Berry Global Group Inc (BERY) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Berry Plastics earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Dustin Stilwell, Head of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us and welcome to Berry's third fiscal quarter 2016 earnings call. Throughout this call we will refer to the third fiscal quarter as the June 2016 quarter.

Before we begin our call I would like to note that on our website at berryplastics.com we have provided a slide presentation to help you guide our discussion today. This presentation can be found by clicking investor tab to the upcoming events section at the bottom of our page and selecting the webcast presentation.

Joining me from the Company I have Berry's Chairman and Chief Executive Officer, Jon Rich, and Chief Financial Officer, Mark Miles As referenced on slide 2, during this call we'll be discussing some non-GAAP financial measures, including operating EBITDA, adjusted EBITDA, adjusted net income and adjusted free cash flow. The most directly comparable GAAP financial measures and the reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and the investor presentation on our website. Additionally, all data referenced today has been conformed to match our new organizational segment structure. An archived audio replay of this conference will also be available on the Company's website.

We would like to make it clear that certain statements made today may be forward-looking statements. These forward-looking 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, in an our annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial conditions of the Company could differ materially from those expressed or implied and those forward-looking statements. Now I would like to call over to Berry's Chairman and CEO, Jon Rich.

Thank you, Dustin. Good morning, everyone, and thank you for joining us. This morning we will review our overall June quarterly financial performance, including the results of our three operating segments, review our outlook for the rest of the year and provide an update on the integration of AVINTIV. First I want to start this morning by welcoming Scott Ullem to our Board of Directors. Scott is the Chief Financial Officer of Edwards Lifesciences. With his past experience in packaging and investment banking, he brings a perspective to our Company and Board of Directors that will be very beneficial to Berry.

The third fiscal quarter was another strong performance period for Berry during which we achieved record sales for any quarter in the Company's history. Our operating EBITDA was the best for any June-ending quarter and operating EBITDA margins were well above last year. The strong quarter and year-to-date results for Berry are a demonstration that are four-point strategic plan is working, our perspective on the transformative acquisition of AVINTIV was correct and that the power of Berry's scale and the diversity of our businesses provides a clear competitive advantage.

Turning to some specific results for the third fiscal quarter, as Dustin highlighted we've provided a short slide presentation on our website that you can reference as we go through the call this morning. First, starting on slide 3, for the June 2016-ending quarter, revenues grew by 33% over the prior-year quarter to $1.645 billion, which is a sales record for any quarterly period in the Company's history. Operating EBITDA increased 44% and was $97 million higher than the prior year, coming in at $316 million.

Overall operating EBITDA margins increased 160 basis points to 19.2% compared to 17.6% in the prior year. Adjusted net income per diluted share was $0.82 compared to $0.51 in the third fiscal quarter of 2015. Additionally, we reported strong adjusted free cash flow of $151 million in the quarter, bringing our adjusted free cash flow for the last 12 months to $475 million. Our free cash flow generation remains robust, providing a yield of 10% on our June 30 market capitalization. These overall strong results have and will continue to allow us to meet our balance sheet deleveraging goals of at least a half a turn per year.

The integration of AVINTIV into Berry continues to exceed our initial expectations. To date we've accomplish the initial synergy objectives of reducing our material SG&A costs. When we announced the AVINTIV transaction we initially estimated $50 million of cost synergies. We have raised that estimate to $65 million and then $80 million subsequently in our first- and second-quarter earnings calls. We expect further future synergies that will be achieved from information technology integration and new commercial revenue opportunities. As these additional synergies become realized, we will communicate the details in future conference calls.

In general, volume demand in the quarter was softer than the June-ending quarter of 2015, but the drivers were different for each of our operating businesses. As a reminder, we measure volumes by resins pounds sold and we typically experienced 0.5% to 1% weight reduction per year. This lightweighting provides benefits to us and to our customers. For our health, hygiene and specialties division, key underlying health and hygiene global volumes grew 7% during the quarter, driven primarily by strong demand from large customers in North America.

Excluding Europe, overall volumes in the heritage AVINTIV business grew about 1% with strong growth coming from Asia. As we have discussed in prior calls, volumes in Europe were lower than last year, primarily as a result of pricing actions and improvements in product mix. These conscious volume decisions in Europe led to a more than 20% increase in operating EBITDA in the quarter over last year.

Our engineered materials business continues to perform at a very high level, achieving over 20% operating EBITDA margins for the June-ending quarter. Q3 2016 overall volumes were slightly lower than 2015. We believe this is primarily attributable to inventory reductions by our customers on the expectation of lower costs after June. We expect year-over-year volume growth for the engineered materials division to return in fiscal Q4.

Turning to our consumer packaging business, volume in the quarter was lower than the prior year, consistent with softer consumer packaged food demand and lower restaurant traffic. Volumes for health and personal care package increased in the quarter.

In the face of ongoing soft demand for packaged food products, we've continued to focus our consumer packaging division in North America maximizing profits and cash flow while managing volumes of our business to optimize those objectives. Utilizing this strategy, the division delivered strong operating EBITDA margins of 19% in Q3 despite the lower demand.

In consumer packaging we continue to take steps to improve our cost productivity and increase fixed asset leverage. Consistent with that strategy, we recently announced the closing of bottle manufacturing facilities in Atlanta, Georgia, and Dunkirk, New York.

Outside of North America we continue to be excited about healthcare, pharmaceuticals, personal care and food packaging growth opportunities, especially in Asia and Latin America where we expect per capita consumption increases to drive organic growth. As we have said before, with the acquisition of AVINTIV we now have the local leadership and resource capabilities to grow our businesses globally.

We were pleased with the volume growth in Latin America and Asia in the quarter. In South America, we are seeing the initial signs of economic recovery, ex Venezuela. Consistent with our goals for global growth, both regions achieved operating margins in fiscal Q3 that were above Berry's total company average.

Now I'll turn the call over to Mark, who will review Berry's financial results in more detail and then I'll come back to provide our outlook for the balance of FY16.

Thank you, Jon, and good morning, everyone. I would like to refer everyone to slide 4 now. As Jon previously mentioned, Berry posted record net sales for the June 2016 quarter of $1.645 billion, which was a $404 million, or 33%, increase over the June 2015 quarter net sales of $1.241 billion. This increase can be primarily attributed to the acquisition of AVINTIV that closed on October 1, 2015.

After adding the historical revenue of the acquired business in the June 2015 quarter, net sales on a combined basis were $1.710 billion. When bridging the combined revenue from the prior year quarter to the current quarter, lower selling prices reduced net sales by 2% and overall organic sales volumes declined by 2%. I will provide more detail in revenue in volumes by segment in the next few slides.

From an earnings perspective, operating EBITDA increased to $316 million for the June 2016 quarter, which was $97 million higher than the prior-year quarter of $219 million. After adding the historical operating EBITDA of acquired business for the June 2015 quarter, operating EBITDA on a combined basis was $294 million. Operating EBITDA margins increase to 19.2% in the quarter which was a 200 basis point improvement over 17.2% in the same prior-year period on a combined basis.

The $22 million increase in operating EBITDA from the combined prior-year period was primarily the result of a $32 million improvement in our product mix and price cost spread which includes contributions from sourcing synergies. This $32 million improvement was in spite of a $3 million unfavorable timing lag impact from contractual resin cost pass-through arraignments with customers.

Lower SG&A cost provided $1 million to our improved earnings as the realization of cost synergies more than offset inflation and higher accrued performance-based bonus expense. These positive contributions were partially offset by the 2% decrease in organic sales volumes, increased operational costs primarily related to the plant consolidation activities in consumer packaging in an unfavorable impact of $1 million for currency translation.

Now turning to results of our operating segments, starting with our consumer packaging division, I would refer you to slide 5. Lower average selling prices decreased our net sales by 1% for the quarter on a year-over-year basis along with the decrease of 2% in organic sales volumes, primarily driven by the market factors Jon just discussed. Our consumer packaging division recorded $133 million of operating EBITDA, representing a margin of approximately 19% compared to operating EBITDA of $140 million in June 2015 quarter.

The year-over-year decrease included a $2 million unfavorable timing lag impact from contractual resin cost pass-through arraignments with customers and $4 million of incremental manufacturing cost primarily associated with claim consolidation activities and the impact of reducing inventories. Excluding these items, operating EBITDA was essentially flat for the quarter as improvements in product mix and price cost spread offset the 2% volume softness.

Next, as noted on slide 6, our health, hygiene and specialties division generated net sales of $567 million in the quarter compared to net sales of $122 million in the June 2015 quarter. After adding the historical revenue of the acquired business, net sales for the June 2015 quarter on a combined basis were $591 million.

When bridging the combined revenues from the prior-year quarter to the current quarter, lower average selling prices reduced net sales by 2%. Volumes were of approximately 1% lower, primarily due to lower volumes for specialty products in Europe as a result of pricing actions and improvements in product mix, partially offset by growth in our health and hygiene products.

Our HH&S recorded $108 million operating EBITDA in the quarter, representing a 20% increase over the prior-year quarter on a combined basis with a margin of improvement of over 360 basis points to 19.0% for the quarter. The improvement can be primarily attributed to a $20 million improvement in product mix and price cost spread, including the impact of sourcing synergies, $1 million of lower SG&A costs on a year-over-year basis, resulting from acquisition cost synergies, partially offset by operational cost increases of $2 million driven by inflation in South America, which was recovered in the $20 million price cost spread.

Turning to slide 7, net sales for our engineered materials division for the quarter were $373 million. Lower selling prices reduced our net sales by 2% on a year-over-year basis as well as an additional 1% unfavorable impact from currency translation. Base volumes were 2% lower than the prior-year quarter, primarily from the customer inventory destocking Jon mentioned earlier.

Operating EBITDA for our engineered materials division was $75 million, representing a 17% improvement over the prior-year quarter. Margins increased nearly 400 basis points to over 20%, primarily as a result of improved price cost spread along with net productivity improvements in manufacturing and SG&A cost reductions.

Slide 8 provides a summary of our quarterly income statement. Overall operating income increased by $58 million, or 48%, over the June 2015 quarter. This increase can be attributed to the items previously discussed that drove the $97 million operating EBITDA improvement, partially offset by $33 million of additional depreciation and amortization, primarily resulting from the acquisition of AVINTIV.

As we further review the income statement for the June 2015 quarter, interest expense was $73 million compared to the prior-year expense of $47 million. This $26 million increase is a result of borrowings associated with the purchase of AVINTIV at the beginning of FY16. Looking forward, we successfully completed a refinancing of our term loans in the quarter, which resulted in an annual interest savings of nearly $10 million.

Our effective tax rate was 20% for the quarter, bringing the effective tax rate for FY16 to 29% through the first three quarters. We continue to drive towards a lower effective tax rate as we implement favorable structural changes and opportunities resulting from the AVINTIV acquisition and currently anticipate a full-year effective tax rate around 30% for FY16.

As a reminder, the Company has a pre-IPO tax receivable agreement. Under this arrangement, the Company remits 85% of its usage of pre-IPO NOLs to shareholders of record immediately prior to our IPO. From a cash flow perspective, the Company is essentially a cash tax payer with a 15% discount. After utilization of the pre-IPO NOLs covered by the tax receivable agreement, we will then be able to utilize the approximate $400 million of federal NOLs included in the AVINTIV acquisition.

Net income for the quarter increased to $96 million compared to a loss of $13 million in the prior-year period. The June 2015 quarter included a $94 million debt extinguishment charge related to refinancing activities that reduced ongoing interest expense. Adjusted net income per diluted share increased 61% over the June 2015 quarter of $0.51 to $0.82 in the current quarter.

Finally, as detailed on slide 9, the Company generated $206 million of cash flow from operations compared to $180 million in the prior-year period. Our adjusted free cash flow, defined as cash from operations less net spending on property, plant equipment and payments made under the tax receivable agreement, in the June 2016 quarter was $151 million compared to $140 million in the prior-year period.

As we stated on our last quarterly earnings call, working capital has been negatively impacted in FY16 by our decisions change certain working capital practices of AVINTIV due to various lower cost of capital. These changes have been accretive to our earnings and in spite of this one-time negative impact to cash flow, we've improved cash from operations by 45% to $567 million through the first three quarters of FY16.

We have utilized our free cash flow to reduce our debt and have repaid $390 million of debt through the first three quarters of 2016. Using our June 30 market capitalization, our $475 million [availability] of free cash flow represents a 10% free cash flow yield. This concludes my financial review. Now I'll turn it back to Jon.

Thank you, Mark. As we've said during prior conference calls, we continue to focus on our top priority of reducing our debt-to-EBITDA leverage ratio through our strong free cash flow and growth in earnings. Our target is to operate in three to four times ratio of net debt to adjusted EBITDA.

I'm pleased to report that we have again reduced this ratio to a quarter-end level of 4.7 times from the 5.1 at the close of the AVINTIV acquisition just three quarters ago. We currently forecast that will be in our targeted range of net debt to adjusted EBITDA at the end of FY17. As we pursue our other strategic goals of increased organic growth, geographic business expansion and value accretive acquisitions, our top priority remains achieving the target leverage range by the end of FY17.

With respect to guidance for the remainder of FY16, at the last conference call we increased our FY16 operating EBITDA target to $1.190 billion and reconfirmed our adjusted free cash flow of $475 million. Given our continued strong performance in the recent quarter, we are again increasing our operating EBITDA guidance for the full 2016 fiscal year a additional $10 million to $1.200 billion, which an increase of $40 million from our original guidance.

We continue to target $475 million of adjusted free cash flow for FY16 with a forecasted improvement in operating EBITDA being offset by incremental cash taxes, timing of interest payments and the plant consolidations in consumer packaging. The $475 million of adjusted free cash flow includes $817 million of cash flow from operations, less $285 million of capital spending and the $57 million payment under our tax receivable agreement.

As a reminder, Berry's fiscal year ends on October 2 this year. We will provide our full FY17 expectations in the November conference call.

Finally, Berry will continue to take the necessary proactive steps to remain competitive and a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages. I am confident that the people at Berry will continue to drive our results and achieve our goals. I thank you for your continued interest in Berry. Now we are ready to answer your questions.

Thank you.

(Operator Instructions)

Brian Maguire, Goldman Sachs.

Morning, guys.

Good morning, Brian.

If I'm looking on slide 4 at the sales bridge, it looks like the volume decline there implied volumes were down about 1.75%. It sounds like there's a lot going on there. I'm trying to disaggregate the different pieces there. Sounds like you had a little bit of customer destocking because of, I would assume, lower propylene prices and then you had the actions are taking in Europe and then you had maybe 0.5% every year from lightweighting. Just wondering if you could maybe put some numbers around each of those and maybe would you say, excluding those factors, volumes would've been more like flat or maybe down 0.5% in the quarter?

I think you've correctly assessed the analysis. That's exactly that the we see it. In HH&S, volumes were strong, especially in health and hygiene. We had very good acceleration of growth in Latin America and Asia, which we expect to continue into fiscal Q4. The decisions that we made in Europe were mostly conscious decisions that affected volumes in the specialties business. For engineered materials we think was primarily destocking and we do expect a rebound in volumes in the fourth fiscal quarter. In consumer packaging, I think there in the marketplace for food packaging continues to remain soft but we were pleased to see an acceleration in growth in health and personal care products and so I think your overall assessment is exactly the way we see it.

Okay. Related to that, I'm wondering if you have a sense where customer inventory levels are at and maybe you can give some commentary on so far in the fourth quarter if you're seeing some of that restocking happen in the channels?

I would say in general we have not always the clearest transparency to that within the three divisions. We can see inventories from our customers the most in our engineered materials business and there, I would say typically, they stock 30 days or so of inventory and we're starting to see a recovery there consistent with our forecast of larger volumes in fiscal Q4. In our consumer packaging division because of the sheer volume of customers that we have it's a lot harder to see the transparency but we also suspect that there was inventory destocking there from some of our large customers in fiscal Q3.

Okay. I'll turn it over now. Thanks.

Ghansham Panjabi, Baird.

Hi, guys. Jon, first off on your comments on health and hygiene growth, which sounds like it was pretty strong, can you expand on what drove that? Also, when do you think the pricing actions in Europe and other regions will be fully annualized?

Again, I think it was driven by a couple factors in North America. I think we had some share gains here. We've also continued to introduce some new products with our health and hygiene customers here that are exciting our customers and they're optimistic about their growth. Adult incontinence in North America continues to be one of the fastest-growing segments in health and hygiene, so we're optimistic about that. I think in Europe there we're also optimistic about health and hygiene products but we have a higher percentage of specialty products there. Some of those go into building and construction in Europe. Some of them go into furniture and bedding. There we typically, consciously take price volume trade-offs there to optimize our assets and I think we're likely to see that stabilize but we won't see recovery in volumes until economic activity in those segments pickup in Europe.

Okay. On your comments on consumer, given the sluggish end markets, should we expect more optimization of the footprint as we head into FY17? I'm just trying to get a sense as to some of the parameters for cash flow for 2017. I know it's early, but restructuring, CapEx, and cash taxes. Thank you.

I think with regard to food packaging for the entire year, if you'll recall at the getting of the fiscal year, we had forecasted volume somewhere around minus 1% to zero. Actually volumes were coming in slightly better than that in the first half of the fiscal year. Given Q3's results, we now believe that our original estimate for volumes is probably fairly accurate as to where things are going to come out. I would also remind everybody that the diversity of Berry's portfolio and the acquisition of AVINTIV and the steps that we're taking, food packaging in North America now represents something like 65% of our CP business and it continues to fall in terms of its overall impact on Berry's so the strength of Berry's diversification is paying off.

We're also optimistic that in the future food consumption will increase as economic activity picks up but we're taking all the appropriate steps to right size our assets, get our cost structure in the right position, be prepared for volume growth if it occurs but also to optimize our earnings as the current environment continues. I think overall on balance, Berry has done the right things to maximize the profits of our business.

Yes. On cash restructuring, sorry?

I would still expect while we not giving specific guidance for FY17, based on what we see today I would still expect a decrease in 2017 versus FY16.

Okay. Thank you.

(Multiple speakers) the acquisition momentum this year.

Thank you very much.

Anthony Pettinari, Citi.

Good morning. Just following up on Ghansham's question, is your thought that consumer volumes for the full year will come in kind of in line with original expectations and with all the puts and takes in volumes, can you just talk about your expectations for where volumes may shake out for the fiscal year by segment? I think last quarter you talked about HH&S up 2%, engineered flat, consumer negative 1%. Where do those stand now?

Again, those are exactly the forecast that we gave at the beginning of the year. We still believe that again with consumer packaging a little stronger in the first half of the year, a little slower in fiscal Q3. We still believe that our original forecast will hold. On engineered materials, we originally forecast flat. We're still optimistic that we will come in ahead of that for the full fiscal year. For HH&S with all the pluses and minuses we described, still believe the total will come in around 2%.

Okay. That's helpful. The $32 million in price cost mix in synergies that you referenced in your remarks, is it possible to tease out what buckets those fit into in terms of price cost versus mix versus the synergies?

Sure. The amount, just as a reminder, is about the same amount we had last quarter. The split this quarter is almost the same as last quarter. It was about a third, a third, a third, between synergies from the acquisition of AVINTIV, a third is pricing actions on our non-contractual business and the third is continued efforts to reduce our costs, substitute lower-cost materials and drive down the cost of our products through lightweighting, et cetera. That $32 million did include, as a reminder, $3 million of unfavorable lag so it was really $35 million, excluding that $3 million because $3 million was just a timing item.

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

Arun Viswanathan, RBC Capital Markets.

Actually, it's Tom for Arun. In looking at your EBITDA guidance, could you comment at all on how seasonally, how the fiscal fourth quarter compares to third quarter? Just doing some rough math, it would appear that your guidance suggests sequentially lower EBITDA on 4Q. Is it just conservativeness or is something else going on there?

We certainly, in terms of seasonality, we're not a highly seasonal business. Generally speaking our March and June quarters are our two strongest, followed by September, followed by December. Again, there's not significant seasonality in our business. Obviously we're continuing to put out a guidance that we feel comfortable that we can beat and exceed. Consistent with we've done this year, we've raised it every quarter. We want to continue to drive upside in our guidance.

Okay. Thanks. You noted the $31 million decline in selling prices impacting your top line. How much of that is as resin cost pass-through? We heard a another plastic packaging company note that they expected higher-than-expected resin costs in the back of 2016. Are you guys seeing that?

Yes, if you look at the timing of just the resin costs curves, this quarter as the quarter progressed, we got close to zero on a year-over-year basis but at the beginning of the quarter we had lower resin year over year so it resulted in some negative price pass-through. Again, as the quarter progressed it got close to zero by the end of the quarter. Most of that price delta was earlier in the quarter.

I would just add that with regards to resin prices, we always have difficulty forecasting that into the future. Prices were up slightly, as Mark mentioned, in fiscal Q3 but I would also note that oil prices have fallen here towards the end of the quarter and historically resin prices tend to track long term with oil prices.

Okay. My last question, on synergies how much have you achieved as of now? I know you guys had that $50 million by year end and then $80 million achieved through 2017. Is that still where everything is tracking? I think you said you exceeded it. Why are you maintaining the $50 million by year end?

The $50 million in FY16 is still our projected estimate with a $30 million carryover into FY17 for a total of $80 million. We're still on track for that. We had a little bit in the December quarter realized, March was, I recall, around 75% to 80% realized and the same in June. It actually got slightly higher in June on a realization basis.

Right. Thanks. I'll turn it over.

Chris Manuel, Wells Fargo

Good morning. This is actually Gabe on for Chris. A couple of questions. Mark, can you talk about the working capital adjustment that you've seen thus far this year with respect to adjustments for AVINTIV and how you guys manage that business and then what that -- how that plays out heading into next year?

Yes. For the year we're negative $26 million on working capital. However, in the prior year it was negative $38 million so we've actually gained a little bit of ground overall in working capital. That's in spite of about $30 million one-time negative impact this year from the AVINTIV changes that we drove primarily last quarter. There was a little at the tail-end of this quarter but most of those actions impacted actually our March quarter and our December quarter, so we're over 90% through that. As you pointed out those should be one-time and not repeating as we roll into FY17.

Okay. I guess sticking with cash flow, a question earlier trying to center around restructuring spend and synergy capture, I think that number was about $65 million this year. I guess I'm trying to interpret Jon's comments around staying competitive in the market we'd expect some sort of spend next year as well. Can you combine that with what CapEx might look like versus this year with the new facility spend and if there's any change in timing with that?

Your guidance for this year around CapEx is $285 million. You're right, in terms of restructuring and business optimization costs it was in the mid $60s million. I think the capital number $300 million-ish feels about the right capital number for Berry outside of something unusual. Again, next year we would expect that restructuring cost to come down outside of something new coming up. As we see it today it should come down as we roll forward into FY17.

All right. Thank you, Mark.

Maybe just a comment about the new facility, as you asked. Look, we continue be excited about health and hygiene growth as we discussed earlier today. We still expect that facility to come on some time late in 2018. We're still in the middle of design engineering and site selection.

George Staphos, Bank of America Merrill Lynch.

Hi, everyone, good morning. Thanks for the details. I guess the first question I had for you, Mark and Jon, following up on a prior question, seasonality, I used to remember for Berry pre-AVINTIV as being a tossup between the fiscal third and fiscal fourth quarter in terms of importance. Depending on where the, if you will, cold cup business fell during the summer, that was a driver of which quarter won, so to speak. Has AVINTIV changed the seasonality such that now that December quarter is less important, September quarter less important as well, question one there.

Question two would be related. I would imagine with it being a relatively hot summer that you would have seen fairly good volume from your cold cup customers. We didn't have that built into our models but anecdotally would have expected that would have been an upward tension point. What kind of trends did you see in that particular element of you business? I had a couple follow-ups.

Yes, George, with respect to the first part of the question, seasonally, you've got it exactly right. Base Berry, the way you laid it out is correct and the AVINTIV acquisition did change the math there a little bit, primarily driven by their international exposure. As you know, Europe gets a little weaker in August actually where we are today and so just the international aspect of that business changed the seasonality a little bit in the September quarter.

Okay.

George, with respect to drink cups, this has been another strong year in totality for drink cups, and so we're please with that. I would say there's been some choppiness in the delivery schedules. Fiscal Q2 was extremely strong. I think we did see some customers back up on inventory in fiscal Q3 but when you average the full year to date it has been another strong year for drink cups.

Okay. Thank you for that. I guess the next question I had, as you've more or less now gotten a year under your belt with the acquisition of AVINTIV, have their been any adjustments to the accounting accruals that you would have had initially? Have there been any adjustments in things like depreciation that we should be mindful of on a going-forward basis? I had one follow on, one last one.

Yes, George, nothing other than the normal purchase accounting. Certainly we had a step up that we have to recognize additional amortization expense. The depreciation expense there was a modest true up this quarter, less than $5 million, which (technical difficulty).

Mark, was that down or up on the depreciation true up?

It was down.

Okay. That's what I had thought just trying to reconcile the numbers. Was there anything else?

No. That was it

Okay. Last question and I will turn it over. Jon, last call we had asked you about the margins that you're putting up within Berry and certainly they are all-time records. You should be pleased with that. As you look out in terms of how you protect that level of margin performance going forward, I guess last quarter was a lot around cost and scale and really scale in the market. As you've been able to evaluate AVINTIV within the mix, is that still the primary in terms of, if the premise of what I phrase correct, where you expect to get that moat around your business or have you found other areas that should help you maintain and grow these margins going forward? Thank you. Good luck in the quarter.

Thanks, George. I would say first and foremost, the operating margin results that we got, which we were very pleased with, are a validation that Berry's cost structure and the scale provides us significant competitive advantages. The other area that I would add, and we talk a little bit about it in the call is that we continue to drive improvements in mix, especially in HH&S, but also within engineered materials, nice improvements in mix. Most of the volumes in HH&S particularly where we saw declines were conscious decisions to mix up the higher value health hygiene and true specialty value-added products. I think it's cost, I think it scale and I think it's mix. We're still helpful in the future that volumes will turn the other way but if it doesn't we think Berry is in a terrific competitive position.

All right. Thank you very much. I will turn over. Good luck in the quarter.

Jason Freuchtel, SunTrust.

Hi, good morning. Just following up on the depreciation. It looks like depreciation declined about $6 million in the quarter absence of the true up for AVINTIV. Should we expect depreciation to decline at a similar rate going forward? Also, what you believe is an appropriate long-term level of base capital spend for your equipment relative to your depreciation expense?

Sure. With your first question, that was the only unusual item with respect to depreciation.

Okay.

Nothing else that I would highlight. With respect to the capital question, we spend about $100 million a year on maintaining our facilities and equipment. The balance of the capital spending is split between growth projects as well as driving further cost reductions in our manufacturing and material costs.

Okay. Great. Thanks for that. Did you see any benefit of the innovative first light offering in the quarter? Do you have any plans of expanding into additional innovative products in the near term?

I think as we said last couple of calls, first of all volumes of Versalite on a year-over-year basis are up substantially. But as we've described in the past, while generally there's almost nothing about low oil prices that we don't like, in the case of Versalite where we have to compete against Styrofoam specifically, low oil prices have driven the delta there and has created a headwind. We've focused in the near term on aggressively reducing our cost structure and we're seeing the benefit of that and we continue to work cooperatively with our materials suppliers to try to optimize the cost structure of Versalite. In the meantime, we continue to optimistically look for new volume opportunities there and as I said, year over year the growth is nice but certainly that's one of the few areas where low oil prices created a headwind for us.

Great. Thank you.

Mark Wilde, Bank of Montreal.

Hi, good morning, Jon and Mark.

Morning.

Good morning, Mark.

Just sticking on that new product theme, can you give us little bit it color on what you're doing in terms of volume on some of the new packaging products like new seal and barricade as well as volume lift from the new products that you mentioned in HH&S?

I think in general where we have new technologies and new innovations we're seeing improvements in volumes. Where we're seeing challenges in volumes are in more commoditized product lines. If you think about HH&S, you think about bedding and furniture applications. When you think about consumer packaging, I would say it's in the more standardized closures in some model offerings. We still view innovation long-term as an important part of our organic growth. We just have to see how that offsets pressure in the more commoditized ones.

Okay. Mark, any sense in the current quarter about where you see the interplay between kind of cost and price from a margin perspective?

Yes. That's something that our divisions our focused on daily. As Jon mentioned earlier, we look to optimize our cash flows and profits. I think generally our operating businesses do a good job of balancing that trade-off.

Do you expect headwind or tailwind from kind of price cost as we look at the fourth quarter here?

It's still early to call but I would expect we've gotten $30 million-ish the last couple of quarters. I still think that's going to be positive. Whether or not it's $30 million or $25 million or $20 million I think is still too early to call but I would expect that positive trend to continue.

Okay. Finally, I think Jon you said that you were seeing some signs of improvement down in Latin America. I wondered if you could put a little color around that?

I think ex Venezuela, in the quarter we saw volumes improve and we saw a pickups in demand. I think from a GDP perspective, people were talking about minus four and now they're talking about zero or one but on an absolute basis that's a big change in improvement. We think we're seeing the early signs of at least hitting a bottom and starting to turn up. We're more optimistic about Latin America and very optimistic about Asia in the fourth fiscal quarter. I think you've got to separate Venezuela from that. Venezuela is a unique challenge. Berry doesn't have a lot of exposure to Venezuela but we have a small amount, mostly I think if you think about Brazil and the rest of the region, we're cautiously optimistic about improvements there.

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

Bill Hoffman, RBC Capital Markets.

Thanks. Good morning. Jon, I know one of the longer-term strategies of the AVINTIV acquisition was some cross-selling opportunities and I know it takes time but is there sort of a [target] you are trying to challenge the Company to develop some of those cross-selling opportunities of Berry products into AVINTIV customers on a global basis?

Bill, as you well know, I'm not a patient guy so we'd like to have those come sooner than later but I would expect we'd start seeing the benefits of that in FY17.

Any thoughts on what percentages it might impact from a volume standpoint?

I think will comment on that when we give guidance for 2017 in November.

Okay. Thank you. Just with regards to Europe and really the AVINTIV business there, there's a couple issues in Europe, obviously Brexit and I'd like to hear your thoughts on what you think that might be impacting the volumes over there? Two, it sounds like you've been doing some realigning your markets over there. Just wondering if you can comment on whether you're done with that or you have more to go?

I would say our European team has done a fantastic job. We really have a great organization over there. I would say most of the steps that we're taking are conscious steps in our control. They're having a huge positive impact on our profit margins there and so we're pleased with that. With regards to Brexit, we really, I would say, our exposure to Great Britain is small compared to all of Europe and so it's not really material from that perspective. We're very excited about health and hygiene there and certain aspects of the technically-specified specialties businesses.

The other thing that we're cautiously optimistic about is using some of our European assets as a launching point to serve more rapidly growing demographics, for example in northern Africa. I'm quite optimistic about Europe and I think we're taking the appropriate steps and I'm not really concerned about Brexit with regards to its impact on Berry specifically.

Great. Thank you very much.

Debbie Jones, Deutsche Bank.

Good morning. I was hoping you could talk about engineered materials. You mentioned destocking an issue in the quarter. I wanted to know what gives you confidence that volumes will improve in the back half as you've seen kind of in the first month of the quarter that destocking has ended and kind of what specific categories are driving the growth?

Well first of all, our engineering materials business has had just a fantastic year and for those of you that have followed Berry for a long time you can appreciate the milestone of reaching a 20% operating EBITDA quarter. Just an absolutely great result and a testimony to our team there. As I said before, the first half of the year we saw volumes above our expectations as we forecasted them at the beginning of the year. Q3 was slightly softer but we believe in that particular business, largely driven by inventories, destockings they typically have about 30 days of turn on inventory and so I would say that we're starting see a recovery there. It's really broad-based. We had a very good quarter in our tapes business. All of our core films business performed very well and we're even starting to see some improvement as one business we have in engineering materials, which serves the oil and gas tight maintenance, our Sealed for Life business, even that business from a demand perspective has turned ever so slightly but positive in the right direction. I think all signs point to a stronger fiscal Q4.

Okay. Thanks. That's helpful. My second question is a point of clarification. Mark, the free cash flow guide, your EBITDA went up, your tax rate went down. I know you called out the cash tax and interest expense items but I wasn't quite sure how to think about how those impacted the guidance.

Yes. Debbie you've got it right. Our effective tax rate for the year decreased. However, our cash tax actually was slightly higher and so part of that is offsetting the $10 million EBITDA increase that we have for the year. So were still holding the $475 million.

Okay. And the interest expense component?

When we refinanced two of our term loans in the quarter, we basically had to term out the old notes and so we had to pay all the interest then and start over so it's just a timing issue because we had to settle those up in the quarter so that also had a negative cash flow impact, but just pure timing. Our interest costs are actually decreasing going forward by $10 million as a result of that refinancing.

Okay. I just wanted to confirm that, that's what was, so thank you.

Yes.

Brian Maguire, Goldman Sachs.

Hi, Mark, just following up on the interest expense point. I know you guys have a lot of floating rate debt and we've seen a big move up and LIBOR recently but I know you guys have a floor on that. Just wondering, if you could just remind us with that floor is and how close you are to breaching it?

Yes. Our LIBOR floor is 1% on all of our variable rate debt and $2 billion of our term loans are actually hedged. The component that is actually subject to LIBOR going above 1% having an impact on Berry you have to take off that $2 billion and we're still well below the 1% for -- in terms of the current LIBOR. I believe it's around 60 basis points.

Got it. Thanks. One for Jon, you correctly pointed out earlier that longer term polyethylene and resin in general are linked to oil and usually seasonally they're a little bit weaker in the back of the calendar year but this year has been a little bit stickier on polyethylene and there's four guys out there trying to nominate a price increase for September. Just wondering what actions you can it take to try to mitigate that if these guys are a little bit sticky on their pricing. There was a big project that came online in Mexico earlier this year. Just wondering if there's any opportunities for you to source more of your raw material internationally these days? Thanks.

First of all, I'm not going to comment on short-term fluctuations in resin or what particular suppliers are nominating or not nominating. I would say a couple factors that we're optimistic about. One is Berry's scale and with the acquisition of AVINTIV the global footprint that we now have to purchase resin, we're taking every advantage of that, so we'll acquire resin anywhere in the world where it makes economic sense to Berry. Secondly, we believe that there's significant increases in supply coming here, largely driven by low-cost feeds. We think that's true for polyethylene, especially here in North America, but we also believe that is true for polypropylene on a global basis and so we think that will allow Berry with its scale and global footprint to take the fullest advantage of whatever cost savings are available to us.

Thanks very much.

Arun Viswanathan, RBC Capital Markets.

Hi, thanks, it's is Tom again for Arun. Just real quick, on the lightweighting on volumes, this may help with some folks thinking about volumes. On the slide 4, you note that it's negative $30 million top-line hit. Is there way to parse out how much of that kind of on a year-over-year comparable basis is this lightweighting issue? How substantive is that? Thanks.

It's a little hard to get the exact number but it's somewhere between 0.5% and 1%. In rough terms it's about half of the $30 million.

Okay. Thanks.

I would just add to that, that historically we've thought about that from the traditional Berry side of the business but with the acquisition of AVINTIV, they've also been quite successful in driving lower area weights and that's an important component to that business as well. It's kind of runs across the entire volume.

The benefits to that would show up in that $32 million price cost spread down in the EBITDA bridge below that on slide 4.

I see that. Great. Thanks.

Chris Manuel, Wells Fargo.

Thank you for taking the follow-up, guys. Jon, I wanted to see if you can comment at all -- we appreciate your vigilance on reducing debt, but anything that you've seen from across the desk in terms of M&A that's interesting or can you comment on seller expectations if they've come in a bit and any geographies where you might be seeing opportunities?

As always, Chris, as you're aware, were this is the plastic side of the packaging industry remains a very fragmented space here in North America and around the world, so there's always lots of things to evaluate. As you well know, Berry has historically been very diligent and focused and that's part of our four-point strategy but it is consistent with our top priority being continuing to focus on hitting our leverage target by the end of FY17.

Thank you.

Thank you. I am showing no further questions at this time. I'd like to turn the call back over to Jon Rich, Berry's CEO, for any closing remarks.

We certainly appreciate everybody's participation on today's call. We thank you for your interest in Berry and we look forward to talking to you again in November. Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.