quarter and we'll continue to monitor that and update the market as the quarters before. But at this point, we've only assumed that benefit continues into the March quarter.

[Mike Leithead, Barclays]

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

[Tom Salmon, Chief Executive Officer]

Listen, it's partly a learning exercise right now by a lot of the global brands out there. There's an array of ways that they can meet their sustainability objectives. There is a sincere interest to make and inform scientific base decision. And they realize there's a number of ways to accomplish that. And what we chose to do at Berry is, have the access to a wider range of solutions. And then as the market ultimate determines what the ideal substrate will be going forward, or one that makes most sense, we ultimately can leverage our global supply chain and scale to get behind those particular types of innovation.

I don't think you're going to see the plastic waste problem solved by one solution, I think it's going to be a variety of solutions. And we feel really comfortable with where we're at right now. The 300 million pounds of mechanically recycled material that we have, that we own, again, we learn more about the industry, we learn more about the collection processes, the sorting processes, it makes us a more valuable supplier, simply with the advanced recycled materials, taking the proactive stance that we did to secure and commit to that kind of capacity is simply going to grow the knowledge of our end users to get them comfortable around this substrate so that as it scales, you will ultimately be able to take advantage of that opportunity and transition them in those materials where it makes sense.

There is an understanding that as products are ultimately new and initial, there can be higher costs associated with those. And again, the evaluation is what's going to be the change that disrupts my end customer, the least addresses their concerns and allows our company to continue to generate the growth and profitability they've always become accustomed to.

And that's a lot of discussion, I feel that you're really during the pandemic, we've made an amazing amount of progress, further penetrating our key accounts globally. We have a pretty strong passion in finding ways to help them meet their growth objectives. And we continue to bring that to bear relative to sustainability. We will take advantage of our global scale, our material science know-how and the intimacy we have with those end users, to ultimately put ourselves in a growth position. And that's why it truly is a growth opportunity for Berry. It's not, this is something not only that we're talking about, but we're investing in and we're seeing the actual results play out and it's encouraging. I think you're only going to see the pace of this improvement, this evolution around sustainability and circularity it's only going to grow. And I think it's going to grow in a collaborative way.

[Operator]

Next one is from Kyle White from Deutsche Bank.

[Kyle White, Deutsche Bank]

I think you mentioned on your healthcare portfolios over a billion in sales now and you referenced as an opportunity, just kind of wondering here on the billion in sales, how much of this has to go through kind of increased regulatory approvals or be produced and kind of clean rooms, and maybe what the returns here are relative to the broader portfolio?

[Tom Salmon, Chief Executive Officer]

It's a mixed bag in terms of the type of manufacturing environment, but clearly, through to support healthcare, we'll be investing in those types of capabilities with the appropriately times taken into consideration, so that there's no disruption. So it's going to be an as you go, depending on what we close and where we close it.

We clearly believe on the asthma front metered dose inhalers that Asia presents a really significant opportunity for us. We're encouraged by that, because we already have a leading position in that space. There's mid to high single digit demand for it and the margins in those business are at or above the company average.

[Kyle White, Deutsche Bank]

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

[Tom Salmon, Chief Executive Officer]

We have similar return profiles regardless of where we operate. So that's one. Two, anything we do from an investment is going to be linked to a customer, so it's going to be supported and aligned around that partnership, which increases the likelihood of success. We've clearly made significant investments in China over the last several years which have paid huge dividends for us. We've announced a recent new non-woven capability at our Nanhai site in China that will serve China Southeast Asia. Four, the healthcare space for dedicated for the healthcare space and we're excited about it. We are going to align ourselves again around market segments that are growing faster and geographies that are growing faster and do it all in a customer linked way.

Our position with global brands around the world and the type of investment, dry powder that we have to invest alongside our customers is part of the driver for this confidence that we have in this -- and the predictability of our growth. Because it's with leaders and brands that can pull that demand through, and the trust and confidence that we build, by already having existing positions, as they expand their business to similarly match those growth geographies, creates a lot of confidence in execution, in commitment, in quality. And that's continued to be built as we continue to vertically penetrate these accounts so that strategically, we're aligned with our customer.

[Operator]

Next one is from Josh Spector from UBS.

[Josh Spector, UBS]

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

[Tom Salmon, Chief Executive Officer]

It really helped us create somewhat of a pure play when we moved the tape business into HHS, we also have a component of our HHS business that's tied to construction through the house wrap business. Having tapes that ultimately can be applied to house wrap substrates created somewhat of a pure play, right? It's a logical combination. We're serving similar markets and it made good sense.

And that has been an area that we've seen success that we wouldn't have had with those businesses being separate. Inside the engineer materials business, we brought the BPI business to be part of the engineer materials. And again, you have two groups of people speaking the same language running similar equipment. And it's provided in that business, not only commercial opportunities to globalize, some of our North American business, similarly in agricultural products, but also in terms of best practice sharing, and productivity improvements, based on the manufacturing processes being like-for-like.

And this, frankly, has been something that we've seen with our CPI and CP North American business as well. So it was a no-brainer for us to make the move, because we'd already seen the benefit that we were enjoying between our international consumer packaging business in North America.

[Josh Spector, UBS]

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

[Mark Miles, Chief Financial Officer]

Not a lot of changes with respect to the individual line items, interest, we've obviously benefited from some refinancings in the market but that's been offset by FX. So there's been some incremental increase in interest from FX that have offset some of those savings.

I would say all the other lines are generally in line, slight increase with respect to working capital, just to account for the inflation that we talked about in our primary raw material resin mostly in the U.S. with polypropylene, followed by polyethylene. So that's probably the biggest change is really higher working capital needs from inflation. We've all said part of that with our restructuring and one time costs related to the acquisition, we're actually coming in lower than we expected, which is helping offset some of that inflation.

[Operator]

We do have a next question from Arun Viswanathan from RBC Capital Markets.

[Arun Viswanathan, RBC Capital Markets]

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

[Mark Miles, Chief Financial Officer]

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

[Arun Viswanathan, RBC Capital Markets]

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

[Tom Salmon, Chief Executive Officer]

I think the pandemic has proven that, plastics is an indispensable part of our lives. I believe that the discussions with our end users have been more balanced, more data driven, and they're looking for the best holistic decision that they can make to address their sustainability objectives.

That coupled with the fact that, we have been making very targeted investments. And frankly, committing to and delivering on, when certain businesses would actually pivot to growth, if you recall, we made a specific commitment in our engineer materials business on when it would recover to growth and it did and the pandemic hit right after that.

We made a commitment when our HHS business would pivot to growth before the pandemic, and it did a full quarter early, and then the pandemic hit there. So yes, we think we've made smart targeted investments, we prioritized our capital investment, sustainability, the value proposition for our company and it's not gone away, it's not going to go away, we're going to have to address the number one issue that we have for our substrate, which is plastic waste.

Plastic is not the problem. Plastic waste is the issue. And what we've got to do is continue to find ways to reuse, recycle products and optimize our design to ultimately improve the likelihood and ability for those to be recycled. And ultimately infrastructure will be required but it will get done and built based on demand that we expect from our end users.

[Arun Viswanathan, RBC Capital Markets]

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

[Tom Salmon, Chief Executive Officer]

It's just balanced. The company over the last 32 years did 47 acquisitions. Acquisitions have created an amazing amount of shareholder value for the company. We simply provide an additional leg to our stool, which is organic growth. And we're very comfortable that we're going to be able to consistently dependably and predictably, provide that organic growth that we've committed to. The cash flows of the company at around $1 billion gives us an amazing amount of flexibility, whether that's returning cash to shareholders in the form of a dividend or share repurchase, or ultimately doing bolt-on acquisitions or further reducing our debt.

So we have an amazing amount of flexibility right now, driven by the robustness of this business, the cash generation that it has, that's supported with a proven track record on delivering for shareholders rather, it's the commitments we make on growth, acquisitions or otherwise, we're going to do what's best to make best returns for our shareholders. And we're excited about the position we're in and we're rendering. Berry doesn't really have to do “anything”, right? We're a strong company. We're a leader. We've got a global footprint. And I think we're in the right markets growing around the world with the right partnerships. So we'll be prudent, we'll be very conservative as we've always been in the past, but we attend to operate between that leverage range of 3x to 3.9x going forward.

[Operator]

Next question is from Phil Ng from Jefferies.

[Phil Ng, Jefferies]

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

[Tom Salmon, Chief Executive Officer]

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

[Phil Ng, Jefferies]

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

[Tom Salmon, Chief Executive Officer]

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

[Phil Ng, Jefferies]

Okay. And then on the stable side?

[Tom Salmon, Chief Executive Officer]

Yes. We really -- we continue to be bullish in the categories of healthcare of at home consumption continues to be to be strong for that those businesses, so continued steady performance in those categories.

[Operator]

Next question is from Mark Wilde from Bank of Montreal.

[Mark Wilde, Bank of Montreal]

Just a couple for you. One, can you can you parse the 2021, CapEx despite rough categories, kind of growth versus maintenance and then growth by segment?

[Mark Miles, Chief Financial Officer]

About half of our capital is what I would define as maintenance, the balance is growth and cost reduction. Some of those projects -- many of the projects in that category, check both boxes. So they have an element of growth, as well as cost reduction as we go to larger tooling, for example, to replace smaller cavitation. I would say, in the current environment, we're probably a little more weighted towards growth capital, given the momentum we're seeing in the business. So that second 50% pie, I would say a slightly overweight to growth at the moment. I'd say in most years, it's pretty balanced between growth and cap cost reduction, so 25%, calling each in those categories.

In terms of segments, we're investing in all four businesses, are getting capital, we've got a -- we have a process here that we go through to approve capital, both within the business as well as corporately, depending on the size and scope of the project. And I would say in the current moment, as you would expect, areas that have been really strong volumes, where we've tied on capacity, you're getting some incremental capacity.

So HHS, is an example, Tom mentioned the investment we've got going in China and healthcare, the wipes investments that we're making in the U.S. So in the very near term, I'd say HH&S is probably on a pro rata basis, getting slightly more capital given the demand and the tight capacities even in some of those markets.

[Tom Salmon, Chief Executive Officer]

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

[Mark Wilde, Bank of Montreal]

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

[Mark Miles, Chief Financial Officer]

And on the scale of the company, Mark, I mean, I think that's back to an earlier question. I can't remember who asked it, which analysts, but I'd say another difference is just the scale of the company, right? I mean, acquisitions for us now to the extent we do anything going forward will be relatively small compared to the overall size of the company just given the market and the fragmentation.

So we would intend to continue to operate in that 3.0x to 3.9x leverage range, including any bolt-on acquisitions that the company may do. But as Tom said, it's not a must do. We're very focused on creating value via organic growth and certainly, we'll be looking to other methods to return value to shareholders, including return to capital.

[Tom Salmon, Chief Executive Officer]

And Mark, I was remiss and not pointed out but in terms of the capital investment, certainly closures dispensing solutions has been a cornerstone of where we focus a lot of our growth CapEx as well serving a variety of markets.

[Mark Wilde, Bank of Montreal]

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

[Tom Salmon, Chief Executive Officer]

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

[Mark Wilde, Bank of Montreal]

Yes. I really wasn't asking you to get too specific. I was just trying to figure out whether this was still an active part of the strategy perhaps accelerate the deleveraging?

[Tom Salmon, Chief Executive Officer]

We continue to look at the portfolio for opportunities that might be -- have more valuable elsewhere. Yes.

[Operator]

Next question is from Gabe Hajde from Wells Fargo.

[Gabe Hajde, Wells Fargo]

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

[Mark Miles, Chief Financial Officer]

Yes. The first part of your question, Gabe the 50 million that was simply we broke it out separately, it was combined in the last call so that had not come up. So thanks for asking that. So we had volume growth and synergies combined, we simply pulled those out this time. So no change to that, the 50 million is what we had expected on our last call and we continue to expect 50 million of synergies, sourcing would be a component of that. There's obviously some other categories that are providing for that $50 million of incremental synergies and that simply just getting the full year benefit of actions that we took in fiscal 2020, or in some cases fiscal 2000 -- late '19.

With respect to the second part of your question, obviously we've got a global sourcing organization that's always working to minimize the impact of inflation on our company and our customers. RPC brought us obviously a lot more scale to be able to move product internationally. We're continuing to look at those opportunities as those markets potentially get disconnected. So I think we're well positioned from a scale and capability perspective to minimize the impact of inflation relative to our competition. I think we're advantaged in that regard.

[Gabe Hajde, Wells Fargo]

Okay. And then, real quick, somewhat of a housekeeping question. There's other expense line item of 25 million in the income statement, I think it was 30 million last year. It looks like it's included for EPS purposes, but excluded for EBITDA. You guys call off the 21 million that I think is mostly stock option expense. But can you describe what that 25 million is Mark?

[Mark Miles, Chief Financial Officer]

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

[Operator]

[Operator Instructions] Next question is from Salvator Tiano from Seaport Global.

[Salvator Tiano, Seaport Global]

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

[Tom Salmon, Chief Executive Officer]

We've talked about some success stories we've had and pivoting end customers to, for example, all polyethylene solutions to support recycling, in stand up pouches. We made significant investment in our engineer materials business. And I'm pleased to say that, the assets that will support more like products to what we announced previously, with the Bear Naked product line. We expect to be fully committed for by the end of our fiscal year. That gives you the sense of -- some of the energy and momentum around that space right now.

So I think we're possible, you're going to see customers look to pivot to those more recyclable materials. In the end, is kind of also why we're getting behind advanced recycling. Advanced recycling is somewhat of an umbrella, if you will in the recycle world, it will allow those materials that are typically and traditionally considered difficult to recycle, they ultimately are converted to liquids that often would become new petrochemicals in a mass balance process. And as such that's something that I think is going to get a lot more attention going forward.

You might have a follow up and say at least, Tom, are they ultimately certified that and how do they keep track of that in those mass balances. Berry actually, now has 14 sites around the world that are what's called ISCC International Sustainability and Carbon Certified, which ultimately allows for certification of circular polymers to assure that, the mass balance equation is correct and that claims can be supported by our end user.

So, when you look at the holistic range of solutions that Berry has, in material science to make films thinner that will not impact in physical properties to make substrates that are fully recyclable, like the polyethylene pouch. And then, ultimately, having means like advanced recycling to support difficult to recycle materials, we're in a really good spot. And I think, when we talk about this being a growth component for us, the initial interest in the materials is very high. So we're bullish going forward.

[Salvator Tiano, Seaport Global]

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

[Mark Miles, Chief Financial Officer]

Yes. I think as we said, we've gotten some incremental benefit in our HHS business related to PPE products. I mean, I think the diversity of our portfolio and we've got things that are doing well and things that have been pressured by, certainly, the pandemic. So as things normalize, the items that are negatively impacted by the pandemic will improve, like our canned liner business that we referenced in engineered materials and our industrial metal houses.

And vice versa, they happen some of the products that have been advantaged, but I think net-net, should be a pretty small impact on the company even in the diversity of our product portfolio.

[Tom Salmon, Chief Executive Officer]

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

[Tom Salmon, Chief Executive Officer]

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

[Operator]

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