Berry Global Group Inc

NYSE:BERY

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Berry Global Earnings Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Dustin Stilwell. Thank you. Please go ahead, sir.

[Dustin Stilwell, Head, IR]

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

Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website at 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. [Operator Instructions]. 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 website.

And finally, a reminder that certain statements made today may be forward-looking statements. These statements are based -- 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.

And now I would like to turn the call over to Berry's CEO, Tom Salmon.

[Thomas Salmon, CEO & Chairman]

Thank you, Dustin. Good morning, everyone, and thank you for being with us today. Here we are, a quarter after much of the globe went into confinement, a situation that none of us have experienced before. For many companies, COVID-19 has created one of the most challenging and uncertain times from an operational and financial perspective that we can recall. Borders were closed, travel is limited and offices and schools were vacated. It's been a lot of work for our teams across the globe, but I can proudly today say that we have shown that Berry stands strong, just as it has in the past, under various challenging economic conditions.

Through our employees' relentless effort and dedication, along with our diverse stable portfolio, we were able to deliver record EBITDA for any quarter in the company's history while growing organic volumes 2% compared to the same quarter last year. This makes the second consecutive quarter of volume growth for the company, further exhibiting our intense focus on investment towards consistent, profitable long-term growth.

I'd be remiss if I didn't give a special thank you to our entire Berry team across the globe, particularly our essential frontline team members, for the amazing job they accomplished during the challenging environment in the third quarter, for not only achieving our financial performance results but helping keep each other safe while meeting the critical needs of our communities and customers.

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 in communities around the world. We continue to take precautions in our facilities to keep our people safe by aggressively cleaning and disinfecting high-touch areas, practicing physical distancing and good hygiene as we have now for many months. Our #1 priority and core value is the health and safety of our team members. Everything we do at Berry starts with safety.

As you can see on Slide 3, we have an ongoing commitment to identifying, managing and eliminating risk, and we're very proud of our safety record with an over 20% improvement in number of injuries in fiscal 2020 and an OSHA incident rate significantly better than the industry average.

Turning to Slide 4. Plastic packaging offers several environmental advantages versus other substrates. Berry has a long history of providing sustainable solutions to our customers with a clear goal of improving our environmental footprint, supported by our culture of innovation and continuous improvement. As highlighted through various product launch initiatives and partnerships across the value chain, we're using the breadth of our portfolio, depth of our technologies and geographic presence to do our part in helping address not only climate change issues but also focusing on eliminating plastic waste. Plastic packaging offers many advantages, such as lighter weight; versatility; durability; convenience; barrier properties like keeping fresh food fresh longer; and cost effectiveness. The bottom line is that plastics has become an indispensable and necessary part of our lives that protects us, helps prevent the spread of diseases and enhances our lives each and every day. At Berry, we were very proud to be a leader in sustainability and providing protective packaging solutions to the market.

Next, as you can see on Slide 5, the safety and supply of necessities such as food, medicine, sanitizing products and protected health care apparel, to name just a few, continue to be in high demand. We believe about 2/3 of our portfolio are unaffected or advantaged in the end markets such as hygiene, stay at home, food, cleaning and health care. The remaining portion of our diverse portfolio, serving industrial and away-from-home food and beverage markets, in aggregate, continue to see pandemic-related headwinds. However, we are beginning to see improved demand trends across those more pressured end markets as areas around the world continue to reopen. In the short term, we view the headwinds related to COVID-19 as transitory. While we believe the advantaged areas benefited from the pandemic for products used for protection, safety and cleanness will be a long-term sustainable benefit to our global portfolio.

Now let me highlight some of the key takeaways for today's call on Slide 6. We had an outstanding quarter with strong organic volume growth. Our portfolio diversity is unmatched and recession-resistant as proven through past economic downturns and further evidenced by our last 2 quarters of solid financial results. We expect low single-digit volume growth post COVID-19 in all 4 divisions. The integration of RPC remains on track, while synergy realization is coming in ahead of schedule for fiscal 2020. Deleveraging is also pacing ahead of schedule as we ended the quarter at 4.5x net debt to adjusted EBITDA, and we're now increasing our fiscal 2020 free cash flow guidance to $830 million.

As Mark will discuss momentarily, our outlook incorporates the appropriate level of uncertainty and dynamism associated with the COVID-19 era. With that said, we remain confident in our ability to execute and deliver on our commitments during these uncertain times.

Transitioning to some financial highlights for the quarter, we generated a June quarterly record for net sales of over $2.9 billion, an increase of over 50% and an operating EBITDA record for any period of $581 million, an increase of 67% compared to the prior year quarter. Our adjusted earnings per share increased 69% to $1.52, and we reported significant improvement in free cash flow, bringing our 4 quarters total to $1,040,000,000.

For the June quarter, organic volumes were up 2%, led by our Health, Hygiene, & Specialty segment, which recorded strong growth of 14%. We anticipated volume growth related to our recent investments and our targeted market approach while also benefiting from COVID-19 related products in our healthcare portfolio. Excluding COVID-19, we believe the HHS business delivered high single-digit growth in the quarter, and we're very proud of the team in achieving their objectives of delivering profitable and sustainable growth on time versus our commitments.

And lastly, our Consumer Packaging-International segment, comprised primarily of legacy RPC business, performed well in the quarter and has been able to drive earlier than anticipated synergy realization as we now are targeting $85 million to be realized in fiscal 2020, $10 million higher than our previous outlook. Additionally, RPC continues to provide many benefits from advancing our sustainability capabilities and initiatives to landing multiyear business wins in excess of $50 million over the term of the agreement through our combined consumer packaging global platforms. We remain committed to maintaining a strong balance sheet, and our consistently increasing, dependable and improving cash flow provides us the opportunity to further improve our strong balance sheet as we've historically demonstrated.

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

[Mark Miles, CFO & Treasurer]

Thanks, Tom. First, I would like to wish good health to everyone and their families. And I would like to refer you to Slide 7 now. As Tom referenced, third quarter sales were up 50% to over $2.9 billion. The increase included revenue from the acquisition of RPC, along with organic volume growth of 2%, including an impressive 14% volume growth in Health, Hygiene, & Specialties. These positives were partially offset by lower sales dollars from the pass-through of lower resin prices to our customers and the sale of our Seal For Life business.

From an earnings perspective, the June quarter operating EBITDA increased over 65% to a company quarterly record of $581 million. The increase included contributions from the RPC acquisition, including synergy realization, cost productivity and the benefit from organic volume growth.

Now looking at the results of each operating segment with the prior year results restated to match the current structure [indiscernible]. For the quarter, our Consumer Packaging-International division delivered sales of just over $1 billion and operating EBITDA of $184 million. This division primarily consists of business acquired as part of the RPC transaction, and therefore, not included in our historical results. So for comparison purposes, we are utilizing results prior to our ownership. As we just completed our first year of ownership of the RPC business on July 1, this will be the last quarter that the year-over-year comparison will be impacted.

In the quarter, volumes were down 7% compared to the prior year due to the transitory impact of COVID-19 in end markets such as automotive, industrial and building and construction, partially offset by growth in grocery, health care and hygiene markets. Excluding the impact of the pandemic on the quarter, we believe volumes would have been flat on a year-over-year basis. We saw improving trends within the segment as the quarter progressed and anticipate sequential improvements over the next several quarters as the transitory pandemic-related headwinds abate, and we would expect the business to return to low single-digit volume growth.

In spite of the pressure on volumes related to COVID-19, the legacy RPC business generated an impressive 35% increase in operating EBITDA from cost synergy realization, favorable product mix and productivity.

Net sales in our Consumer Packaging-North America division were $718 million in the quarter, which was 10% higher than the June 2019 quarter as a result of the addition of the North America rigid business from the RPC acquisition, partially offset by lower sales dollars from the pass-through of lower resin prices to our customers. Organic volumes were flat in the quarter, slightly ahead of our expectations provided on our last earnings call. Operating EBITDA was $159 million compared to $126 million in the prior year quarter. This 26% increase was primarily driven by the contributions and synergies from the RPC acquisition.

Our Health, Hygiene, & Specialties division delivered sales of $608 million compared to $603 million in the prior year quarter. The increase was primarily attributed to organic volume growth of 14% including growth in all 4 regions globally, partially offset by the pass-through of lower resin prices for our customers, the sale of the Seal For Life business and an unfavorable impact from foreign currency changes. Segment volumes were up high single digits related to organic growth investments with the balance benefiting from the additional COVID demand for products such as materials for mass, wipes and medical gallons. Operating EBITDA increased by $38 million from the prior year quarter when adjusted for the sale of the Seal For Life business. This improvement was primarily driven by the organic volume growth just referenced, favorable product mix and cost productivity. As forecasted, the HHS segment inflected positive in price versus cost in the quarter, which was enhanced by the better-than-expected volumes.

And lastly, sales for our Engineered Materials division were $564 million compared to $630 million in the prior year quarter. The decrease included an 8% decline in volume along with lower sales dollars from the pass-through of lower resin prices to our customers. As anticipated, our Engineered Materials segment saw more unfavorable impacts from COVID-19 compared to the other divisions. Many of our products in this business are sold through distribution to schools, offices and restaurants, to name a few, which saw more contracted demand than our more consumer-facing businesses. Excluding the impact from COVID-19, we believe volumes were up low single digits, driven by continued growth in our differentiated products around barrier films for the growing snack trend and films for e-commerce. We saw improving trends within the segment as the quarter progressed and anticipate sequential improvements over the next several quarters as the business returns to growth post-COVID, as demonstrated in the March quarter. Operating EBITDA saw a modest decrease to $109 million as the team delivered strong cost productivity, offsetting the COVID-19 related volume headwinds.

Slide 9 provides a summary of our income statement for our fiscal third quarter. Overall, operating income increased $132 million over the prior year quarter, primarily attributed to the improved operating EBITDA just discussed, partially offset by incremental depreciation and amortization from the RPC acquisition. Our net income increased to $191 million, and adjusted earnings per share improved by 69% to a quarterly record for any period of $1.52 per share. As a reminder, we do not add back amortization of intangibles from acquisitions to our adjusted earnings per share. If we were to add back this amortization, it would increase our annual adjusted EPS by more than 30% and believe this should be considered when comparing to other companies that make this adjustment.

Next on Slide 10, the company generated $446 million of cash flow from operations compared to $240 million in the June 2019 quarter, increasing 86%, primarily from incremental cash flow resulting from the RPC acquisition. Net capital expenditures in the quarter were $156 million and $419 million through the first 3 quarters as we incurred spending on cost reduction initiatives as well as customer linked growth-related projects.

Our free cash flow was $290 million, an improvement of $154 million compared to the prior year quarter, primarily attributed to our growth in EBITDA. For 4 quarters ended, free cash flow was an all-time record of $1,040,000,000. We remain committed to maintaining a strong balance sheet, and our consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically.

The company maintains a strong liquidity position with over $900 million of cash at the end of the quarter as well as an undrawn $850 million asset-based line of credit, representing almost $1.8 billion of liquidity. Also, we have no financial maintenance covenants or near-term debt maturities. We are progressing ahead of plan on all 3 of our primary financial objectives, including strengthening our balance sheet as we have repaid over $600 million on our outstanding debt through the first 3 quarters, lowered our annual interest expense by over $100 million and reduced our leverage from 4.9x to 4.5x.

Our fiscal year 2020 free cash flow guidance and assumptions are shown on Slide 11. We are increasing our guidance to $830 million, which includes $1.45 billion of cash flow from operations, partially offset by capital expenditures of $620 million to support our increasing growth pipeline. Our fiscal year 2020 free cash flow represents a free cash flow yield of over 14% using our quarter end market capitalization. Cash taxes are expected to be $170 million and cash interest costs are projected at $430 million. Additionally, we expect restructuring costs, working capital and other costs to be $50 million.

Overall, for volumes, our trajectory and outlook heading into the fiscal Q4 has improved from our last earnings call. Specifically on volumes by segment, we anticipate our Health, Hygiene, & Specialties segment to produce low double-digit growth. Our Consumer North -- Consumer Packaging-North America business, we believe, will deliver low single-digit volume growth as the food service space recovers, along with continued solid demand in hygiene and grocery markets. Both our Consumer Packaging-International and Engineered Materials businesses, we believe, will experience low single-digit and mid single-digit volume declines, respectively, related to the weakness from the impact of COVID-19. As COVID-19 headwinds subside, we would expect the businesses to get back to low single-digit volume growth.

From an earnings perspective, we are increasing our operating EBITDA guidance by $70 million to now $2.1 billion. This assumes that fiscal Q4 would have a sequential decline from the June quarterly result of $581 million due to the traditionally seasonally weaker September quarter, along with some incremental inflation.

This concludes my financial review, and now I will turn it back to Tom.

[Thomas Salmon, CEO & Chairman]

Thank you, Mark. As I stated before, our economic resiliency and durability has proven true as it has in the past [indiscernible] economic periods. COVID-19, as anticipated, has modestly impacted our global benefits. However, due to our diverse and stable portfolio, we've grown volumes in the face of these headwinds while cost productivity has provided a modest tailwind to our earnings. For those reasons, 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 for all our stakeholders. We continue to work diligently across all our businesses to grow organically and have been able to demonstrate organic volume growth by providing advantaged products in targeted markets as evidenced in our recent results.

Our HHS division is performing very well as we continue to benefit from the pivot to higher-growth markets and from capital investments in nonwoven and film line for premium hygiene, health care, disinfectant wipes and high-end air filtration products. We are also seeing additional demand for products like disinfectant wipes, masks and gowns needed to combat coronavirus pandemic, some of which we think are going to continue post-COVID.

Next, with the acquisition of RPC, we are able to provide differentiated and sustainable solutions using our material science know-how and operational prowess that our global customers have come accustomed to at Berry over the years. RPC has given us a world-class product innovation engine, where we enjoy leading positions in higher value-added closures, dispensing systems, medical devices and health care packaging. We're close to 300 facilities around the world and a wide mix of technologies. We're working on translating solutions for our customers in different parts of the world to meet the changing needs of the customer -- of the consumers.

Lastly, in a period that the world almost came to a complete standstill for over 2 months, we've recorded positive organic volume growth of 2%, strong earnings, while increasing our free cash flow guidance in what has been some of the most difficult conditions we witnessed in our history. We are pleased with the progression and perseverance of our teams and remain focused on driving positive growth throughout all businesses in the post-COVID environment.

Additionally, on our other key strategic targets, we're pleased to be outpacing our plan on cost synergies for the RPC acquisition. Our teams will continue to leverage our combined know-how, material science, supply chain, product development, manufacturing technologies and sustainable solutions, which will benefit us for many years to come. I'm pleased with the discipline demonstrated by our teams on cash management, which is a core competency for Berry. As such, we've been able to overdrive our free cash flow target, use that cash to reduce our interest costs and delever quicker than we anticipated, yielding the leverage of 4.5x at the end of the quarter. We are well on our way to get below our targeted leverage ratio of 4x.

And finally, we will continue to take the steps necessary to remain a leader in the markets where we participate through our relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. Our key priorities are: to safeguard the health of our employees and communities, ensure the reliability of supply chain; and provide accurate and timely service to our retail customers and consumers. Additionally, we continue to be laser-focused on finding ways to extract more value for our shareholders by reinvesting in our leading low cost position, leveraging our resources around the business with the greatest opportunity to grow and create value for our customers, all while doing our part to protect our environment. I'm confident that the people at Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important.

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

[Operator]

[Operator Instructions]. Your first comes from Anthony Pettinari with Citi.

[Bryan Burgmeier, Citigroup]

This is actually Bryan Burgmeier sitting in for Anthony. You discussed sequential volume improvement for Consumer Packaging-International in the fourth quarter. What have you seen in July so far? And what indicators are you looking at that give you confidence and improvement throughout the quarter?

[Thomas Salmon, CEO & Chairman]

I'll comment really on how we exited Q3. We saw -- probably the tougher parts of the quarter occur in April and May with a strong rebound in June, and that gives us confidence as we -- our outlook is for sequential improvement in Q4, which we're confident of. It's really driven by that. I'm not going to give any current quarter commentary on the call, but I would say we exited Q3 in a very strong way, and the outlook is positive for sequential improvement.

[Mark Miles, CFO & Treasurer]

And I would just add that, that's -- Bryan, this is Mark -- consistent with the economic indicators you're seeing in Europe, which is obviously where the predominant portion of that business is, U.K., Germany, France, being the 3 primary countries.

[Bryan Burgmeier, Citigroup]

And your LTM free cash flow is well above the normalized level that you called out after the RPC acquisition. Do you still feel that the $900 million is representative of Berry's longer-term earnings power? Or is there possibly some upside to that number based on what you've seen?

[Mark Miles, CFO & Treasurer]

Yes. The $830 million guidance would still reflect a normalized level above $900 million when you exclude the transition costs that we've incurred in the year resulting from the integration of the combination as well as annualizing the synergies that we're realizing this year. So that -- when you factor in those 2 additional points, that would take you over $900 million for fiscal 2020.

[Thomas Salmon, CEO & Chairman]

Bryan, I'd add, we take a great deal of pride at Berry in the consistent, dependable free cash flow as well, frankly, as earnings year in, year out, irrespective of the external environment. It's something that we focus on throughout the organization, and it's a strong value attribute we do for the company.

[Operator]

Your next question comes from Phil Ng with Jefferies.

[Philip Ng, Jefferies]

Congrats on a very strong quarter. I guess good to see the free cash flow coming in really strong. If you have line of sight to that 4x leverage, would you be open to kind of returning cash to shareholders maybe a little sooner? And what are some of your bigger capital deployment priorities going forward?

[Thomas Salmon, CEO & Chairman]

Well, I'll start with the capital priorities. We -- our strategy has been across all 4 of our businesses to continue to invest in specific targeted markets with advantaged products and always try to link those investments to an anchor customer. We continue to believe areas around protective solutions, health and wellness continue to be strong categories. If you look inside, many of our spaces, we're seeing it now in HHS as well as CPI, a lot of focus on areas like health care, dispensing systems, sustainable solutions, and we feel really good about it. It's a model that we deploy inside our Consumer Packaging-North American business, which has consistently delivered organic growth the last couple of years. And all of our businesses, frankly, pivoted as we had projected pre-COVID from a growth perspective as we had highlighted. So more of the same in that regard. But again, those bigger trends around health and wellness, food safety and protection, barrier properties continue to be areas of high interest for us. What was the second part of that question? I apologize.

[Philip Ng, Jefferies]

If you have line of sight to your 4x leverage, would you be open to returning cash back to shareholders sooner?

[Thomas Salmon, CEO & Chairman]

Well, we review that every quarter as the Board of Directors. And the first priority is get -- achieve our objective of getting back below 4x. And we were really thrilled in the quarter here to take it down to 4.5x, so we're well on our way to meet that objective, and we'll be updating that guidance in the next couple of quarters.

[Philip Ng, Jefferies]

Got it. And Tom, sorry to sneak one in. Just you're talking about some of these growth opportunities on health and hygiene. I mean, obviously, we can appreciate a bump from COVID. How are you thinking about like the medium-term growth just because there seems to be a lot of momentum in that business?

[Thomas Salmon, CEO & Chairman]

Well, we were really pleased. If you look really across all of our businesses, we were able to highlight upgrades from our last call, our guidance in terms of 4Q outlook. CP North America is improving from what we had forecasted, with down low single digits to up low single digits. CPI is going to be down low single digits in the upcoming quarter. Our HHS business, up low double digits; and Engineered Materials, down low to mid-single digits as COVID-19 continues to abate. So feel good about the growth trajectory. Certainly, both in Engineered Materials and CPI, both businesses, we anticipate sequential improvement. And the teams continue, really, outside of COVID to work on all those things absolutely under our control: people; safety; the processes that we're using inside the businesses; operational conversion costs; the pace by which we continue to automate the business; supply chain efficiency, which continues to be a key attribute for our global portfolio in terms of how we deliver value has continued to shine through the COVID pandemic. And frankly, post-COVID, I think it will be that much more important.

[Operator]

Our next question comes from Ghansham Panjabi with Baird.

[Ghansham Panjabi, Robert W. Baird & Co.]

I just want to go back to CP-International. Mark, I think in your prepared comments, you called out weakness in autos, industrial and building and construction. As the regions open up in Europe, will there be some level of pent-up demand that benefits future quarters in your view and not just 3Q as the cyclicality sort of works in your favor. And just asking because auto production is ramping up meaningfully, and so is construction in Europe. And so how are you kind of netting out these dynamics?

[Thomas Salmon, CEO & Chairman]

I'll answer that question for Mark. Yes. The target position pipeline -- in that pipeline for CPI is very strong. So it is coupled not only with expected new business closes but also sequential improvement, just based on the pace of the opening. There's a bigger expectation, I think, in Europe right now that the calendar Q3 is going to be stronger in Q2, just based on the way they ultimately shut their country down relative to COVID. I think there's a higher expectation that there'll be a stronger recovery. We're certainly -- we're trying to be as agile as possible in that regard, Ghansham, just given that each country, each region is different. Germany is going to be different than the U.K., which is going to be different from Italy. But we feel very good. We feel very confident that we'll see sequential improvement in the quarter. And to your point, most industries have not been holding on and carrying a tremendous amount of inventory as they've been weeding that off over the last several months, of course. So there'll probably be some component to that. Difficult to articulate what it is, but we're really focused on giving our customers challenges in terms of forecasting demand, our agility and our supply chain strength is really, as I said previously, rang through.

I have to share with you, and I'll give you an example, and we talk a lot about global value delivery capability. And in Mark's comments, he noted a recent close that we secured the $50-plus million opportunity with a major brand, a worldwide brand. And the way that team is actually managing supply chain, managing execution in this environment, incredibly impressive. Four months ago, we were identified of the opportunity. We identified and negotiated in India. We built the tool in China, and we're manufacturing in 4 months in Mexico. So when you think about how that team and how this organization is executing in a COVID environment and being able to support our customers' growth objectives, what can it be post-COVID? And that's what I'm so proud of. This team has worked so incredibly hard during this time, not only to execute around growth objectives to make that progress, delight our customers,and fully integrate that business. So I'm really bullish about what we've done in CPI and the prospects for that business going forward.

[Ghansham Panjabi, Robert W. Baird & Co.]

Very clear. And then for the EM segment, just comment on your strategy to offset the volume weakness, given that many of the venues you cited, schools, office buildings, et cetera, will likely remain impaired from a usage standpoint for a while. What are you doing in that segment in the interim?

[Thomas Salmon, CEO & Chairman]

We've got over $70 million of new CapEx committed over the next year, including new lines, upgrades, all around, multiple-advantage products in that space to support e-commerce, to support snack packaging, the retail trash bag business. And it's interesting, if you look at that business, it's -- by design, it's historically been an industrially driven business to a large extent. And we have also been under indexed, if you will, for at-home consumption. But that is coincidentally where we've been making the majority of our capital investments over the last 12 and 18 months, to give that business better balance. So Engineered Materials has been a strong business for a long time. We continue to focus on ways that we can innovate and differentiate, and again, support those faster-growing components of that business, specifically e-commerce and snack packaging.

[Operator]

Your next question comes from Arun Viswanathan with RPC Capital Markets.

[Arun Viswanathan, RBC Capital Markets]

Just wanted to delve into the free cash flow guidance, I guess, for the rest of this year and potentially into next year. I guess do you see any upside to that, I guess, given that you're increasing EBITDA guidance a little bit more? I guess what is the offset on free cash flow that leads to a slightly lower, I guess, increase there?

[Mark Miles, CFO & Treasurer]

Yes, sure. So a couple of things. One is, you probably noted, we've increased our capital plan by $20 million for the fiscal year. We continued to see a strong pipeline of growth opportunities, that we're investing behind our customers. And there are some timing elements where our cash flow is -- while it's still heavily weighted towards the June and September quarter, it's a little more balanced than it has been in the past. And we've got some incremental inflation as well built into our cash flow guidance as there are some chatter, as you probably know, in the market about some potential increases in our primary raw material inputs around polymers. So those are really the 3 factors that we've got considered when we provided the guidance of $830 million. But we're certainly proud of our track record of exceeding our cash flow every single year as a publicly traded company, and want to make sure we maintain that.

[Arun Viswanathan, RBC Capital Markets]

Okay, next. And I guess looking into next year, I guess, are there any large items discrete or otherwise that would help us kind of understand where you think capital will be for next year -- CapEx for next year? And you guys have made a lot of investments in HH&S recently and redirected some capacity towards PP&E. I guess is that going to continue? Or would we see that reverse?

[Thomas Salmon, CEO & Chairman]

Yes, I won't comment specifically on what the amount of investment will be in a by-business basis, but I'd take you back to what we think are some trends that will be more sustainable in the future and specifically relative to HHS. As you recall, a couple of years ago, we invested in a new technology in faster-growing regions of the world, specifically China, to support premium hygiene as well as in Mooresville, North Carolina for hard surface disinfectant wipes. That -- we not only got the benefit of the pivot to the faster-growing regions of the world, but also things like hard surface disinfectant wipes, we believe will be a longer-term trend that will benefit Berry, and specifically our HHS business, not only in the most developed region of the world, which is the U.S. and Canada, but also, it's going to begin to proliferate outside of the United States and Canada.

And as that happens, Berry, with its ability to have over 290 manufacturing sites around the world, it gives us the opportunity to consider investment and get some support, as you've seen on multiple press announcements and communications of collaborations that we've done with local governments, municipalities and such to support investment all around the spirit of nationalizing certain supply chains and certain items. So we believe some of those dynamics are going to have much longer legs. We're a recognized leader in terms of hard surface disinfectant wipes know-how. And certainly, when people consider global expansion, Berry is obviously one of the companies that has to be part of that conversation. So again the bigger mega trends, health and wellness, food safety, and sustainability for us continue to be real primary along with barrier in general. It's just a strong attribute for the global Berry portfolio.

[Arun Viswanathan, RBC Capital Markets]

Great. And if I may squeeze in one more. Given what you just said, I guess, how are you looking at the long-term growth in HH&S, if you could? Is it higher post-COVID, maybe by a point or 2? And maybe you get into kind of mid-single-digit growth? Or how should we think about the kind of mid- to long-term growth on a normalized basis in HH&S now?

[Thomas Salmon, CEO & Chairman]

Well, I'd start with the portfolio. All our businesses, we believe, will be low single-digit growers, and obviously, the dynamics that you've seen in terms of HHS, similar, we believe, will show towards the higher end of that range for sure. And again, the continued investments that we're making around the world, the globalization of this business and the sustainability of some of these platforms are very exciting for us, not just in 2021 but for the longer term. So more to come, and obviously, we're not giving guidance yet on 2021 and beyond. But nonetheless, it's a very healthy franchise for us, globally deployed. And what I'm proud of is the team and their focus strategically on making these investments some 2 years ago. So this is part of our strategy as a company to make certain that we have local value delivery capability in advantaged products. And every one of these investments, we ultimately match up to targeted customers that can help pull that demand through, again, thus, reducing risk.

[Operator]

Your next question comes from Brian Maguire with Goldman Sachs.

[Brian Maguire, Goldman Sachs Group]

My congrats on solid results here. Just a question on the fourth quarter guidance and the third quarter results. I think last quarter, you talked about likely that fourth quarter EBITDA would be flat with 3Q. But now you're sort of guiding for it to be $50 million lower. So just wondering if there were any unique items in 3Q you're not expecting to repeat. And kind of associated with that, wondering if you could kind of quantify what sort of resin benefit, if any, you got in the quarter? And any kind of headwind you might be expecting in 4Q?

[Mark Miles, CFO & Treasurer]

Yes. Our normal seasonality, Brian, would be that June is typically a little stronger than September quarter. So I wouldn't say there's anything unusual. We do have, as I mentioned in the cash flow question, we do have some incremental inflation coming that we're expecting in Q4. Obviously, to the extent that doesn't happen, that would be upside with respect to our guidance. But I wouldn't say anything unusual, again, other than normal seasonality, things are a little slower in September as well as the inflation that may or may not happen in the September quarter. We've assumed it does for the purpose of the guidance.

[Brian Maguire, Goldman Sachs Group]

Okay. So just to be clear, it's not inflation that you're seeing today. This would be kind of inflation above and beyond where we sit today that you're just putting in there for some conservativism in the case we get it?

[Mark Miles, CFO & Treasurer]

Yes. July hasn't settled yet for our primary raw material. Again, I think there's indications that there will likely be some increases. The magnitude of that is still undetermined, but we're -- we feel comfortable with the outlook that we've provided.

[Brian Maguire, Goldman Sachs Group]

Okay, great. And then just one more on Consumer International. I think you noted in the release that COVID, it seems like it hurt the volumes there by roughly 7%. But in North America, the impact was more muted, only kind of a low single-digit impact from COVID. I just wondered if you could talk about why COVID and the lockdowns would be having a bigger impact on your international business than what you're seeing in the North America business?

[Thomas Salmon, CEO & Chairman]

Yes. It's a great question. We -- the driver is we've got a larger foodservice business in North America that showed ramped improvement from the prior quarter. That's probably the biggest distinction. And also the makeup of the industrial business inside of CPI, specifically around automotive, industrial is heavy again. It didn't have that offset of a ramping improving foodservice business that we saw in North America.

[Operator]

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

[George Staphos, Bank of America Merrill Lynch]

Congratulations on the progress. I want to take a step back, and some of the earlier questions have touched on this to some degree. But Tom, you mentioned early in the call, and I think you mentioned in your slide deck, the company's current free cash yield of 14% or 15%, which implies perhaps that you think that yield in the market should be lower. When you look at other companies when you model best-in-class, companies that perhaps trade at lower free cash yields, what do you think the takeaways are for Berry? Again, recognizing all the progress that you've seen in terms of how you will manage the balance sheet and allocate capital there and value return and also product areas for investment. How do you think about those 3 things in capital allocation, aiming for best-in-class performance, and over time, not next quarter necessarily or next week, valuation metrics? How should we think about that?

[Thomas Salmon, CEO & Chairman]

Well, I'd start, and I'll let Mark weigh in as well. But remember, the top 3 primary strategic objectives for the company that we felt that were essential for us to address was to deliver predictable, sustained organic growth, which we've been investing in and around and executing against quite well. The second piece was we've just completed, just 1 year ago, transforming the largest acquisition that we had done in our company's history. And our objective was, first and foremost, make certain that we execute against the synergy outline -- that we've outlined on time while integrating that business and getting it harmonized around our growth objectives. And then the third piece was simply making certain that we take advantage to delever the company as quickly as possible because clearly, there was a dislocation of our net debt to adjusted EBITDA versus the rest of the market. Strong improvement made this quarter at 4.5, we'll be on track to get to 4x by the end of the -- into 2021. And certainly, we feel comfortable that beyond that, we can now begin to approach more dialogue with our Board of Directors around what the appropriate model is in terms of allocation of spend, towards that #1 objective of consistent, predictable, reliable growth, coupled with other opportunities to advance the company on a capital allocation basis.

[Mark Miles, CFO & Treasurer]

I would say those are the exact things. I would reiterate what Tom said and just say we have a very high level of confidence in our team's ability to successfully execute on those initiatives that we've got as a company.

[George Staphos, Bank of America Merrill Lynch]

And perhaps, you're not in a position to comment on it now, and I recognize that. But could you give us perhaps a bit more in terms of how you are deliberating, thinking about it in terms of whether 4x is, in fact, the right leverage point. You said you're making progress towards being below that target, which suggests that maybe the target really should be below 4x. Companies, frequently, in packaging, do have some form of recurring value return. Can you remind us what you said before and maybe about some of the things that are on the horizon there in terms of Berry and your move towards advancing your reputation valuation in the market over time. And then kind of a quick unrelated follow-on. Can you talk to us a bit about how COVID is affecting your dispensing business and health care trends more broadly, forgetting about the impact it's obviously having on HH&S.?

[Thomas Salmon, CEO & Chairman]

Thanks George, and I'd start with this. The fact that Berry had industry-leading growth rates on revenue, EBITDA, free cash flow, not just near term, but for a long period of time, gives us an amazing amount of flexibility. We've articulated that our first objective is to get at or below 4x. And then we'll ultimately restate that objective to the broader market as we come to that conclusion with our Board of Directors, not only on the net leverage, but just what -- more details relative to capital allocation in general. And before we prognosticate on what it might be or what we may have as an objective, we want to deliver on that commitment before we ultimately start speculating on what the next hurdle could be, just as we did on growth.

And George, I have to mention, this business and this leadership team and the teams inside of Berry, they said when they would pivot to growth in Engineered Materials, and they did. They said when they'd pivot to growth in HHS, and they did early. And I'm incredibly proud of this team and their ability to execute, make commitments and honor commitments. And that's what the cornerstone of this company is going to be built around, coupled with this global value delivery capability that has been enabled by this global pure-play on packaging between legacy RPC and the Berry CP North America business and the already international HHS business. So we've got a tremendous amount of flexibility as an organization, and I couldn't be more proud of how this team is executing.

In terms of the pandemic, let me say the first thing. The first thing that pandemic has done has increased the level of morale, believe it or not, inside our company to heights that it hasn't been in a long time by the way these teams are caring for one another, caring for their communities and caring for their customers. And I think, ultimately, what we've seen in terms of our integration efforts, even in a difficult growth environment, CPI was able to maximize earnings. They were able to -- as well as free cash flow and continue to execute against synergy realization ahead of schedule, dispensing solutions. It is a cornerstone of where we're investing. We believe that's an advantaged area for us. We believe health and wellness, health care dispensing systems, metered dose inhalers are all key components, both in terms of maintenance of good health as well as, in some instances, potential opportunities for vaccines through inhalation as options that can be created. So the portfolio continues to morph and continues to be centered around those larger mega trends that we think are going to continue to sustain for many years to come, and we think we're really well positioned as a result.

[Operator]

Your next question comes from Anojja Shah with BMO Capital Markets.

[Anojja Shah, BMO Capital Markets]

I wanted to ask about the M&A markets, particularly as we're seeing dealer activity picking up around the space right now. If you could talk about what kind of valuations you're seeing, that would be great. And also, similarly, how are you feeling about divestitures now? Do you think the market has become more accommodating?

[Thomas Salmon, CEO & Chairman]

Listen, we continue to stay abreast of what's happening from an M&A perspective. Clearly, our primary objective, as we've stated strategically, is to fully integrate and take advantage of the synergy realization of the RPC transaction, just 1 year old. But clearly, yes, as the economy improves, as people get comfortable in a relative new dynamic in terms of how different geographies open, it's going to increase the level of activity. So nothing specific I'd comment relative to Berry or relative to multiples. And we always are continuing to look at our diverse portfolio. And if there's opportunities for us to reconsider portions of it that might be ultimately better suited for other individuals, we could certainly and we'd consider those for divestiture. But nothing we'd comment specifically on this call.

[Anojja Shah, BMO Capital Markets]

Okay. And then my next question is, we saw recent news reports about an EU proposal for a new tax on plastic packaging, I believe, on nonrecyclable plastic packaging. I think it's about EUR 0.8 per kilogram to be introduced on January 1. Can you talk about if this will affect you?

[Thomas Salmon, CEO & Chairman]

It would affect everybody in the space ultimately. And it's really driven to support larger percentages of post-consumer materials, putting them into the product line. Actually, given our presence in terms of a post-consumer -- user, I should say, in our products already, it's actually an opportunity for us because of the access that we have to some of those feed streams. But nonetheless, it would be a tax that's ultimately passed on to the end customer, all in the sport to create additional, larger infrastructure in the geographies, which is certainly relative to plastics waste, continues to be a great opportunity for the industry to address waste and also take advantage of the valuable raw material that can continue to be reused multiple times.

So nothing negative that we would outlook or forecast in that regard. We look at sustainability for our business. It's actually been improved and bolstered, given the acquisition of RPC. And not only in terms of PCR materials but also some of the chemical recycling materials, and we talked previously about what was an exciting collaboration with Mondelez in their Philadelphia cream cheese, using recycled materials from an advanced recycling technology that's currently in the market today. We've recently introduced a new product in CPI today called Sustain, another high-performance, sustainable polymer using recycled content. So it's really driven more innovation in our business. And we believe our background in terms of material science as well as recyclability and understanding the post consumer as well as advanced recycling processes, it gives us a great opportunity to provide that to our end customers where the need is there.

[Operator]

Your next question comes from Neel Kumar with Morgan Stanley.

[Neel Kumar, Morgan Stanley]

In Consumer Packaging-North America, I know that your polypropylene green cups in the foodservice channel was a key driver of growth historically. Are you seeing evidence of your food service customers wanting to pursue conversion opportunities to plastic or your Versalite drink cup products from paper? Can you just give us a sense of the conversations you're having with your customers?

[Thomas Salmon, CEO & Chairman]

Absolutely. The CPNA had really strong success, not only in the foodservice space but also personal care, health care bottles, closures, food. On the foodservice side, the attributes of a fully recyclable polypropylene, clear substrate has continued to grow in its popularity in the foodservice space. So we're excited about that. But as you mentioned, relative to Versalite, that's a product line that continues to operate at a very high level right now inside the CP North America division. There's clearly a number of targeted niches that we're deploying that against and opportunities to keep cold food, cold drink cold in very warm climates without a lot of the condensation, build up, et cetera, as well as premium instant properties on hot drinks as well. So continues to be a nice component, a profitable component inside CP North America and continues to be introduced to more customers literally every quarter.

[Neel Kumar, Morgan Stanley]

That's helpful. I just had also a question on HH&S. You've had several announcements relating to adding new nonwoven capacity for PPE production. But are all these capacity announcements based on specific minimum volume commitments from customers? And as we think about the CapEx outlook in 2021, should we expect to step-up from the $620 million level this year in all these new capacity additions?

[Thomas Salmon, CEO & Chairman]

I'll start with the investments. All the investments that we're making relative to PPE are tied to either a municipality or anchor customer that's pulling through percentages of that demand. So we feel really good. We really -- we deployed the exact same model that we've talked about for the company as a whole, making sure that we have anchor customers, with letters of intent, strategic commitments on the consumption that ultimately reduces risk. But what's most exciting as well about that business is the flexibility of the asset because it not only can produce products for things like surgical 1, 2, 3 face mask, N95, but it also can support air filtration opportunities, which, as many of you know, continue to be a growing niche for air cabin filtration, home filtration, office filtration and the like.

[Mark Miles, CFO & Treasurer]

With respect to the capital dollars, we believe $600 million -- our $600 million capital plan is about half maintenance. The balance is a combination of cost reduction and growth. We believe the $600 million can accomplish our objective of growing both our top line and bottom line. And to the extent we have incremental opportunities that meet our thresholds, we'll certainly update the market and hope that's the case as it is this year, where we see some incremental opportunities to grow our top line and bottom line, even higher than our expectation.

[Thomas Salmon, CEO & Chairman]

It's a terrific problem to have, as Mark said, and it's not one we would apologize for. The teams are doing an amazing job, making certain that we continue to vertically penetrate a lot of the larger accounts we do business with. As an example, our CP North American business, our pilot line is close to full capacity right now, meaning that's the lab, and that's the lines that we're ultimately testing and qualifying new application, new parts. That's a strong correlative industry for us going forward. And I think what I publicly need to say is thank you to my team and the teams around the world for them to develop and actually implement, execute the capital that we have around the globe on time to allow this local value delivery capability, regardless of the geography that we're in, has been really impressive. The team has done an amazing job and really given us a tremendous amount of confidence in their ability to not only manage the course of the day-to-day business but also implement what is a very technical and complex projects in terms of some of this new capacity, whether it's on the premium hygiene products, nonwoven applications. There's been a lot of great examples of really strong execution by the group. Really proud of them.

[Operator]

Your next question comes from Kyle White with Deutsche Bank.

[Kyle White, Deutsche Bank]

I'll leave it to just one question here late in the call. Focusing on price cost expectations for fiscal 2021, any early thoughts there on kind of underlying price cost when we take out the impact of the RPC synergies there? Do you foresee price/cost being a headwind, tailwind or just kind of a neutral for next year?

[Mark Miles, CFO & Treasurer]

Excluding the synergies, I wouldn't expect a big delta there on a year-over-year basis. Were pretty modest.

[Kyle White, Deutsche Bank]

Great. Actually, if I could sneak in another one. I wanted to actually go back to the foodservice business and just follow up on that. How were volumes in that business throughout the quarter? How was June relative to April and May? And what does the recovery there look like?

[Thomas Salmon, CEO & Chairman]

Steady as she goes. June was a stronger month than April and May and continue to be the outlook going forward. That business is continuing to ramp. And it's interesting, what you're seeing is, ultimately, people are kind of learning how to deal with this new norm of complete shutdown to modified shutdown. It's really been a learning for the foodservice companies. So we've been really pleased that the teams have been able to manage that successfully. But yes, we exited our fiscal Q3, with June being a strong month.

[Operator]

And your final question comes from Lars Kjellberg with Crédit Suisse.

[Lars Kjellberg, Crédit Suisse]

I'll stick to one question, RPC. Clearly, it's been a good transaction for you. What is interesting, I think -- and I want to know on your comments on this. You're delivering ahead of your expectations while there's been not great economics in Europe and Canada, like COVID's impact on scale in the calendar second quarter. Why don't we see an up synergy benefit there? Would there not be an opportunity in your view?

[Thomas Salmon, CEO & Chairman]

We are a continuous improvement culture, and we also tend to be conservative in terms of making certain that we're providing guidance on numbers that we have line of sight to and that we can hit. I can assure you that the team is focused on maximizing delivery of synergies, not only on time, but to the degree to which we can exceed our outlook. But at this time, we've maintained the 2-year look on that at $150 million, but we were really pleased that the team, in this COVID environment, were able to execute so well that we were able to increase by $10 million, the outlook for attainment in 2020.

[Lars Kjellberg, Crédit Suisse]

And just to Mark, so just a follow-up. One year into this acquisition, is there anything that surprised you to the upside and, potentially, anything on the downside versus your expectations a year ago?

[Thomas Salmon, CEO & Chairman]

Not a lot on the downside. Obviously, a difficult growth environment throughout Europe right now, but blown away by the quality of the people, the speed by which they've pulled together as a team and part of our one Berry family and the fact that there is 100% laser focus on not only executing in terms of earnings and free cash flow, but wiring that business for growth. And as we said, we're very confident that we'll see sequential improvement in our fiscal Q4, and there is a strong alignment in that organization to return as quickly as possible post-COVID or even before to low single-digit growth for that business. We're pleased with it. And as I said, I think that example of how we're able to close a $50-plus million opportunity in 4 months is some of the best execution I've seen in my history in this industry.

[Operator]

I'd now like to turn the call back over to the presenters for any closing remarks.

[Thomas Salmon, CEO & Chairman]

Well, thank you, everybody. Continue to stay safe. We look forward to updating you on our progress after -- for our next call. Thanks very much.

[Operator]

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