Berry Global Group Inc (BERY) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Berry Plastics earnings conference call. (Operator Instructions).

I would now like to introduce your host for today's conference call, Mr. Dustin Stilwell. You may begin, sir.

Good morning, everyone. Thank you for joining us, and welcome to Berry's first fiscal quarter 2017 earnings call. Throughout this call we will refer to the first fiscal quarter as the December 2016 quarter.

Before we begin our call, I would like to note that on our website at berryplastics.com, as before, we have provided a slide presentation to help you guide our discussion today.

Joining me from the Company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles.

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, and adjusted free cash flow. 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 the investor presentation on our website. An archived audio replay of this conference will also be available.

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 risk including but not limited to those described in our earnings release, annual report on Form 10-K, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the Company can differ materially from those expressed or implied in our forward-looking statements.

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

Thank you, Dustin, and good morning, everyone. This morning we have several topics to cover with you, including our first-quarter results, an update on the AEP acquisition, our perspective on the overall market conditions, and our expectations for the remainder of fiscal 2017. Afterwards, Mark, Dustin, and I will be happy to answer any questions you have.

I would like to begin this morning by thinking the Board of Directors for their support as I embark on my new position as CEO of Berry. I look forward to working with our customers, suppliers, investors, and employees in this role. Also, I want to congratulate Jon on his retirement as CEO, and I look forward to working closely with him as he transitions to his new job as Executive Chairman.

Berry has a strong leadership team in place, including Jean-Marc Galvez, whom we promoted in December to the position that I previously held as President of Consumer Packaging. I want to also welcome our employees and shareholders from the recently closed AEP acquisition, and I look forward to meeting and working with each and every one of you. The future is extremely bright for Berry, and I'm excited to get started as CEO. I look forward to many opportunities in the future to communicate our strategy, execution plans, and accomplishments with you.

Now, turning to our results. I'm very pleased to report that Berry had a solid start to our fiscal year. We had a significant amount of activity during the quarter, as we worked to complete the acquisition of AEP Industries, which was closed on January 20. And as Mark will describe, we also completed the refinancing of a term loan in January, further reducing our interest cost.

Turning to Berry's specific results for the first fiscal quarter, starting on slide 3. It is important to remember that our prior-year December 2015 quarter contained an extra week compared to Berry's current December 2016 quarter.

Revenue for the first fiscal quarter was $1.502 billion, essentially flat year-over-year, normalizing for the extra days. Operating EBITDA was a record for any December quarterly period in the Company's history, coming in at $277 million, an increase over the prior-year quarter, despite fewer days of operations. Our operating EBITDA margins were up 130 basis points to 18.4%. Adjusted net income was $0.50 per diluted share compared to $0.35 in the first fiscal quarter of 2016. Mark will provide more detail on our financial results momentarily.

Please know that when Mark and I discuss volumes today, we will normalize the data by utilizing average volume per day versus the prior year as the metric. On a normalized basis, total volumes were flat versus the prior-year period with our health, hygiene, and specialties division, recording organic volume growth of 3%. As a reminder, we continually work with our customers to light-weight and redesign our products, which reduces our reported volumes by about 1% annually. These actions are generally net positive to our earnings.

Turning to our divisions results. Our HH&S division grew organic volumes by 3%, recording growth in all three product categories of health, hygiene, and specialties; with healthcare-related products, such as components for medical masks and gowns, providing the highest growth rate.

Geographically, the division's strongest growth for the quarter came from the Asia region.

Normalized volumes in our engineered materials business were flat in the quarter.

Now, looking at a consumer packaging segment. Consumer demand for packaged products in the United States, as measured by scanner survey data at grocery stores, was soft again, with volume being down year-over-year for our overlapping food and non-food categories. Scanner data for health and personal care products declined more than food, while traffic at restaurants lagged grocery volumes. Similar to the weak reported retail demand, consumer packaging's normalized volumes were 3% lower than the same period in 2015.

Now I will turn the call over to Mark, who will review Berry's quarterly financial results in more detail and discuss our financial outlook for fiscal 2017. Mark?

Thank you, Tom, and good morning, everyone. I would like to refer everyone to slide 4 now. As Tom previously mentioned, Berry posted net sales for the December 2016 ending quarter of $1.502 billion, which was essentially flat year-over-year on a normalized basis when factoring in the additional calendar days in the prior-year quarter. Berry operates on a 52-week calendar; and, accordingly, about every six years the fiscal year contains 53 weeks, as fiscal 2016 did.

When bridging revenue on a normalized basis, lower selling prices and mix resulted in a less than 1% reduction to net sales in addition to a small unfavorable impact from currency translation.

From and earnings perspective, we achieved operating EBITDA of $277 million, which is a record for any December-ended quarter in the Company's history. The December 2015 quarter included $17 million of operating EBITDA as a result of the additional days of operations, and $7 million of favorable resin timing lag versus an unfavorable lag of $5 million this year.

Adjusting for the extra calendar days and the resin lag timing, operating EBITDA improved nearly $30 million on a year-over-year basis. Product mix and price/cost spread, including synergies from the AVINTIV acquisition, contributed $16 million, which netted $4 million after including the $12 million negative impact from the year-over-year change in timing on contractual raw resin cost pass-through just mentioned.

Lower SG&A costs added another $9 million to the earnings growth, primarily from cost synergies resulting from the AVINTIV acquisition and related reorganization.

Net productivity improvement to manufacturing provided another $2 million to our earnings, along with a small favorable impact from currency. Operating EBITDA margins were 18.4% for the quarter, which was 130 basis points higher than the prior-year period.

Looking at the results of our operating segments, starting on slide 5. Our health, hygiene, and specialties division generated net sales of $570 million in the quarter compared to $600 million in the December 2015 quarter. The decrease was primarily attributed to a negative impact of $26 million related to the additional calendar days in the December 2015 quarter; a decrease of selling prices, including the pass-through of plastic resin costs; and a 1% unfavorable impact from currency translation, partially offset by the 3% increase in organic sales volumes.

Our HH&S division recorded $110 million of operating EBITDA on the quarter compared to $104 million in the prior-year quarter, and was $10 million or 10% over the prior-year normalized quarter. Operating EBITDA margins of 19.3% was an improvement of over 200 basis points. The increase in operating EBITDA was primarily a result of the 3% increase in organic sales volumes; $4 million of net productivity improvements in manufacturing; and a $3 million decrease in selling, general, and administrative expenses.

Next, as noted on slide 6, net sales in our consumer packaging division decreased by 9% compared to the prior-year period. The decrease was primarily attributed to a $43 million negative impact from the additional calendar days in the December 2015 quarter, and a 3% reduction in organic sales volumes, partially offset by a 1% increase in net selling prices.

The division achieved $97 million of operating EBITDA compared to $107 million in the December 2015 quarter, which included $8 million of operating EBITDA as a result of the additional week of operations. Normalized for the extra days and a $5 million negative year-over-year change on resin pass-through timing, operating EBITDA increased $3 million or 3% from the prior year, with a $4 million decrease in selling, general, and administrative costs, offset by a $3 million negative impact from organic volumes and $3 million from increased manufacturing costs primarily related to plant consolidation activities.

Turning to slide 7, net sales in our engineered materials division for the quarter were $383 million compared to $408 million in the prior-year quarter. The decrease was primarily attributed to a negative impact of $29 million related to the additional calendar days in the December 2015 quarter, partially offset by a 2% increase in net selling prices.

Operating EBITDA for our engineered materials division was $70 million, an increase of 8% over the prior-year quarter and an increase of $10 million or 17% over the prior-year normalized quarter. The increase was primarily attributed to a $6 million improvement in the relationship of net selling price to raw material costs; and a $2 million decrease in selling, general, and administrative expenses. Operating EBITDA margins increased over 240 basis points to 18.3%.

Slide 8 provides a summary of our income statement for the December quarter. Operating income for the quarter increased 70% to $146 million when compared to the $86 million in the prior-year period, and over 90% when compared to the normalized prior-year period. This $60 million increase primarily resulted from a $40 million decrease in business integration costs due to the AVINTIV acquisition in the prior-year quarter; and a $12 million decrease in depreciation and amortization expense, primarily driven by reduced capital spending and the finalization of AVINTIV purchase accounting in fiscal 2016.

Interest expense was $68 million for the December 2016 quarter. The $7 million decrease from the prior-year quarter is a result of fewer calendar days and interest savings from free cash flow used to reduce debt and the term loan refinancing completed in the June 2016 quarter.

Subsequent to the December 2016 quarter end, we completed two financing activities. As part of the AEP acquisition financing, we closed on a new $500 million term loan, due 2024 at LIBOR plus 2.5%. Additionally, we refinanced our $1.9 billion term loan, reducing the LIBOR spread from 2.75% to 2.5%.

Our expected annual cash interest expense for fiscal year 2017 is $275 million, which includes the most recent financing for the AEP acquisition and term loan refinancing, as well as the continued utilization of free cash to pay down debt throughout the year.

As part of our commitment to apply free cash flow to reduce debt, we plan to make a voluntary $200 million early principal payment on our term loan borrowings next week.

Our effective tax rate was 35% for the quarter. 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 is essentially a cash tax payer with a 15% discount. After utilization of the pre-IPO NOLs covered by the agreement, we will then be able to utilize the approximate $500 million of federal NOLs acquired in the AVINTIV acquisition.

During the quarter we made our annual payment under this agreement, which was $60 million. This payment is made once per year in the first fiscal quarter. After making this payment, we have $114 million remaining on the tax receivable agreement to be paid in subsequent years. We estimate that we will pay approximately $100 million in the first quarter of fiscal 2018 and will start utilizing the NOLs from the AVINTIV acquisition to offset cash taxes. We believe that we will utilize approximately half of the AVINTIV-acquired NOLs over the next five years.

Our expected fiscal 2017 effective tax rate, for income statement purposes, remains at 32%.

Net income for the quarter increased to $51 million compared to $4 million in the prior-year period. Adjusted net income per diluted share increased to $0.50 in the current quarter, a 43% improvement from the December 2015 quarter of $0.35.

Next, on slide 9, the Company generated $143 million of cash flow from operations in the quarter, down $48 million from the prior year, primarily due to timing on working capital. Our adjusted free cash flow, defined as cash from operations, less net spending on PP&E and payments made under the tax receivable agreement, was $492 million for the four quarters ended December 2016. Using our market capitalization as of the end of the year, our last four quarters' adjusted free cash flow of $492 million represents an adjusted free cash flow yield of over 8%.

Our financial guidance, including our underlying assumptions for fiscal year 2017, is shown on slide 10. Note our guidance includes the recent AEP transaction closed on January 20.

We are reaffirming our fiscal 2017 adjusted free cash flow at $550 million, which includes $925 million of cash flow from operations, partially offset by net capital expenditures of $315 million and the $60 million tax receivable payment that was made in the first fiscal quarter.

Within our guidance for cash flow from operations, we are 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 acquisition integration expenses and synergy realization costs associated with AVINTIV and AEP.

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

Thank you, Mark. As we've stated before, we will continue to focus on our top priority: reducing our leverage ratio through our predictable and strong free cash flow.

At the end of the December quarter, our leverage was 4.4 times. Our plan for fiscal year 2017 remains unchanged: to achieve a target leverage ratio below 4 times. We continue to forecast that we will reach this level on or before the end of September 2017.

As mentioned earlier, we completed our previously announced acquisition of AEP on January 20. We issued 6.5 million common shares and paid $297 million as merger consideration in exchange for all of the outstanding equity of AEP. Additionally, we paid $164 million to retire outstanding AEP debt. Berry financed the cash consideration of the acquisition with a new $500 million, seven-year term loan.

AEP recently reported its fiscal year ending October 31, 2016, results. Net sales were $1.1 billion, including a 3% increase in organic volumes, and adjusted EBITDA increased 48% to $113 million. The combination of AEP with Berry's engineered materials division offers the opportunity for significant value creation for Berry and AEP shareholders.

Our expectation is to realize at least $50 million of annual cost synergies within the first two years. We are optimistic, two weeks into the integration; and as we identify additional synergy opportunities, we will communicate those in future calls.

With respect to guidance for fiscal 2017, weakness in the euro versus the dollar and resin cost increases in Europe could create headwinds in our HH&S division for the March 2017 quarter. Additionally, the sharp increase in the value of their Brazilian real, along with market pressure in South America stemming from challenges in Venezuela, could also negatively impact HH&S in Q2. These external headwinds in HHS could put some pressure on the base Berry fiscal Q2 earnings versus the March 2016 quarter, excluding the contributions from the AEP acquisition.

For the full fiscal year we expect that a stronger second half in 2017 as a result of synergies related to AEP and other business improvements that will offset the fiscal Q2 headwinds.

As a result, we are reaffirming our full-year adjusted free cash flow target of $550 million, including the impact of the acquisition of AEP that closed on January 20. And we expect our quarterly earnings in fiscal 2017, adjusted for acquisitions, to follow our normal historical trend of strongest to weakest earnings quarters, being first, June; second, September; followed by March; with the December quarter that we just completed being the weakest.

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 of Berry will continue to drive our results and achieve our goals. I thank you for your continued interest in Berry.

And at this time, Mark and I will be glad to answer any of your questions. Operator?

(Operator Instructions). Phil Ng, Jefferies.

Engineered materials has a little more exposure on the cyclical side with the new administration in place. How are you thinking about your growth outlook in that business, as well as AEP? I think you kept volumes pretty much consistent with how you thought about things last quarter.

Yes, this is Tom. They remain consistent. As we understand more of the specifics of some of the policies coming from the new administration, obviously we will have greater clarity to the impact. I think an important note in that business, most of what we do internationally, we serve local markets, and it's only about 1% of our overall business. So, should not have too significant of an impact.

Okay, that's helpful. And then from a procurement savings standpoint, which is a meaningful component to your synergy capture for AEP, but with some of the -- just due to the timing of the close, will that impact your ability to leverage that cost savings in 2017? And just curious to get your view on the resin market, broadly. It seems like the market has tightened up a little bit in terms of your ability to leverage your scale. Thanks, and good luck in the quarter.

We'll answer two sides, and I'll answer the first part. In terms of the resin markets, clearly we have seen some recent resin increases. That could put modest short-term pressure on the end of Q2 and beginning of Q3. However, we do expect that overall prices in fiscal 2017 to be very similar to what we saw in fiscal 2016.

Mark?

Yes, with respect, Phil, to your first question, no, there is not a limiting factor based on the timing. There is no contractual relationships that would limit our ability to achieve synergies in 2017.

Okay, great. Thanks.

George Staphos, Bank of America Merrill Lynch.

Actually, Victoria Madsen sitting in for George Staphos. So I have two questions for you. One, recently over the past couple of weeks, we've seen a pickup in food service paperboard. Has Berry seen that also in plastics, or do you think that paper is taking share?

I wouldn't necessarily say that paper is taking share. Clearly, I think it's very -- it's a little too soon to predict any type of overall victory. We are a very short cycle company in terms of visibility to demand, and we continue to manufacture a product that people buy every day. But at this point, I think it's a little too soon to make that call.

Okay, got it. Thank you. And do you have any new developments with Versalite in terms of commercializations at some of the larger customers that you've discussed previously?

Nothing different than what we've discussed on a previous call.

Okay, got it. Thank you.

Brian Maguire, Goldman Sachs.

This is actually Kia Pourkiani sitting in for Brian. So my first question is just on working capital. If I'm not mistaken, you seem to have updated the working capital portion of your free cash flow guide. I was wondering what's driving that there.

Yes, sure. There's no changes to our working capital assumption for the year. We had projected flat originally on our last call, and we continue to project flat for all of fiscal 2017.

Got it, okay. And then on your AEP acquisition, so you closed 10 days earlier than you expected. I was wondering, what have been the key learnings so far? And have you found any opportunities for some potential upside to the $50 million synergy target there?

Well, first, listen, we're only two weeks into the acquisition but we continue to be very, very excited about the company and the opportunity that it presents for our engineered materials business. Clearly, we are in the process right now of meeting people, engaging with the workforce. And as we have more detail to provide additional guidance, we will do that on subsequent calls.

Great. Thank you, gentlemen.

Jason Freuchtel, SunTrust.

Can you comment on how you derive the impact of volumes from the one fewer week in December? Did you track the volumes that were completed during the last week of December 2015, and compare them to December 2016? Or did you utilize some sort of allocation methodology over the course of the quarter or month? Just trying to get some sense of volume trends during the quarter as well as December.

Sure. It was an overall average per day over the entire period, for both periods. There was a slight difference, you'll see, between the three segments. And that was because AVINTIV was purchased right after the beginning of the quarter in last fiscal year.

Okay. Do you have a sense for how much of your quarterly sales you did experience during the last week of the year? Were the sales spread out pretty evenly?

Yes, December is typically our weakest quarter due to the holidays -- or, excuse me, weakest month of the quarter, due to the holidays. But in terms of the holiday timing, they were pretty much the same year-over-year. With one exception, New Year's Day flipped, but that wouldn't have been a significant impact, which is why we just used an overall average.

Okay. And then going into fiscal 2018, should we assume that there should be additional days relative to fiscal 2017?

No; it would be the same as fiscal 2017. The phenomenon we had in fiscal 2016 is about once every six years. And it's just a mathematical problem because we operate on a 52-week calendar year, which is 364 days versus the 365 in-a-quarter day calendar when you consider leap year.

Understood. And lastly, can you remind us how much polypropylene and polyethylene you purchased on a pro forma basis for the two recent acquisitions? And with that, do you have a sense for how much lower an average price Berry purchased polyethylene to AEP?

Obviously we're not going to comment relative to procurement and the differential in our price versus AEP. It will be a component of the overall synergies that we will report on, as we have more detail, perhaps the next call.

Yes, but we purchase roughly 4.5 billion pounds annually, including AEP. And it's roughly half-and-half between polyethylene and polypropylene. And AEP is a predominantly -- that business is predominantly polyethylene.

Okay, great. Thank you.

Adam Josephson, KeyBanc Capital Markets.

Tom, congratulations, and best of luck in your new role.

Thank you.

Just one question about volume. Volume was flat in fiscal 1Q. I think, Tom, you mentioned some market pressure in South America that could affect HHS in the second quarter. Can you just talk about what gives you confidence in maintaining the organic volume guidance for the year?

Listen, I think first and foremost, we're only one quarter into our fiscal year. And what we're seeing, as noted, we do have some near-term pressure in South America. It only represents about 5% of our total net sales. So at this stage, we still remain -- we remain confident in our outlook. And as always, if for whatever reason we see a change in demand for the overall business, we will take the necessary steps to do ultimately hit our free cash flow and earnings target as necessary. But right now, given we're one quarter into it, no need to change the outlook.

And just one on CP volume; it was down 3 in the quarter. You are guiding to down 1 for the year. Is there any particular reason why you're expecting an acceleration throughout the year?

It's a good question. And clearly the consumer and demand continues to be weak: the food volume demand for the December quarter; clothes, health and personal care; restaurant traffic; were all very significantly low. So, for CP we just need a general improvement in consumer incomes and consumer demand and preference, and we will as accordingly. Should we not see that type of improvement we've take the necessary rightsizing steps of our assets, as we always do, to be ready for the consumer turnaround.

I'm very excited also with the addition of Jean-Marc Galvez, who will be leading the consumer packaging segment. And we continue to remain committed to growing this business, not only domestically, but also exploring the possibility internationally.

Thanks, Tom. And Mark, just one accounting question. It looks like you are excluding stock-based comp from operating EBITDA. Have you been doing that previously? I couldn't find it previously.

Yes we have, Adam. That's been a consistent practice for many, many, many years.

Okay. All right. Thanks very much. Best of luck.

Ghansham Panjabi, Robert W. Baird.

It's actually Mehul Dalia sitting in for Ghansham. One of the large petrochemical producers reported this morning and commented that capacity delays have improved industry supply and demand dynamics for ethylene, and also its derivatives, which includes PE resin.

How should we think about raw material risk for Berry at this point relative to all your various portfolio changes -- AVINTIV, AEP, et cetera? And also if you could touch on some level of working capital sensitivity, that would be great.

Well, first and foremost, when I say predicting the resin market is very difficult, but we're still optimistic relative to the supply/demand, and that that dynamic and its impact for converters. There may be ebbs and flows in terms of timing of some of the capacity expansion. But I think overall it's a very favorable supply/demand dynamic for conversion.

And in terms of the question on sensitivity, it's roughly $5 million per $0.01. We need to update that for the AEP acquisition, but that was the view, pre-AEP. So it may have moved slightly due to AEP, but roughly $5 million per $0.01. And that would assume all grades of resin change by $0.01.

Okay, great. And then can you talk about your debt structure? How much of Berry's debt profile is variable? How much is hedged? And what's the sensitivity towards interest rate changes on the P&L?

Sure. Our debt is about two-thirds fixed and about one-third variable. And so, roughly, we have $2 billion of debt that is variable. So whatever interest rate assumption change you want to make, you can multiply that times $2 billion. And that would be the annual (multiple speakers).

Got it. Thank you.

Arun Viswanathan, RBC Capital Markets.

Just a question on HH&S. There did appear to be a slight improvement sequentially from the last couple quarters on volumes. Is that a fair characterization? Do you expect that to continue? I know you have some headwinds in Q2, but was there any noticeable incremental improvement sequentially in HH&S?

Yes, there was. And then I think overall, HH&S business, it continues to be business we're very pleased with. It's given us access to markets, people, and geographies that, frankly, we otherwise wouldn't have had. The headwinds are really not volume-related or currency -- resin, I should say.

Okay. Great. And then similarly, I know consumer packaging is facing structural headwinds, away from processed food and so on. But is there anything you guys could do to mitigate that exposure? Any new markets that you're going after, or any other categories that are actually performing better than what we've seen?

I'll say really three things: innovation, channel to market, and customers are areas that we focus on. And with Jean-Marc Galvez coming in as the new leader of the business, we've given him a white sheet of paper, ultimately, to make certain that we're deploying our resources towards the highest growth areas within that segment. We still believe it's a good segment. It's a segment that has potential, given that these are products that people buy every day.

And ultimately, to your point, we continue to make choices relative to how we can reduce our capital intensity. And where we redeploy capital, we redeploy the capital towards the higher growth areas that have either intellectual property or stronger commercial differentiation that we can value from on the long haul.

This is something that we do on an everyday basis in terms of making those types of trade-offs and decisions. And I think equally important, as we do our diligence relative to globalizing that business, we're going to be very prudent in that analysis. It presents a huge opportunity for us because we're completely under-indexed from an international perspective. Less than 1% of total net sales from the consumer packaging business are currently in China, for example. So, big opportunity for us potentially.

Great, thanks. And just on the synergies at both AVINTIV and AEP: I know it's early for AEP, but are you at your full run rate for AVINTIV? And do you expect to see upside on AEP?

Listen, it's just our practice in terms of synergy targets is typically very conservative and realizable. Just as a perspective, we generally average about 5% of the acquired company's net sales and cost synergies. And we will continue to adjust or re-project those expectations as we delve deeper into the business. And, again, we're very optimistic that AEP is a great fit for the engineered materials business and Berry Plastics' shareholders.

And one more last one, if I can. The M&A environment looks like it has picked up a little bit recently. There's been some transactions in packaging. I know you are going through your own large transaction here. But maybe you can just comment on what you're seeing, and if you would participate if you see anything interesting. Thanks.

We're always familiar with businesses and companies that are for sale. But again, I want to remind everyone that we remain committed to executing on our strategy of getting our net debt to adjusted EBITDA to below 4 times. But we will continue to take into account opportunities, but understand the prevailing objective is to drive that leverage to below 4 times.

Thank you.

Scott Gaffner, Barclays.

Tom, congrats on making it official earlier this week.

Thank you.

My question is really -- you mentioned, just right at the end of your prepared remarks, some comment on the second quarter. And I just want to make sure I understood it correctly. It sounded like you were saying that the base Berry business EBITDA would actually be down or flat year-over-year, ex-AEPI. If you could just walk through what the comments were there.

Yes. Good morning, Scott. No, we're not providing quarterly guidance. That's a practice that we're not looking to do so in terms of specifics. We just wanted to highlight a couple things. As we get further into the AVINTIV business, it is certainly new for our investors, having only owned it for a year. And just some of the international things that were going on in the market that didn't impact Berry in the past, such as the euro, which is -- again, it's relatively de minimis in the grand scheme of things. For every 1% move in the euro is about $1 million earnings impact to Berry. And then the challenges in South America, again, representing only 5% of our business.

Okay. But did you make a comment on the base Berry business? I thought I heard something, right at the end of the prepared remarks.

We were just pointing out that those two things could have an impact on our Q2 base Berry earnings, excluding AEP.

Okay. Well, I'm just trying to figure out what that means. When you say, could have an impact, obviously they are negatives. But you're just trying to lower expectations there? I'm just trying to figure out what that means.

We're one month into the quarter, Scott. So the euro changes on a -- it's a dynamic currency that changes regularly. And so it's just again something new to highlight that people should be cognizant of.

To the extent that certain things, as Mark said, are out of our control, we're making you aware. We're going to do everything in our power to offset any deviation that could potentially create. But we're just highlighting the fact that it's something new, as Mark said. With AVINTIV, that hasn't typically been a component of Berry calls in the past, given the international presence.

Sure, that's fair. The D&A for the full year, Mark, can you highlight what that should be now, including AEPI, and maybe if there's any variance by quarter? Just so we end up modeling that correctly.

Yes, obviously we still need to finalize the purchase accounting for AEP, and we'll keep you apprised as those things develop. The D portion of that is roughly two-thirds-ish, 70% or so; and roughly $600 million in the aggregate. And that's an annualized number, so obviously you would need to take a full year into account for the third and fourth quarter; but only part of that, as AEP will only be in our results next quarter for two-thirds.

Okay. And the $120 million of D&A in the first quarter, was that impacted by the one fewer weeks?

Yes, it was. Yes, it was, in the year-over-year comparison, absolutely.

Okay. Last one for me. Tom, just now that you're in the CEO role -- and I realize you were COO at the time the guidance was originally formulated -- but could you give us some sense as to your view on guidance? Every CEO seems to have a little bit of a different view. Do you feel like normally being conservative, stretch targets? How do you feel about the overall methodology towards guidance on a go-forward basis?

Yes, I think we'll see no deviation; but overall the guidance, as we just did in this call, reaffirming our 2017 full-year guidance for both free cash and our earnings, I'm confident.

Thanks, guys.

Tyler Langton, JPMorgan.

I just had a question on consumer. You had previously talked about potentially some benefits from cross-selling to AVINTIV's customer base. Is that an opportunity you see in 2017, or is that really more something that you could benefit from in 2018?

It's an ongoing process. We're literally this week -- I won't mention the customer -- there was an HH&S customer here at our corporate headquarters. And that was ultimately working on a package configuration that we previously did not have visibility to. So, it's happening on a daily basis. And certainly as something becomes notable that we can carve out, that opportunity in totality, we will share it as needed. But it's an ongoing process, and we continue to be excited about the prospects, both in 2017 and beyond.

Great, thanks. And then just within HH&S, I know specialties, especially in Europe, had been a drag in the past. It sounds like at least that business is doing better. Should those pressures, as you're exiting some unprofitable business -- is that largely behind you now? And what kind of growth do you expect on the specialty side within HH&S?

I'm sorry, could you repeat the question? Were you asking about Europe specialties or the aggregate specialties?

I guess both. My sense was that certainly in the past it was Europe as you were exiting some business in Europe within specialty. That was sort of -- had been a drag on specialties and the segment as a whole. And just trying to get a sense if that's largely behind you now.

Yes, it is. I think there may be a little tail in the March quarter relative to that exiting of business in Europe in the specialty segment. But after the March 2017 quarter, we will have fully lapped that.

And I think there's a product mix component to the specialties business. Half of it I would describe as a more commoditized; and the other side, very profitable, and I would call it more technology-oriented. I just want to make certain there was some clarification there.

Okay, great. Appreciate it, thanks.

Anojja Shah, BMO Capital Markets.

You had talked in the past about new products in consumer products, but you weren't willing to share any details yet. Is there anything you can share at this point?

That doesn't -- and that hasn't changed. Innovation continues to be very important to us. And I will -- until we ultimately have intellectual property finalized, consumer agreements completed, and/or the formal commercialization, I don't want to be premature. As we have information, I will anxiously present it in an upcoming call, I assure you. But is a continuing area of focus, for sure.

Okay, fair enough. And then I know it's a bit premature to talk about M&A, but you guys are getting pretty close to your target range. Are there any particular areas of interest that you are thinking about?

Well, I will say this, that Berry's a very diverse company between its three operating divisions, and we're very fortunate to have complete visibility to opportunities in each of those respective spaces. As we evaluate those, we make certain that it meets our internal and external objective in terms of our historical execution that we've demonstrated in acquisitions, so we're very prudent in it.

But again, our number-one goal right now is to keep the leverage at 4 or below. We believe that's a leverage range that we can consistently operate at in the near future.

All right. Thank you very much.

Debbie Jones, Deutsche Bank.

I don't (multiple speakers) this was addressed, but if so, I apologize. On the $3 million headwind in consumer on operations, what was that related to?

Sure. It was negative manufacturing, $3 million, due to plant reorganization activities we have; moving business around to optimize footprint.

And is that over with, this quarter?

No, there still a little bit of activity on that. I would tell you it's declining, but that could continue here as the next couple of quarters unfold. But again, it's declining.

Okay. And then my second question. I might have misheard this, but when you were talking about the TRA, you mentioned the $100 million payments. Were you referring to next year, and then the idea being the following year you could start using the AVINTIV NOLs?

Yes. So right now, our current look is that there would be a $100 million payment due in fiscal 2018 relative to the TRA. And that would leave a balance of, like, $14 million. Very, very small number, which primarily relates to international jurisdictions and some state NOLs. But again, not material.

And I haven't seen anything out there, but is there anything about the new administration's tax policies that would prevent or help you in utilization of the NOLs?

We're continuing to look at that. Right now, we don't see anything that's a significant impact to us. There's things that benefit us and things that go the other way. But net-net, based on the work done to date, nothing material. But again, we're continuing to evaluate it and watch it as it unfolds.

Okay, great. Thank you.

Danny Moran, Macquarie.

Just on your base business guidance for fiscal 2Q, is there any way to get more details? Should segment volumes be similar to your full-year guidance? And then are you expecting any temporary resin headwinds in there?

Volumes -- again, we're not giving quarterly guidance. We are reconfirming our annual targets that we gave on the last call, really in all respects, in terms of volumes as well as cash flow, and all of the detailed earnings components that we provided guidance on.

With respect to resin, I wouldn't expect it to be a material result. We've really, just as a reminder, done a nice job of minimizing the lag impact. It's plus or minus $1 million or $2 million every quarter of -- $5 million, plus or minus $1 million or $2 million, every quarter.

And in the aggregate, we again -- we believe that overall prices for fiscal 2017 will be very similar to fiscal 2016.

Okay, great. And then just on the AVINTIV synergies, I know you gave a target of $80 million. How are we tracking, or how much runway is there left to achieve that $80 million there?

We're actually at the full run rate of the $80 million -- is showing up in our results quarterly now, and we're obviously continuing to work towards growing that number. But we're at the full run rate of $80 million. And as we have significant changes in that $80 million, we will communicate those in the future calls.

Okay, great. Thank you. And then just last one for me. I know you gave the resin sensitivities. Is there any way to give what that flat working capital guidance in fiscal 2017, when resin -- or where you based resin prices off of when you gave that guidance?

We expect fiscal 2017, while there may be some choppiness amongst the month, we don't expect the prices there to be different than fiscal 2016. So effectively flat, year-over-year.

All right, great. Thanks, guys. Good luck in the year.

Lars Kjellberg, Credit Suisse.

Lars, your line is open. You can go ahead and ask your question. Did you want me to go just ahead and move on to the next questions?

Yes, that would be great.

Chris Manuel, Wells Fargo.

Welcome, everyone, to their new roles. I guess there's a new bull on the hill.

Thanks, Chris.

I had just two questions. One, when you look at some of your assumptions on the volume side, they still seem relatively reasonable. Although perhaps in the consumer business, maybe it's a little bit of a longer putt rate now than it was earlier. But some of the levers that you've got to pull, plus and minus, over the balance of the year if volume doesn't come in, do you still feel that you have some more runway for synergy in AVINTIV, even if you're at the full run rate as you sit today? Do you feel that you maybe got some new products? What are some of the levers you've got to balance that, if you will?

Yes, it's a good question; but there's always opportunities. We're a continuous improvement culture. So we're putting a lot of pressure on our teams always to make certain that the processes, the people, the product that we make, continue to evolve and get better and drive customer satisfaction, lower cost rates. So, that did not change.

And clearly it's a good business, again. We've been excited by the people, the access, the geographies that we haven't had before, and certainly some of the cross-selling opportunities.

So, we continue to look at that in all three of our businesses, frankly, and we make certain that we've got cost structures that correlate to the run rate of those respective businesses. That's real time; that's not an annual event. We will do that based on what we see in the marketplace relative to demand overall.

All right. My follow-up question is: one of those levers I was thinking about is it's been two, maybe three years now since you've gone out and done a significant, non-material price raise for different inflation components, things like -- I don't know, freight, energy, labor, et cetera.

We're beginning to see chunks of inflation flowing through the system again, both -- all those factors, things we just talked about. Are you at a spot -- is that something that you would consider? Is that a lever that you think you have yet to pull? Or are you not at a level yet, or have things not yet moved up to a spot where you need that?

We're always focused on making certain we're at market prices, and that's our game, but we will certainly take some of your counsel under advisement; appreciate that. But we always focus on where the market's at, and we will maximize the opportunity to create as much value as we possibly can with the products we sell.

Okay. Thank you, guys.

George Staphos, Bank of America.

I'm joining late, so if you already answered these, just please leave them to the side; we can talk about it afterwards. Have you talked with AEP in terms of how your -- now that you've owned it, the synergies may be flowing from different sources, or how you expect that to trend in terms of sources, relative to prior deals? That'd be question number one.

And then question number two would be on consumer. With volumes down 3%, I'm sure that's been a subject of discussion already. Any thoughts in terms of what will ultimately turn that around for you, or for the industry? And I had a couple of follow-ons.

With respect to synergies, obviously we've done this a few times. And so we're, I'd say, doing a pretty good job of effectively identifying the categories based on our diligence. And I would say this one is falling in line with our expectations. Again, with those categories being procurement, base savings, operations, and SG&A. So I would say, at this point, we remain optimistic; but no surprises in terms of the categorization of the synergies.

And Mark, is that the stack order ranking? So you think you're going to get the most out of procurement, then I think you said SG&A, manufacturing? Is that how we should think about it?

Yes, this one has a lot of overlap, obviously, in the fact that it's all North America; certainly provides a catalyst for higher synergies in some of those categories. So I would say it's probably in that order. SG&A and operations could flip-flop as time unfolds. But generally speaking, the order I gave is also an order of magnitude.

And again, George, as we get deeper into the AEP integration, we will adjust or re-report it as necessary in upcoming calls. Relative to CP, first, we are encouraged by the labor report that came out today. Because, in general, we need general improvement in consumer incomes and consumer spending to drive improvement inside that space. It's been consistent relative to survey data. It's been consistent with many of the end users inside that space, and that's obviously a big driver.

Okay. Thanks for that, Tom. There was an earlier question on leverage. And I think that question was getting at when might you look at M&A. You responded you're comfortable in the 4 times leverage ratio. Not taking away the fact that you can clearly run this business with a lot of leverage -- you've done so in the past -- what are you building into that 4 times threshold for how the market's view of leverage my change in future years, and what kind of cost of capital might be applied to companies?

Do you think, as that appetite for leverage in the market changes, might it be time maybe to move the threshold to 3.5, say? I'm just throwing that out there. Not because you can't operate at a 4 or even 4.5, but just because the market will apply different cost of capital to different companies with different balance sheet structures.

We'll continue to evaluate that, George. But the target that we've put out there -- and frankly been tasked with, and we think it's the right thing to do -- is to get to below 4. Once we're at 4, we will reevaluate based on the external environment in terms of interest rates, if we change that view. But clearly we believe this is a level that we can operate and have a lot of flexibility in terms of the strong free cash generation that Berry is known for, and that we expect to be able to continue to generate.

Okay. I appreciate that, Tom. Last question, if it hasn't already been asked: have you talked at all about the increase in capacity that we've seen in nonwovens? Any view, any change in view, in terms of how that capacity may or may not be absorbed by the demand outlook that you're seeing. Thanks, and good luck in the quarter.

It's not unusual. And we continually evaluate supply/demand balance and competitive capacity additions and market growth rates, always. So it's not out of the ordinary, and it's fairly tight.

What would fairly tight be, Tom?

From a traditional maximum capacity, plus or minus 3%, let's say, versus what they would assume to be optimal run rates inside their sites right now. And there's obviously ebbs and flows in given quarters, based on individual capacity expansion inside some competitors' sites. But it's not significant right now. I don't go back -- it's fairly tight. It's tough to put a number on it, but it's fairly tight.

Okay. Thank you very much.

Jason Freuchtel, SunTrust.

It seems like there may be a greater emphasis on innovative offerings at Berry now compared to previous years. Should we assume Berry will invest more in R&D spend, going forward, or maintain a similar level it has the past several years?

I look at innovation beyond just product. It's innovating around our people, our products, our processes, the entire continuum. And Berry has never been shy to spend appropriate amounts for the right opportunity to create the right differentiation with the right customer support. It is obviously an area that we spend a lot of time commercially focused on, and I do. As we have some developments to share, relative to progress we're making on the innovation front, we will bring those forward in upcoming calls, I assure you.

Okay, thank you.

Scott Gaffner, Barclays.

Tom and Mark, I hate to come back to this, but I just want to clarify on the second-quarter commentaries, especially around HHS. Because there does seem to be some confusion. On the resin piece, Tom, that you mentioned, can you -- is that specific to the January increase in polypropylene pricing? And then given you view that resins are going to be flat for the full year, is that something you would expect to get back in HH&S later in the year, based on contractual pass-through?

Thanks, Scott. The answer generally is yes to that. Obviously those are evolving markets; but, yes, that's the right way to think about it.

And the pass-through within HH&S, is it terribly dissimilar from the rest of the Company?

It is not. It is very similar.

Okay. And can you remind us of the geographic breakdown within HH&S? Is it one specific country that you are focused on as, far as the FX impact?

Again, in terms of the euro, it's about $1 million of earnings for every 1% move. So if you just look at the year-over-year change in euro, and the percentage change, you can basically take that times $1 million. And that will get you pretty close to the impact year-over-year on Europe currency changes.

Okay. And just lastly, what are you using for the euro for the rest of the year?

We haven't disclosed specific guidance with respect to currencies. And I would say, in general, we had a pretty similar outlook in 2017 as 2016; not significantly different.

Okay. I appreciate it.

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

I want to thank you all for joining us for our conference call here. We look forward to speaking with you on the upcoming call. Take care.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.