Berry Global Group Inc (BERY) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Dustin Stillwell, Head of Investor Relations. Sir you may begin.

Good morning, everyone. Thank you for joining us and welcome to Berry's fourth quarter FY15 earnings call. Throughout this call we will refer to the fourth fiscal quarter as the September, 2016, quarter. Before we begin our call, I would like to note on our website, at BerryPlastics.com, we have provided a slide presentation to help guide our discussion today. This presentation can be found by clicking the investor tab to the upcoming event section, at the bottom left of the page and selecting the Webcast presentation.

Joining me from the Company, I have Berry's Chairman and Chief Executive Officer, Jon Rich; Chief Financial Officer, Mark Miles, and recently appointed Chief Operating Officer, Tom Salmon.

As referenced on Slide 2, during this call we will be discussing some non-GAAP financial measures including operating EBITDA, adjusted EBITDA, adjusted net income, adjusted free cash flow, and net debt. 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.

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 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 those described in our earnings release, annual report on Form 10-K, and other filings with the SEC.

Therefore the actual results of operations or financial condition of the Company could differ materially from those expressed or implied in our forward-looking statements. Now, I would like to turn the 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 have several topics to cover with you, including our fourth quarter and full fiscal year results, an update on the AEP acquisition and appointment of Tom Salmon as our new President and Chief Operating Officer.

We'll also provide our perspective on the overall market conditions as well as our expectations for FY17. On September 30, the Company announced that I would retire as Chief Executive in February, 2017, and that Tom Salmon was elected to the role of President and Chief Operating Officer as part of a thorough succession planning process conducted by the Board of Directors. I want to start this morning by congratulating Tom and his newly appointed role.

Tom joined Berry in 2007 as part of the Covalence acquisition. For eight years he was President of our Engineered Materials division and for the past two years was President of Consumer Packaging. Tom began his career at GE and also held leadership positions with Honeywell and Tyco.

For the past six years, I worked closely with Tom and I am very confident in his leadership abilities. In 2017, Berry will celebrate its 50th year in business. From our simple beginning in 1967 with one injection molding machine producing plastic caps, today Berry is a global business with annual revenues of $6.5 billion over 21,000 employees and 115 facilities around the world.

I am very proud of our accomplishments over the past six years. The Company has an extremely strong and deep leadership team and the time is right to pass the baton.

I look forward to continuing my relationship with the Company as Executive Chairman where I intend to advice and assist Berry in any way I can and remain involved with our investors. And now I'd like to turn it over to Tom Salmon who will provide an overview of our September quarter and FY16 results. Tom?

Thanks, Jon, and good morning, everyone. First I want to sincerely say thanks and congratulate Jon for the significant accomplishments has Berry achieved under his leadership as Chairman and CEO. I'm honored to take on this role as Berry's President and Chief Operating Officer.

I look forward to continuing Berry's long history on delivering value to our customers and shareholders, while providing great opportunities for our employees and the communities where we are located. I'm very pleased to report that Berry had another strong quarter in fiscal Q4 and that for the full-year 2016, we exceeded our guidance for operating EBITDA and adjusted free cash flow.

Turning to Berry's specific results for the quarter, starting on Slide 3. Revenue for the September, 2016, ending quarter was $1.618 billion, a 35% increase over the prior year. Operating EBITDA was $301 million, an increase of $96 million over the prior year. Both sales and operating EBITDA were record results for any September quarterly period.

Our operating EBITDA margins in the quarter were up 150 basis points to 18.6%. Adjusted net income was $0.73 per diluted share, compared to $0.50 in the fourth quarter of FY15. We generated $231 million of adjusted free cash flow in the quarter versus the prior year result of $189 million.

For the full FY16, adjusted free cash flow was an annual record of $517 million providing a yield of approximately 10% on our September 30 market capitalization. In total, volume in the fourth fiscal quarter was down less than 1% from the same prior year period, adjusted for acquisitions.

For our health, hygiene and specialties division volumes were up in the heritage AVINTIV business by 1% globally with health and hygiene-related products up mid single-digits versus the prior year.

Volumes in the specialty product line were lower than last year. As a reminder, our specialty offerings consist of high margin, technically specified products, but materials for, air and liquid filtration, dryer sheets and building wrap, while also contain higher volume, lower value add products used in furniture and bedding applications. In the last several quarters, we had chosen to shift our assets to higher value-add products, which has resulted in higher margins and EBITDA but yielding lower physical volumes.

International volumes in heritage AVINTIV were up in the quarter, lead by Asia. I'll also remind you that Berry's international businesses in South America and Asia generally have operating EBITDA margins above the total Company net average. Volumes for engineered materials products were flat versus last year, but improved from the lower year-over-year volumes we saw in the June quarter when customers reduced inventory levels.

Demand for food packaging and restaurant food service products in North America remain soft, consistent with reported market data on consumer spending and consistent with what our customers have reported. Berry's volume in the consumer packaging division were down about 2.5% versus the September 2015 quarter, while pound volumes continue to be affected by ongoing light weighting and package downsizing, both of which generally benefit our earnings.

We continue to take steps to optimize price and volume tradeoffs to maximize earnings. Long term, we believe that our global HH&S division will grow volume 3% to 5% and both engineered materials and consumer packaging will grow 1% to 3%. With our recent acquisition of AVINTIV and pending acquisition of AEP, we continue to position the Company towards market segments and geographies that should benefit from higher growth rates.

A year ago in October, we closed the acquisition of AVINTIV, which has proven to be transformative for the Company. The integration process continues to exceed our expectations. In the first year we have surpassed our initial synergy targets of reducing material and SG&A costs and we expect to achieve additional synergy opportunities as we complete the integration.

Now I'll turn the call over to Mark who will review Berry's financial results in more detail and discuss our financial outlook for FY17. Mark?

Thank you, Tom, and good morning, everyone. I would like to refer everyone to slide 4 now. As Tom previously mentioned, Berry posted record net sales for any September ending quarter of $1.618 billion, which was a $422 million or 35% increase over the September 2015 quarter.

This increase was primarily the result of the acquisition of AVINTIV that closed on October 1, 2015. After adjusting for the historical revenue of acquired business in the September 2015 quarter, net sales on a combined basis were $1.645 billion. When bridging the combined revenue, total organic sales volumes declined by less than 1% in addition to a small unfavorable impact from currency translation.

From an earnings perspective, operating EBITDA increased by $96 million from the prior year quarter to $301 million, which is also a record for any September-ended quarter. After adjusting for acquired business, operating EBITDA on a combined basis for the September 2015 quarter was $276 million. The $25 million increase was primarily a result of a $22 million improvement in our product mix and price cost spread which included contributions from sourcing synergies and a $3 million favorable timing lag impact from contractual resin costs, pass-through arrangements with customers.

Lower SG&A cost and net productivity in manufacturing provided another $10 million to our improved earnings. These positive contributions were partially offset by an unfavorable impact of $6 million from currency translation. Operating EBITDA margins were 18.6% for the quarter, which was a 180 basis point improvement over the same prior-year period on a combined basis.

Now turning to slide 5. Net sales for 2016 were a fiscal year record of $6.489 billion compared to $4.881 billion in 2015. This 33% increase was primarily due to the acquisition of AVINTIV.

After adding the historical revenue of acquired business, net sales on a combined basis for 2015 were $6.816 billion. The 5% reduction in net sales from the combined FY15 results includes 4% from lower selling prices as a result of the pass through of lower plastic resin costs and a 1% unfavorable impact from currency translation. Organic sales volumes were flat on a year-over-year basis.

Operating EBITDA for FY16 came in at a record $1.210 billion. This $109 million increase in operating EBITDA from 2015 on a combined basis was primarily a result of a $117 million improvement in our product mix and price cost spread which included contributions from sourcing synergies and a $9 million favorable timing lag impact from contractual resin cost pass-through arrangements with customers.

Net productivity improvements in manufacturing provided another $10 million to our improved earnings. These positive contributions were partially offset by an unfavorable impact of $12 million from currency translation. Operating EBITDA margin was 18.6% for FY16, which was a 250 basis point improvement over 2015 on a combined basis.

Looking at the results of our operating segments starting on slide 6. Our Consumer Packaging Division Recorded $122 million of operating EBITDA, compared to $128 million in the September 2015 quarter. The year-over-year decrease included $6 million of incremental manufacturing and SG&A costs primarily associated with plant consolidation activities.

Excluding these items, operating EBITDA was flat for the quarter as improvements in product mix and price cost spread offset the volume softness. For the full FY16 and FY15, the consumer packaging division posted $508 million of operating EBITDA in both years, while operating EBITDA margins improved from 17.7% in FY15 to 18.4% in FY16.

Next, as noted on slide 7, our Health, Hygiene and Specialties division generated revenue of $560 million in the quarter, compared to $119 million in the September 2015 quarter. After adjusting for acquisitions, net sales for the September 2015 quarter on a combined basis were $568 million. When bridging the combined revenue, organic sales volumes and average selling prices in the quarter were flat with a 1% unfavorable impact from currency translation.

Our HH&S division recorded $109 million of operating EBITDA in the quarter, a 22% increase over the prior year on a combined basis and operating EBITDA margins were 19.5%, which was an improvement of over 380 basis points. The increase was the result of an $11 million benefit in product mix and price cost spread and $14 million of lower manufacturing SG&A cost, primarily from acquisition cost synergies, partially offset by a $6 million unfavorable impact from currency translation.

Turning to slide 8 net sales for our Engineered Materials division for the quarter were $365 million, compared to $370 million in the prior-year quarter. The 1% decline is due to lower selling prices on a year-over-year basis of 1% as well as a small unfavorable impact from currency translation.

Operating EBITDA for our Engineering Materials division was $70 million, an increase of 20% over the prior-year quarter. Margins increased over 320 basis points to 19.2%, primarily a result of improved price-cost spread along with net productivity gains in manufacturing and lower SG&A costs.

Slide 9 provides a summary of our 2016 September quarter and fiscal year income statement. Operating income for the quarter increased by 41% to $151 million. This $44 million increase was due to the $96 million operating EBITDA improvement, partially offset by $48 million of additional depreciation and amortization primarily resulting from the acquisition of AVINTIV.

Interest expense was $69 million for the September 2016 quarter. A $30 million increase from the prior-year quarter as a result of borrowings associated with the AVINTIV acquisition offset by interest savings from free cash flow used to reduce debt and the term loan refinancing completed last quarter. Our expected annual cash interest expense for FY17 is $275 million, which contemplates the continued utilization of free cash to pay down debt throughout the year and the financing of the AEP acquisition.

Our effective tax rate was 7% for the quarter bringing the FY16 full year rate to 23%. 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 free cash flow perspective, the Company has essentially a cash taxpayer with a 15% discount. After utilization of the pre-IPOs covered by the tax receivable agreement, we will then be able to utilize the approximate $500 million of federal NOLs included in the AVINTIV acquisition. This is an increase of $100 million from our previously communicated amount as the final pre-acquisition tax returns provided additional NOLs acquired by us.

A $60 million TRA payment was just made last month, representing our estimated obligation to our pre-IPO shareholders for the FY16 year results and has been included as a reduction to our adjusted free cash flow for FY17. After making this payment, we have $114 million remaining on the tax receivable agreement to be paid in subsequent years. We estimate our FY17 effective tax rate for income statement purposes at 32%.

Net income for the quarter increased to $77 million, compared to $48 million in the prior-year period. Adjusted net income per diluted share increased 46% from the September 2015 quarter to $0.73 in the current quarter. For FY16, our adjusted net income per diluted share increased by 46% to $2.53 compared to $1.73 in FY15.

Next on slide 10, the Company generated $290 million of cash flow from operations, compared to $245 million in the prior-year quarter, an increase by 35% in FY16 to $857 million. We have utilized our free cash flow to reduce our debt and repaid $524 million of debt in FY16. Our adjusted free cash flow, defined as cash from operations less net spending on [EP&E] and payments made under the tax receivable agreement was $231 million in the September 2016 quarter compared to $189 million in the prior year period.

Using our September 30th market capitalization, our $517 million of adjusted free cash flow in FY16 represents a nearly 10% adjusted free cash flow yield. Our financial guidance, including our underlying assumptions for FY17, is shown on slide 11. Note that we are providing financial guidance for FY17 assuming a February 1st closing for the AEP transaction.

For the extent that the closing is different, the impact will be included in our updated guidance in subsequent quarter conference calls. We have targeted our FY17 adjusted free cash flow at $550 million, which was reduced by the $60 million tax-receivable payment that was made in the first fiscal quarter. This estimate assumes no impact to working capital and constant currency rates.

Additionally, our capital spending is forecasted to be $315 million. Within our adjusted free cash flow guidance, we are also assuming other cash taxes primarily related to international jurisdictions of $80 million and other cash uses of $60 million primarily related to items such as integration expenses and synergy realization costs associated with AVINTIV and AEP.

As we look forward to the December 2016 quarter and FY17, I would like to remind everyone that our December FY15 quarter and FY16 year included an extra week of operations. Accordingly, our reported FY16 first quarter and annual results should be adjusted down by 8% and 2% respectively to provide comparability to our December 2016 quarter and FY17 results. This concludes my financial review and now I will turn it back to Tom.

Thank you, Mark. We continue to focus on our top priority of reducing our net debt to adjusted EBITDA ratio through our predictable and strong free cash flow. I'm pleased to report that we reduced this ratio to a FY16 year-end level of 4.5 times representing a reduction of 0.6 from 5.1 at the close of the AVINTIV acquisition a year ago.

Our plan for the upcoming FY17 year remains unchanged from a year ago as our top priority is to achieve a target leverage ratio below four times net debt to adjusted EBITDA. We currently forecast we'll reach that level on or before the end of FY17.

I'd like to update everyone on our pending acquisition of AEP Industries. In late August, we entered into a definitive merger agreement under which Berry will acquire all of the outstanding shares of AEP, in a cash and stock transaction. Each AEP shareholder can elect to receive either $110 in cash or 2.5011 shares of Berry Common Stock per AEP share in the transaction, subject to an overall 50/50 proration to ensure that 50% of the total outstanding AEP shares are exchanged for the cash consideration. Upon closing, AEP shareholders will own approximately 5% of Berry on a fully diluted basis.

The potential combination of AEP with Berry's Engineered Material division offers the opportunity for significant value creation for Berry and AEP shareholders alike as we realize procurement and operating cost savings across the two organizations. Our initial expectation is to realize $50 million of annual cost synergies within the first two years. I'm pleased to report that we have received early termination of the HSR waiting period from the FTC and we anticipate the close of the transaction to be completed in the March quarter, subject to the approval of AEP shareholders.

With respect to guidance for FY17, as Mark discussed, our adjusted free cash flow target is $550 million and assumes successful closing on our acquisition of AEP effective February 1, 2017. The guidance also assumes overall organic sales volume growth to be 1%, which includes 3% growth from HH&S, 1% growth from Engineered Materials and 1% decline in our Consumer Packaging division. Our conservative approach to guidance will be the same as last year and we plan to provide updates quarterly as appropriate.

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, and now we are ready to take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from George Staphos with Bank of America Merrill Lynch.

Hi, everyone, good morning. Thanks for all of the details and congratulations to Jon and Tom on the next chapter of your careers. Obviously, we've enjoyed working with you.

I guess the first question I had on AEP, can you talk about the progress in terms of actually closing the transaction? Has it been more or less as you expected? Was it delayed for any reason? And if the latter, what have been the issues, if you could remind us? And then I had a few follow-ons.

Sure. Good morning, George. It's Mark.

Hi, Jon. Hi, Mark.

Good morning. So we have, as Tom I think noted in the opening comments, we received early termination so the regulatory approval from the FTC is complete and so now we are just going through the registration process with the SEC.

And we will be filing an amendment soon so I would say it's on track, normal course, obviously it could have went faster had we not been subject to the random review by the SEC but we were, so we're just going through that process as normal. And again our next amendment should be filed in the next week.

That's the only thing that's held up the process from what you can see?

That is correct.

Appreciate that. Can you talk about this question and a couple others and I'll turn it over and try to come back in queue, around guidance. Can you talk at all about how much AEP is anticipated to add to your free cash flow for 2017, including the effect of the integration spending, which I'm assuming much of that is going to be related to AEP? And then within guidance, what are you using for foreign exchange, if anything?

What should we assume for synergies with AEP and what rate are you using on interest expense? You said current so is that the fourth quarter average that we just reported or was it the current interest rate?

Okay, George, I think I've got all your questions, If I missed one please let me know. This is Mark again.

Will do.

With respect to AEP, we still feel very comfortable with the annual cash flow that it will generate of around $85 million on a normalized basis. In FY17 however, it is a de minimus impact to our FY17 results because A, we only have it for eight months. And more importantly, B, we will have all of the closing costs associated with the acquisition that will impact our free cash flow, such as advisor fees, et cetera, as well as the normal synergy-related costs that we have at the beginning.

So the impact of 2017 is very modest but we still feel very good about the $85 million of free cash that will add once we get past the start up costs from the acquisition. With respect to FX, we used basically the end of September's rates. I will tell you we have very low impact from FX.

The biggest impact is the Euro related to translation. So for us FX, as you can see in our reported results, has a fairly modest impact due to our heavy concentration in North America and the US specifically. And with respect to interest rates we have a 1% floor on our floating rate debt so we have about $2 billion of floating rate debt to the extent LIBOR stays below 1% it's not relevant.

To the extent it goes above 1%, you would just have to take that impact times around $2 billion to determine the impact which will become less as the year unfolds, as we pay down that debt because that's the debt that we're paying down throughout the year.

Okay that makes sense. The last one. I'll turn it over. It sounds like there's not much in synergy then from AEP for obvious reasons. If you can confirm that? The tax rate was pretty low this quarter, aside from just fourth quarter's being noisy, what was behind that? Thank you.

We do have -- again, we continue to feel confident with the $50 million of cost synergies for AEP. The impact of those synergies is built into our outlook for FY17 but they are offset again by the costs associated with achieving those that come up front in the transaction but there is an amount baked in around $20 million in FY17.

Thank you.

With respect to the tax rate, it was impacted by a couple factors. One was the new accounting regulations that allow you to take the benefit of stock compensation expense relative to our stock options as well as the R&D tax credit and some one-time tax planning project that we completed in the quarter.

Thank you, Mark.

Thank you, our next question is from Chris Manuel with Wells Fargo Securities.

Good morning, gentlemen, and congratulations both to you, Jon. Its been wonderful working with you over the last few years. And congratulations to you as well, Tom, and look forward to spending a lot of time with you over the next couple years.

Thank you, Chris.

Thanks, Chris.

Had a couple questions I wanted run through. One to kind of follow on to what George was talking about. The currency has moved a chunk here and I recognize it's not a big, big component. But, Mark, I think I know you well enough to know you usually leave room for some conservatism, but at current currency rates do you still feel that your numbers would be okay, that you've laid out here today?

Yes, we do.

Okay that's helpful. And then second, if you could remind us, because we're part way through it, where are you on -- what's the current synergy target for AVINTIV? How much have you got via year-end and it's still embedded into 2017? And then with the timing being moved back a little bit for AEP, or at least as we had modeled things or thought about things, the $50 million do you have a sense of timing for that coming through both 2917 and 2018 or how that phases?

I think -- Chris, good morning. It's Mark again. With respect to the AVINTIV synergy, we still feel good about the $80 million of synergy, $50 million of that realized in our FY16 results and the remaining $30 million in our FY17 results. As we identify more synergies related to that transaction that will be upside to the guidance that we've provided with respect to AVINTIV.

AEP, again, we still feel very confident with the $50 million synergy. And I would expect similar to AVINTIV that in the second year, we'll be on a full run-rate basis and as we identify more synergies, just as we did with AVINTIV, we'll update the market on a quarterly basis.

Do you think that you can get to maybe half of those in the eight months you own it this year? If I were splitting it would that be a fair way to think about it?

Just under that.

Okay. And then I have a question for you, Tom. The -- what you've embedded here in the numbers is still a little bit more degradation in the consumer business and HHS, it looks like slowing a bit to 3% where you've been running mid single-digits. Can you maybe kind of run through some of what you're seeing in each of those pieces?

I know you've been working on up-tiering mix and such in the AVINTIV piece but are you -- is most of that behind you at this point? I think particularly in specialty you were still down a little bit this quarter, per plan, but are we close to running through the course of that? Number one. And then two, in the consumer side, what are you seeing with respect to -- we're already part way through the current quarter but what's the path or is there a path to maybe get that back to flat?

So, Chris, couple good questions. Clearly our guidance tends to be conservative on the HH&S side, demand has continued to improve each of the quarters in 2016. And certainly headwinds that impacted 2016 have fallen off giving us a lot of confidence in our 2017 estimate of 3%, as we've also seen excellent growth in Asia. So we feel very comfortable with that business, as we talk, we made certain tradeoffs in terms of volume versus margin in that business and 3%, the conservative achievable number.

Relative to consumer packaging the consumer continues to be challenged and what we're seeing is just that. Volume remains steady but sluggish. The guidance that we provided in 2017 is consistent with what we achieved in 2016. And again, as opportunities arise to update that guidance we'll do so.

We also believe that the AVINTIV acquisition has provided a tremendous opportunity for us to build plans long term to globalize that business. And having the platform to globalize the business, to take advantage of higher growth rates in other regions of the world is a very positive thing.

Okay, that's very helpful. And thanks, guys, and congratulations on strong finish to the year as well.

Thank you, Chris.

Our next question is from Jason Freuchtel with SunTrust.

Hi. Good morning, guys.

Good morning, Jason.

Yes, it looks like your depreciation expense increased pretty significantly quarter-over-quarter in Q4 and has fluctuated over the course of 2016. Can you just comment on what's driving the fluctuation in your depreciation expense? And additionally, it looks like, for forecasting purposes, depreciation expense has been about 60% of CapEx over the past couple quarters, is that a good metric to use going forward or what variables could impact that metric?

Yes, good morning, Jason. This is Mark again. So we have some volatility in our depreciation on a quarterly basis due to the true ups from the AVINTIV acquisition and the purchase accounting related to that, so I wouldn't simply look at our annual amount and divide it by four. That's what was driving the -- some of the bumps quarter-to-quarter. And going forward, that should continue to be a good result, although decreasing as some of the purchase accounting step-ups run off. Right? So as time unfolds, obviously depreciation and CapEx will converge outside of M&A activity.

Got you. And then in terms of your synergy expectation, I think I noticed in your proxy, you shared that you didn't receive pricing information from AEP. In terms of expecting some synergy benefit from sourcing and pricing, what is it that gives you confidence that you can achieve your synergy expectations, both in FY17 as well as in FY18?

I'd say this. This is Tom. Shareholders should continue to note that our sourcing scale and benefit provides really a valuable competitive advantage for Berry. And I think that it's clear, historically, from other acquisitions we've done. We've demonstrated the ability to execute on those synergies and we feel very confident in our ability to do so here as well.

Okay, great, thank you.

Thank you our next question comes from Arun Viswanathan with RBC Capital Markets.

Yes, it's actually Tom for Arun. I know you guys discussed this just now but I wanted to maybe get in a little deeper on the consumer packaging volumes, the down 2.5% this quarter. Last quarter was down 2% and you guys are forecasting down 1% in 2017.

I get there's some fuzziness there and you could reevaluate it then, but could you maybe talk about maybe what's behind that -- some degree of optimism there or what's things you could do, or perhaps your customers are doing, that could potentially turn the tide there and lead to the improved performance in consumer packaging volumes?

Yes, it's a good question. A couple things. In terms of the fourth quarter performance, it really was more of a timing function in terms of certain demands and business being pushed from one quarter to the other. It was not symbolic of what the entire year reflected, so that reflects Q4. We're focused really on innovation.

There's a tremendous number of opportunities for us and the number of account relationships we have with key end-users throughout our Company gives us unparalleled access and our opportunity to work with those customers to find and understand unmet needs in the marketplace is what we do from a consumer insight and marketing perspective. Clearly, we'll continue to reveal in future calls progress we're making on the innovation front, but clearly, areas around barrier technologies, hybrid structures and others are key components of our longer term growth for the consumer packaging business.

We are bullish, as I said, and I said that to address a previous call. We also believe this is a business that long term we have a great platform to continue to grow this business globally. Last, I'd say during this time where the marketplace and our consumers have seen a difficult soft environment, we've continued to temper our investment in certain areas and focus on manufacturing efficiencies and right-sizing our assets. We are ready for the turnaround so when the turnaround happens Berry will be very well poised to take advantage of it.

Okay, that's helpful. On diapers, we noticed some Nielsen data that showed what appeared to be a potential shift from branded to private label. There could have been some issues in that data and some eCommerce may have been taking share.

One, is that a net kind of negative for you guys? Are you seeing that? And also with the potential for capacity increase in diapers just market-wide, could you comment on that end market and what's happening there?

Certainly. To be real clear and simple, we don't care either way. We do both.

We participate both in the branded as well as private label space so it's an opportunity for us on both ends. Clearly dynamics in terms of this being a global business, we can take advantage of regions with higher birth rates and that is an advantage to Berry for sure.

Okay. And we notice the pretty sizeable shift in working capital in Q4, a pretty sizeable benefit. Could you comment on the timing there, why Q4 is such a big impact there? How to think about that?

Yes, I would say it's a normal seasonality with our business. We continue to drive improvements in working capital, obviously, that's part of our ongoing efforts as a Company. We're highly focused on generating free cash and we understand working capital as a component of our free cash but nothing unusual.

Okay thanks, I'll turn it over.

Thank you our next question is from Tyler Langton with JPMorgan.

Good morning, thanks. Sorry if I missed it, but could you just run through what the Q4 volumes were in HH&S and Engineered Materials?

Sure, they were both relatively flat in both of those businesses for the September quarter. Again, Health and Hygiene being up, offset by the Specialties as we look to move to higher value-added products in our Specialty segment. And Engineered Materials was slightly up, we rounded it to flat but basically flat for the quarter.

Got it. Thanks. And just looking for 2017, the 3% volume growth guidance for HH&S. Could you talk about what you're expecting from Health and Hygiene in those numbers and what you might be expecting from Specialties?

Like we said earlier, the demand has continued to improve in each of the quarters in 2016 and with some of the headwinds that impacted 2016 falling off, the run rates give strong support to the 3% growth rate. Again we believe also that the international growth that we've seen, specific in Asia, will continue and us being fresh into the New Year, we remain very confident in that 3% estimate.

Got it, thanks. And then last question on working capital, I know you guided to flat for 2017 but I guess sort of ultimately with AEP, do you think you could get some working capital gains going forward?

As we get deeper into that acquisition and to the extent we have opportunities there, we'll certainly update our guidance and look forward to doing that. But for now we think the right way to view it is flat assumption conservatively for next year.

Okay. Great. Thanks so much.

Thank you our next question comes from Philip Ng with Jefferies.

Good morning. It's Alex Hunter on for Phil Ng. Congratulations on a nice quarter, guys.

Thank you.

So first just back to AEP. It's our understanding that annual negotiations with resin suppliers takes place typically in the calendar fourth quarter. With the AEP deal closing in February, are you able to leverage the scale of polyethylene purchases you gain from AEP throughout the entire system in 2017 or is that more of a 2018 event now?

Listen, clearly I'll reiterate the sourcing scale and definitely benefits us in terms of resin negotiations. While there may be some calendarization when agreements are negotiated that happens really depending on the opportunity. And clearly, we certainly will begin those negotiations with AEP and we believe that we'll be able to capture the associated benefit from that.

Great and resin prices have been stubbornly high in 2016 as you head into 2017 and your guidance, what have you baked in for resin prices and what are you seeing in the overall resin market? Are you starting to see polyethylene turn to more of a buyers market?

I would say this, resin prices are very difficult to predict. We assume flat resin costs for the end of the fiscal year.

Our guidance on both free cash and EBITDA should not be significantly impacted relative to the movements in resin. Near term, we do think additional capacity additions should provide a positive supply-demand dynamic for converters like ourselves.

Great and then it seems like you have a pretty good line of sight to getting to the high end of your leverage target by the end of next year. Could you talk about how you think about capital allocation once you get there, your appetite for dividend, was looking to get more aggressive on M&A again? Or just how you're viewing that?

Yes, we would discuss that during later calls but our top priority remains simply achieving the target leverage range on or before the end of FY17.

Great thanks very much and congratulations on the new role, Tom.

Thanks.

Thank you our next question comes from Brian Maguire with Goldman Sachs.

Yes, good morning. Thanks for taking my questions and I'll add my congratulations, Tom and Jon, on your next chapter in life as well.

Thank you, Brian.

Looking on Slide 11, appreciate the outlook for free cash flow. It looks like there's some components there that you could bridge back to an EBITDA number that's around $1.34 billion. Is that kind of roughly about right, $1.34 billion for EBITDA in 2017?

Yes, that's correct, Brian.

Okay. Great. And then just wondering if you had any initial thoughts on impacts from potential tax reform in the US? That's been a hot topic since the election. I realize you guys have a lot of NOLs in the US and the cash taxes aren't very high but as you think about the duration of those NOLs, could it potentially stretch it out or just any general thoughts you have on lower tax rate given the size of your US earnings?

This is Mark again, Brian. We continue to monitor, certainly, the proposed changes that are being talked about. Obviously being predominantly a US Company with a majority of earnings coming from the US to the extent tax rates do go down in the US, we would benefit from that. But we'll continue to monitor that and take the actions as appropriate to manage the Company's cash flow and earnings. And we're certainly staying abreast of those.

Okay, great. And then -- so I'm just following on, on the prior question, should we just then assume that for your resin assumptions in 2017 you don't have much of any benefit from lower resin prices in your guidance?

That's correct.

Okay. And then are you seeing inflation in non-resin raw materials these days or any tightness in labor markets in particular?

Nothing noteworthy.

Okay, great. Appreciate the time.

Thank you. Our next question comes from Debbie Jones with Deutsche Bank.

Hi, good morning. Jon, congrats on the retirement. My first question is on cash interest expense for next year.

Mark, you mentioned the contemplation of continued utilization of free cash flow to pay down debt in your comments earlier. Should we assume a similar pay down to what we saw in 2016?

Yes, I think our quarterly -- I think if you look at our quarterly cash flow, we basically use that on a quarterly basis to pay down debt and I would expect us to do the same this fiscal year.

Okay, and then I wanted to see if you guys could talk about growth CapEx spending by segment in 2017? How that compares to 2016 and I'm trying also to figure out, do you need to spend more meaningfully in consumer to get to that 1% to 3% longer term target that you have?

Relative to the spend, we don't break that out by given segment but, as I said in an earlier response, we have focused quite heavily actually on tempering reinvestment in certain areas and focusing our time around manufacturing efficiencies and right-sizing the assets. We don't think it will require significantly larger amounts of capital to achieve those growth targets.

Okay, thanks, And last question, can you talk about how your M&A strategy coincides with your leverage target? Do you see acquisitions out there that interest you that you think you can kind of stay neutral in terms of where you are trying to get to leverage by the end of 2017?

I'll reiterate and clearly my number one objective is to achieve the target leverage range on or before the end of FY17. That is what we are focused on as well as making certain that we execute on the AEP acquisition and complete executing on the synergies relative to AVINTIV.

Okay, thanks. I'll pass it over.

Thank you our next question comes from Mark Wilde with Bank of Montreal.

Good morning Jon. Good morning, Tom, Mark. Tom, I wondered if we could just come back to consumer packaging and you could just help us think about he moving pieces from your perspective in that business? The benefits from some of the new products that you're rolling out versus what's going on in the underlying existing products? And then finally, whether you get any benefit in volume from the fact that you're buying resin more effectively or more cost efficiently than your competitors or whether you assume that resin benefit just goes to the bottom line rather than volume.

Well, Berry has a host of advantages in terms of how we go to market. Clearly our people, our process, our product, our scale are all components of it. But to be clear, the consumer packaging business just continues to be challenged, consist the with what we're seeing from the consumer and our end customers. We clearly believe that they get stronger and discretionary spend becomes more available to the consumer that we will benefit from that.

I think there is a real opportunity with the scale and the reach that we have from an end-user base to work with our customers on finding ways to innovate more effectively with them by providing consumer insights on what those unmet needs are. And we continue to work with all of the major consumer packaging companies to uncover what those nuggets of opportunity might be. Clearly, in future calls we'll break out in greater detail some of the areas of innovation that we're working on inside the Company at a later date.

And, Tom, is it possible to get a sense of -- in consumer packaging say what percentage of your business is kind of new products that you've rolled out in the last two or three years?

That's also something that we will present to you in future calls, happy to do so.

Yes, okay. And then finally, can you -- just with the dollar quite strong right now, is that influencing at all how you think about offshore acquisitions?

Mark, good morning. It's Mark. We're continuing to focus on hitting that leverage target. We want to make sure we get there by the end of the fiscal year so that's our number one priority. We're certainly monitoring currency with respect to our operations and our earnings and cash flows and taking the appropriate actions but our number one priority is hitting that leverage target.

Okay. Fair enough. I think that's been quite clear this morning. Thanks.

Thank you. Our next question comes from Ghansham Panjabi from Robert W. Baird.

Hi, guys. Good morning. You know I guess some of your peers have commented on some level of inventor destocking in certain channels both during the calendar year, Q3 and also Q4. First off, are you seeing signs of that as well in your various segments in the current quarter and also your most recent quarter?

We clearly have been our hedging our materials business. We saw that versus last year but the September quarter closed -- or fourth quarter was -- it reversed itself so we definitely saw that in Engineered Materials but it's back on a normalized rate right now.

Those are ebbs and flows that happen throughout the course of the year and we'll manage it accordingly over a 12 month calendar.

Okay. And then the $80 million other cash tax, I guess for international jurisdictions, Mark, how much of that would be recurring?

So we had about $40 million of other cash tax in FY16. We took a conservative look at that for the guidance, I think $80 million should prove to be very conservative. But with the AEP acquisition, just the uncertainty of how that would impact all our taxes, we thought it was the prudent thing to do. But we'll continue to update that quarterly.

Okay and just one final one on CapEx of $315 million for 2017. How much of that is the AVINTIV capacity for HH&S your adding in the US? Thanks.

Yes, we certainly have a component built into that. We haven't disclosed the actual amount and we're continuing to monitor the spending on that and obviously we want to make sure it matches the demand as we add capacity to that market.

Well, for that capacity addition in the US, is the bulk of it in 2017?

There's a big portion in 2017, yes.

Okay, thanks.

Thank you. Our next question comes from Danny Moran with Macquarie.

Hi, guys, good morning. Thanks for taking my questions. I just had a follow-up on Brian's question on the implied FY17 EBITDA guidance and just a bigger picture bridge.

It sounds like we have $30 million from additional AVINTIV synergies, eight months of AEP EBITDA synergies from AEP, and then volume growth. You had impressive price cost in FY16. Are you anticipating some of this reverses?

We do have the lag benefit that we received in FY16, which was just under $10 million. We removed that from our FY17 guidance, otherwise we assume no additional upside.

Okay, got it. Thanks. And then when should we start to see some of this volume improvement? Could this come as early as fiscal Q1 or is this more back-half weighted?

Yes, we're close into the year right now. Obviously, we're just into the November time frame, but we shall see that predominantly in the back half of the year, Q3.

Got it. Okay. And then just one last one for me. I think you gave a range of CapEx of $110 million to $330 million last year and mentioned this depends on how much you spend. It depends on where volumes shake out for your CapEx spend.

It looks like volumes came in below expectations yet CapEx was unchanged. How should we think about this range in FY17?

Yes, I mean there's obviously a lag impact on CapEx and volumes, right? As you add capacity throughout the year there's a lag impact so I would say capacity that you're adding now is more -- the larger portion of the impact is going to be in the next fiscal year.

Okay, great. Thanks, guys, good luck in FY17.

Thank you.

Thank you. Our next question is from George Staphos with Bank of America Merrill Lynch.

Thanks, operator. Thanks for taking my follow-up questions, guys. Did you put out what your expectation for depreciation amortization is for FY17 on a net basis? Obviously, when AEP is closed upon?

We have not, George. Let us circle back on that. We'll look at how we can get that out either before the call or on our next earnings call.

That would be helpful, Mark. Obviously, as we try to evaluate the business and the level of spending and there's questions on this as well, it's helpful. It's not the only marker but it is helpful to have a marker relative to depreciation.

Do you think, given your spending level relative to your current depreciation which is whatever north of $500 million, that there are any areas that perhaps need some reinvestment? Maybe it doesn't occur in 2017 but maybe 2018 or 2019 on a more accelerated basis? Or do you feel pretty comfortable with a run rate of $315 million relative to the base of business that exists today?

We feel very comfortable with the $300 million capital budget, plus again about $20 million for AEP, which is how you get to $315 million and achieving the growth rates that we've talked about today.

Okay. Appreciate that. My last question. Again there were a lot of good questions on volumes and innovation relative to the Company and I guess I had a near term question and a bigger picture question. Then I'll turn it over.

Is it possible, we're almost into December now, to comment to what kind of volume trend you've seen thus far in the fiscal first quarter? Obviously adjusting for the extra week you had last year. And then bigger picture, since you've gone public, you've obviously --, you've performed well relative to consensus expectations, you should be applauded for that. But one thing that has been a challenge for Berry, not just one quarter or two quarters but longer term, has been the volume story.

So Mark, Tom, Jon, as you think about it, is it that the consumer is still struggling or you're getting traction on your innovation but there are other portion of the portfolio that are fading or maybe subject to more competition? How would you have us think about that? Great quarter, congratulations and good luck in the upcoming year.

George, this is Jon. First of all I would say with regards to the current quarter, no significant movements there other than we were pleased to see the revisions of the GDP results today and any improvements in economic activity in the US should benefit our business and we've been looking forward to that.

I think with regards to the long term, obviously the steps we've taken with the business through the acquisition of AVINTIV and now the acquisition of AEP, our diversifying the Company's portfolio towards Health, Hygiene and Medical, we think these spaces, not only here in the US but on a global basis, will benefit us with larger volume growths in the future. And we're optimistic, cautiously optimistic, about Consumer Packaging and, as Tom said, we're going to look to diversify that business globally and hopefully see a turnaround here in North America as the economies continue to improve.

So you don't think its been really a competitive factor or a natural fading of some portions of your business lead to the sluggish volume in particular consumer, it's -- you aren't concerned about that?

Not concerned and I think its been reflected in consumer behavior and it's very similar to what our customers report as well. Thank you, Jon. Again congratulations to you as well. We'll see you soon, hopefully. Thanks, George, appreciate it. And again, with no other questions, I would like to thank everybody for their continued interest in Berry, and we look forward to talking to you again at the end of the next quarter. Thanks, everybody.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.