Berry Global Group Inc (BERY) 2017 Q3 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the Berry Global earnings call. (Operator Instructions) Mr. Dustin Stilwell, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Berry's Third Fiscal Quarter 2017 Earnings Call.

Throughout this call, we will refer to the third fiscal quarter as our June 2017 quarter.

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

After today's call, a replay will also be available on our website at berryglobal.com under our Investor Relations section. Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles.

Following Tom and Mark's comments today, we will answer any questions you have. (Operator Instructions)

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

And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks including, but not limited to those described in our earnings release, our annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

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

Thank you, Dustin, and good morning, everyone. This morning, we'll be discussing several topics including our third fiscal quarter results, an update on the integration of AEP, highlights from our operating segment and expectations for the rest of fiscal 2017. Afterwards, we'll be happy to answer any questions you have.

I want to start today by highlighting a milestone in Berry's history that was achieved during the quarter with our placement into the Fortune 500. From our beginning in 1967 in Evansville, Indiana with 3 employees and 1 injection molding machine, today, Berry has more than 130 factories around the world providing great jobs to over 23,000 employees. The growth of Berry has translated in value creation for our equity investors and our stock has appreciated more than 300% since our IPO in October of 2012. Berry has grown to be a global leader in providing value-added customized protection solutions for our customers. The innovative products and solutions we provide are helping them to succeed in their respective markets.

Reflecting back at our history and these accomplishments, we have many things to celebrate. In fact, this year, Berry is celebrating our 50th year in business. During our 50-year history, Berry has faced every type of economic environment and has always come out stronger. To this point, Berry has consistently provided 10-year compound annual growth rate of over 20% on revenue, EBITDA and shareholder return throughout our 50-year history.

Today, we and our customers are facing changing consumer buying habits and new channels to market, many of which are being led by the Internet. These challenges will come and go, but what will remain constant is our ability to act and evolve in response to these changing market conditions. Berry's strategic approach is to maximize our near-term performance to increase shareholder value while taking the right steps long term to adapt to these changes in consumption. While we are proud of our exceptional history including the record results we'll be reporting on this call today, what excites us most is our future and the strategies that we are executing to position Berry to continue to excel.

Turning now to our results for the June quarter on Slide 3. Berry's sales and operating EBITDA for the third fiscal quarter were a record for any quarterly period in the company's history. Milestones for both revenue and operating EBITDA were achieved of $1,906,000,000 and $364 million, respectively. Adjusted free cash flow was also a record for any June-ended quarter, improving by 20% to $181 million and adjusted net income per diluted share was 13% higher at $0.93. I'm pleased to also report that we, again, reduced our debt leverage ratio. At the end of the third fiscal quarter, the company's net debt-to-adjusted EBITDA was 4x, which is the lowest leverage in our history as a public company.

Consistent with our strategies, we continue to make volume-price trade-offs across the portfolio in an effort to maximize the company's earnings. Additionally, our strategy of diversifying the company to higher-growth markets, regions and products is transforming Berry and improving our long-term growth proposition. Today, food packaging represents about 20% of our annual revenues compared to approximately 40% at IPO. This diversification, along with our continuous improvement culture, allowed us to achieve these record results.

In looking at our results by segment, we had a strong quarter in our Engineered Materials division with EBITDA sales margins over 19% for the period including the integrated results from the acquisition of AEP. Strong synergies from the AEP acquisition led the way, thanks to the effort from our employees. We are very pleased with the integration progress and the collaboration of the combined teams. In addition to the integration efforts, these teams were able to drive cost improvements and earnings growth in the core Engineered Materials business. Similar to recent quarters, we continue to benefit from the advantages of Berry's scale in leveraging our asset capability and raw material sourcing. We remain positive about the fundamentals of our Engineered Materials segment as reflected in our outstanding results and continue to believe our long-term volume growth target is achievable at 1% to 3%.

Within our HH&S division, nonwoven products grew 1% during the quarter with the strongest growth coming from our health care products. Furthermore, all 3 international regions saw positive growth for the quarter. As detailed in our press release last week and described on our last call, our Asian nonwoven business continues to experience growing demand and our assets are operating at high utilization rates. To support our customers' growth, we announced plans to add another nonwoven line in China to supply the region. We continue to believe that the long-term volume growth for our HH&S segment will be 3% to 5% and this investment in China is necessary to support that growth.

Our Consumer Packaging division saw similar trends to what we've witnessed for several quarters in a row now, and accordingly, we have structured the business to align our resources around product focus to stream line our cost structure and drive innovation within our product categories. We're excited about these changes and have already landed an unprecedented amount of new business last quarter in Consumer Packaging, representing over $50 million in annual revenue that we expect to start shipping in the last half of 2018. This new business was secured as a result of new product innovation with existing products and customers.

Now before I pass the call over to Mark for more details on our financial results, I want to highlight our progress with AEP and our recent strategic bolt-on acquisition of Adchem. The acquisition of AEP continues to exceed our expectations, and the results to date have validated the strategic strengths we outlined when we first announced the transaction in August of 2016. We continue to efficiently integrate the business and cost synergies remain ahead of our initial expectations.

As I stated before, Berry has a disciplined and systematic approach to integrating acquired businesses that's been developed and proven over the more than 40 acquisitions we've completed throughout our history.

Based on the progress to date, we are increasing our annual cost synergy target for the AEP acquisition to $80 million from our revised guidance of $70 million on our last call and up from the original estimate of $50 million. As we stated, these cost synergies are being generated primarily from the combined purchasing power, elimination of redundancy and SG&A costs and operational best practices.

I'm also pleased to report that, at the end of June, we completed the acquisition of Adchem Corporation. For over 50 years, Adchem has been a respected leader in the development of high-performance adhesive tape systems for the automotive, construction, electronics, graphic arts, medical and general tape markets with sales approaching $40 million. The combination of Berry and Adchem will enhance our ability to further penetrate new sales channels and growing specialty tapes market through expanded technologies and product line extensions. This acquisition is yet another example of our successful track record and strategy to uncover and acquire unique businesses that are leaders in their respective spaces with like products and materials to utilize our distinctive scale advantage to realize synergies. It is more important to note that the purchase of Adchem will not impair our ability to reach our leverage goal of below 4x by the end of the fiscal year. The Adchem business is operating within Berry's Engineered Materials division.

Now I'll turn the call over to Mark who will review Berry's financial results in more detail then I will come back to summarize our strategy and open the call for questions. 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 quarter in our history of $1,906,000,000, which was up $261 million over the June 2016 quarter. The increase is primarily attributed to the AEP acquisition along with the pass-through of higher raw material costs, partially offset by a decrease in base sales volumes.

From an earnings perspective, we achieved quarterly record operating EBITDA of $364 million resulting in a margin of 19.1% in net sales. The $364 million was an increase of $48 million over our June 2016 quarter. Acquisition and organic sales volumes increased our operating EBITDA by $24 million. Additionally, positive product mix and price/cost spread added $11 million while our cost-saving initiatives and productivity improvements in operations and SG&A added another $12 million.

Looking at the results of our operating segments, starting on Slide 5. Net sales for our Engineered Materials division for the quarter was $686 million compared to $408 million in the prior year quarter. The increase is primarily attributed to the AEP acquisition, along with an increase in net selling prices due to the pass-through of higher raw material costs, offset by an decrease in organic sales volumes. The decrease in sales volume was a result of AEP's strong June 2016 quarter and our decisions between volume and price in order to maximize earnings including the impact of combining product lines within our overlapping legacy AEP and Berry businesses. Additionally, we believe customer destocking impacted the quarter primarily in our distribution channels in anticipation of lower resin prices.

Operating EBITDA in our Engineered Materials division was $132 million, representing an increase of $58 million or 78% over the prior year quarter. The heritage AEP business had a strong prior year quarter, which added $36 million of operating EBITDA to our comparable period. Product mix and price/cost spread provide an additional $25 million, along with lower operating expenses of $4 million, which both included the realization of cost synergies from the AEP acquisition.

Turning to Slide 6. Our HH&S division generated net sales of $606 million in the quarter, which was the same as the June 2016 quarter. Higher selling prices as a result of passing through higher raw material costs were offset by an unfavorable impact from currency translation. As Tom mentioned, within HH&S, our nonwoven products witnessed a 1% increase in organic sales volumes, which was partially offset by softer volumes in our legacy pipeline maintenance products.

Our HH&S division recorded $111 million of operating EBITDA in the quarter compared to $118 million in the prior year quarter. The decrease in operating EBITDA was primarily a result of a decrease from product mix and price/cost spread partially offset by a decrease in operating expenses driven by improved productivity and cost-reduction actions. As we discussed on our last call, a combination of factors including inflation, currency and consumer demand put pressure on our South American HH&S business. Despite these recent macroeconomic pressures, which we do not expect to continue long term, we remain confident in the growth dynamics of the region and our entire HH&S segment.

Next, as noted on Slide 9, net sales in our Consumer Packaging division decreased by 3% compared to the prior year period resulting from a reduction in organic sales volumes, partially offset by an increase in selling prices due to pass-through of higher raw material costs. The division generated $121 million of operating EBITDA compared to $124 million in the June 2016 quarter. We are pleased that our cost-reduction efforts were able to almost completely offset the volume weakness and raw material inflation.

We continue to face soft demand for overall packaged food products in North America and continue to take proactive steps to diversify our business portfolio. These actions have also significantly enhanced our ability to leverage our total scale as a plastic resin converter. We will continue to maintain our low-cost position in the Consumer Packaging business while increasing our focus on segments and geographies where future growth opportunities are expected to be better.

Utilizing our strategy, operating EBITDA margin for the last 2 quarters have been 20% in the segment. Our culture is and has been focused on continuous improvement while striving for operational excellence as we have historically demonstrated.

Slide 8 provides a summary of our income statement for our third fiscal quarter. Overall, operating income increased by $33 million or 18% over the prior year quarter. This increase can be attributed to the items previously discussed that drove the $48 million operating EBITDA improvement, partially offset by an increase in depreciation and amortization expense resulting from the acquisition of AEP. Other income was $1 million during the quarter compared to other income in the prior year quarter of $14 million due to income in the prior year quarter's related to foreign currency changes on the remeasurement of nonoperating intercompany balances.

Interest expense was $68 million compared to the prior year expense of $73 million. This $5 million decrease is primarily a result of interest rate reductions we achieved from proactive actions to reduce our interest costs from completed refinancings. Additionally, as part of our commitment to apply free cash flow to reduce debt, we have voluntarily made $400 million of early principal payments on our term loans through the first 3 quarters of the fiscal year.

Our effective tax rate was 26% for the quarter and fiscal 2017 year-to-date. We continue to believe our effective tax rate going forward will be 32%, however, based on discrete items, we believe that we should be able to achieve a rate of 30% in fiscal 2017. As a reminder, the company has a pre-IPO tax receivable agreement whereby 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, since our IPO, the company had essentially been a cash tax payer with a 15% discount. We have $123 million remaining on this agreement.

While we are not providing free cash flow guidance for fiscal 2018 today, we have received inquiries regarding our cash taxes for next year. As we anticipate being under our initial guidance for fiscal 2017 capital expenditures of $315 million by approximately $50 million, we anticipate that we will prepay a portion of our remaining tax receivable agreement in the September 2017 quarter effectively allowing us to achieve our adjusted free cash flow target of $550 million while mitigating the potential negative impact of incremental cash taxes of fiscal 2018.

Irrespective of the timing on this payment, what remains evident is our free cash flow consistency and predictability year in and year out. We plan to continue to grow our adjusted free cash flow each year as demonstrated historically. Additionally, as a reminder, our $550 million of expected fiscal 2017 adjusted free cash flow includes $60 million of acquisition- and business integration-related costs that we would expect to be lower in fiscal 2018, along with incremental free cash flow from the AEP acquisition. As always, we will continue to work diligently to maximize our free cash flow.

In wrapping up the income statement, our net income for the quarter increased to $107 million compared to $96 million in the prior year period. And adjusted net income per diluted share increased to $0.93 in the current quarter, a 13% improvement from the June 2016 quarter of $0.82.

Next on Slide 9, the company generated $247 million of cash flow from operations in the quarter, up $41 million from the prior year quarter primarily as a result of our improved operating results. 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 a record for any June quarter at $181 million and reached $554 million for the 4 quarters ended June 2017.

And finally, on Slide 10. With respect to guidance for the remainder fiscal of 2017 and with only 1 quarter remaining, we are reaffirming our original 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 $265 million and $110 million of payments under the tax receivable agreement, which includes $60 million made in the first fiscal quarter and $50 million we anticipate making in the September 2017 quarter. Using our market capitalization as of the end of the June quarter, our last 4 quarters and -- our 2017 expected adjusted free cash flow both represent an adjusted free cash flow yield of over 7%.

Additionally, as Tom mentioned, we are increasing our synergy target to $80 million for AEP, up from our original $50 million estimate and the $70 million we increased our guidance to last quarter. Approximately half of these cost synergies are expected to be realized in fiscal 2017 with the remaining in fiscal '18.

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

Thank you, Mark. Last conference call, I talked about the change in our corporate name to Berry Global and discussed the evolution of who we are as a company and where our strategies are taking us in the future. I'm truly excited about our new mission statement: always advancing to protect what's important. Our products protect what people consume, they protect health care professionals and their patients and they protect infrastructure such as buildings, transportation and pipelines.

We continue to reduce our leverage ratio in fiscal Q3 to the generation of predictable, strong free cash flow and earnings growth. As I mentioned earlier, at the end of the June quarter, our leverage ratio was 4x, which is the lowest in the company's history as a public company. Our goal for fiscal year 2017 remains unchanged: we expect to reduce our net debt-to-adjusted EBITDA ratio to below 4x.

In terms of our growth pipeline outlook. We are excited about the organic as well as bolt-on acquisition opportunities within each of our businesses. We believe that our Engineered Materials business will benefit from the growing e-commerce channel as we increase our focus on products serving this market.

Additionally, our HH&S segment will continue to benefit from our leading market positions, faster end market growth in health care and hygiene and higher growth rates within developing countries. To support the growth in China, we, again, were pleased to announce the launch of a state-of-the-art capacity expansion last week.

With respect to Consumer Packaging. While we did not see a change in the recent volume trends, we are excited about the future prospects of this business with the globalization opportunities we have in addition to the positive momentum in our organic volume wins.

Looking forward to the fourth fiscal quarter and the full year results, we are reconfirming our financial guidance for the fiscal 2017 year of $550 million of adjusted free cash flow generation. The details of the guidance were provided by Mark earlier and described on Slide 10.

With regard again to the cost synergy benefit we anticipate from AEP, I'm pleased to report that these actions are proceeding better than planned, and we're increasing our annual cost synergy expectation to $80 million. The synergy increase and anticipated strong financial performance from Engineered Materials should offset demand challenges in CP and earnings pressure in HH&S South America.

Finally, Berry will continue to take the proactive steps necessary to remain a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages. I'm excited about joining the Fortune 500, and I'm confident that the people of Berry will continue to drive positive 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 questions you have. Kayla?

(Operator Instructions) Your first question comes from the line of Edlain Rodriguez with UBS.

Just one quick question on Engineered Materials. Can you give some clarity or more color about what's going on there in terms of the volume drop and how sustainable do you think that is and how quickly do you think the inventory destocking might come to an end?

Listen, thank you for the question. It's very typical that in anticipation of reduced raw material costs that customers, distributors will often make their consumptions reduced in a given month or quarter to reduce inventory in anticipation of those costs. We do believe destocking, though it's difficult to determine the exact percentage, what the component of what happened in Engineered Materials, we feel very good about the longer-term growth prospects in this business and we expect quarter 4 to return to a normal trend consistent with what we saw in the first half of fiscal 2017.

Okay, great. And just one last one on CapEx. So you've reduced the CapEx for this year, is that sustainable going into next year? So what should we think of CapEx for next year?

We still think $320 million is a good normalized number for our CapEx going forward.

Your next question comes from the line of Phil Ng with Jefferies.

Margins in HH&S fell short of what we were kind of modeling. I know part of that -- a big part of that was price cost. Did you see any incremental competition per se? And I know part of this was just how your contracts are set up in Brazil. Can you shore up some of that dynamic next year?

We'll kind of tag team this response. Clearly, we're making decisions on price-volume trade-offs all the time in our businesses, but there's no new dynamic in terms of enhanced competition outside what we've described and happening in South America inside of HH&S. The business continues to be one that we're very, very excited about. All our international regions saw positive volume growth in the quarter. And we also had some modest decline year-over-year within our pipeline corrosion products business. But all in all, we're excited about the recent press release we just made driven by our Asian growth where our capacity has been coming a bit constrained with higher utilization rates. So we're excited about that because it's ultimately giving us access to higher-growth regions in the world, which will help us continue to focus on our long-term goals of 3% to 5% growth.

Phil, it's Mark. With respect to resin, we did have a headwind in the quarter on our pass-through related to contractual arrangements that you referenced in the quarter. And just due to the timing and the movements of polypropylene, we do expect that to reverse to a tailwind in the September quarter.

Okay, that's helpful. And then the synergy capture in AEP has been really impressive. I mean, you guys have owned it for a brief time and you've upsized synergies twice. Where are you finding some of the upside surprise, is that procurement? Cost redundancies? And then going forward -- and, I guess, to capture some of these synergies, do you need to realize any incremental cash cost?

Listen, we're very pleased with the AEP acquisition and our history has been to guide conservatively relative to synergies. But as we said in some of our prepared comments, redundancy in terms of SG&A, benefits in terms of our scale and combining our purchasing power with those 2 companies, and in general, just continue to optimize processes between these 2 businesses has generated very positive results. The teams inside Engineered Materials and the legacy AEP have done a wonderful job collaborating. And you hear us talk a lot about the culture inside Berry around continuous improvement, our teams are committed to drive that improvement inside these businesses and it's not something, as you've seen, that's going to happen over several years. We'll have these synergies realized completely in the 2018 fiscal year and we're very encouraged about the prospects of this business. I think it's important to note, just in general, while we were affected in the quarter by some destocking as we talked about in Engineered Materials, they really had an outstanding quarter, in my view, with operating margins around 19.2%, it's up 110 basis points in the quarter. Obviously, they continue to grow in the legacy businesses while we're integrating AEP and our operating EBITDA was up $58 million -- or 78% compared to the prior year. So this is a business that's really hitting in all cylinders. And frankly, when we talk about growth, we talk about the advent of e-commerce, this is a business that's participating real-time and will participate in a bigger way in the future both in terms of its shrink and stretch film, which is being sold to a large extent through distribution today, but there's I think the enhanced excitement we have in that, today, we are working collaboratively with specialty equipment manufacturers who have proprietary technologies who are sourcing our film and using this film, converted in innovative packaging design to serve the largest e-commerce names in the world. And this is in its infancy, but we are really excited about the prospects for this for Engineered Materials. It's a solid franchise just like our other 2 businesses and one that we feel, again, has strong opportunities in 2018 and beyond.

And Phil, with respect to your synergy and cost question, we have historically averaged about 1:1, so the cost to achieve synergy is usually about equal to the synergy amount. In this case, I think, pretty high probability that we're going to come in under that, that our cost will actually be below the average of 1:1 just given the overlap of the businesses.

Your next question comes from the line of Adam Josephson with KeyBanc.

Forgive me if I missed any of this. Mark, could you talk about why you reduced your CapEx guidance and why it's running obviously a bit lower than normal?

Sure. We had guided to $315 million. Obviously, the weak demand is a component of that as well as just timing. We have one nonwoven asset built into our capital plan annually, I think we've discussed that when we announced the AVINTIV acquisition and just the timing of those investments, so the spending has been slightly delayed from the original plan.

Okay, Mark. And just relatedly, just in terms of the weak demand. Was what happened in Engineered or Consumer more of a surprise? I assume Engineered was the much bigger surprise in the quarter, but can you elaborate at all on how volume was compared to what you were expecting organically?

Clearly, as we mentioned, there definitely was destocking that took place inside the quarter. And frankly, we've seen throughout the space relatively consistently soft consumer demand plagued a number of channels inside the space. And the reality is as we combined these 2 businesses, we're making price-volume trade-offs real-time. That's what we do all the time to optimize profitability inside the space to make certain that we got businesses and pieces of business that are consistent with our expectation in terms of value that we bring and those were the primary components of it. I think the destocking obviously is a component of that industry and the customers we serve, but the reality is, as we said, quarter 4, a period we're at normalized rates -- expecting normalized rates in quarter 4. And as I said, the prospects long term inside that business as well as are really robust. So this is by no means a broken businesses. This is a business that we're investing in, we continue to be very excited about and frankly a business that predominantly consumes polyethylene and is predominantly a North American supplier. And if you think about supply-demand dynamics inside that space and our level of competitiveness, we're bullish on it.

Tom, thanks. Just a couple others. Mark, on working cap this year, are you expecting flattish, I think it was $113 million drag in the 9 months?

Yes, that's correct. Our expectation would be to get back to flat and that's consistent with the prior year as well where we were coming into the last quarter negative and actually we're able to get a positive outcome in working capital here last year.

Tom, just one last one on M&A. I know you talked about bolt-on acquisition opportunities in your prepared remarks. Would it be fair to say that bolt-ons are more likely in the foreseeable future than larger-scale acquisitions or not necessarily?

I'd say the following: we're committed, as we stated very clearly, in 2017 to reduce our leverage to below 4x. We believe that's a number that we can operate successfully in. We are very fortunate in all 3 of our businesses to be in very fragmented industries. And we believe the opportunities to take advantage of what is Berry's core competency in identification of acquisitions as well as successful prompt integration of those acquisitions is alive and well. But I think there's a range of possibilities, and frankly, as we seek out to -- opportunities to expand the business and grow ourselves globally, it's a very large pipeline. When I say that, though, I think it's also important to know, we are very disciplined. That discipline will not change. We're not going to chase companies or valuations that fall outside of our modeling and our belief of what is fair value. So I'm not ruling anything out, but I think it's important to note that our expectation is to operate below 4x and we'll continue to do that inside Berry under my watch.

Your next question is from the line of Ghansham Panjabi with Baird.

First off, on Engineered Materials. Can you just parse out the volumes between AEP and the legacy Berry assets? And Tom, were you disrupted in any way by some of your customers talking about a malware incident, particularly Mondelez, and the impact on shipments, et cetera? Do you see any impact from that?

Okay, Ghansham, with respect to the first question, we haven't detailed out the volumes by business and some of that becomes more difficult to do as the business becomes integrated. We're taking orders from both sides of the business, so we haven't broken that out. I will say that it was probably slightly larger in the heritage AEP business. They had a very strong June 2016 quarter.

Relative to malware, nothing noteworthy that we would point to as rationale for a volume decline, by no means.

Okay. And then my just second question in terms of your leverage philosophy by year-end at under 4x. How does that change your view in terms of capital return to shareholders?

We think we're in a terrific position. As you heard from Mark and what's been consistent with our history is our expectation to improve free cash flow generation inside the company. We have many opportunities in terms of how to deploy that cash, and we know we're going to keep all options open. The first priority is to get to the target of below 4x by the end of '17 and then we'll reevaluate at that time based on market circumstances. But we think it's great that we got multiple levers we can pull, all driven by what we think is going to be best for shareholder value.

Your next question is from the line of Anthony Pettinari with Citi.

Just following up on an earlier question on CapEx. Is it possible to say what portion of the $50 million gets pushed out into 2018 versus what portion has maybe actually been avoided?

I think it would be difficult to try to quantify that. But again, we don't expect that $320 million going forward to be impacted. So this year, we'll be able to go under is our expectation and $320 million should allow us to achieve our long-term growth targets going forward.

I want to just piggyback on Mark's comment there. Throughout the company, obviously we're a large portfolio of businesses. Our teams are highly sensitized to the fact that we're going to be very efficient in our use of CapEx and fund and invest businesses with absolutely the best growth propositions and likelihood of success. And that ultimately, areas that have demonstrated growth that might not meet our expectation, they're going to be more heavily scrutinized and we're certainly going to be focused on reducing that capital intensity. So it's an active process throughout the entire portfolio that's real-time and it's based on collaboratively what the business opportunity and what the commitment from our end customers are in terms of how we deploy that capital. So there's a lot of pieces to it, but we're highly sensitive to it and focused on making certain it's the absolute best use of our funds for the best return for our shareholders.

Okay, that's very helpful. And then just given the pull forward in the TRA payment, is there any change in the timing or how you plan to use the AVINTIV NOLs? Can you just remind us when you can realize those? And Is it $50 million per year Or how they would be distributed?

Yes, that's roughly the right order of magnitude and this does not impact the timing of utilization of those. What this does is, effectively, this year our cash tax liability including the TRA is going to be in the neighborhood of $200 million, just under that. And our current expectation would be a similar amount for fiscal 2018 including that TRA liability.

Your next question comes from the line of Debbie Jones with Deutsche Bank.

You mentioned doing well in international markets and I was just wondering if we could focus on Brazil a bit, and if you could talk about how your exposure was there and how it progressed through the quarter and what you're seeing kind of in August?

It was difficult to hear you. Can you repeat that, Deb, do you mind?

Yes, sure. I'll take it off speaker. I was wondering if you could talk a bit about Brazil because you mentioned you had growth in your international markets and I think there was some concern about the health of that market. So I was wondering if you could talk about how Brazil progressed through the quarter and what you're seeing in August and July?

Yes, I think that region, again, has been improving sequentially and our expectation would be for it to continue to improve. Brazil is a big component of our South America region and so obviously it impacts the results of that region. And again, we still think it's a great region for us long term and we've seen sequential improvement in each quarter.

Deb, we're not declaring victory by any means right now, but we do believe it's bottomed out. And as Mark said, that we'll begin to see positive trends going forward inside that region. Again, the growth dynamics for South America are still very attractive to us in our nonwovens business, and we believe that with our size and the scale, that this will be positive component of our portfolio in the future for sure.

Okay. And just second question, just to follow up on the comments you made about customers potentially delaying ahead of resin moving down. Is just conceptually makes sense, but it does seem like it's maybe a little bit bigger than what we've seen in the past and then -- does that relate to the, I think, the lower piping pipeline that you talked about? That just wasn't clear to me.

I think when you think of Engineered Materials there's really 3 components. One, overall, we had soft consumer demand, which we saw throughout really the business as a whole. The destocking was a component. And the other component was the price-volume trade-offs when we merged product lines with the legacy AEP business, that was a component of it for sure. And I think, as you heard from Mark, inside that business, it was also being measured against a very strong comp in 2016 on the AEP side that's the business we're working through. I reiterate that this is a business that is very, very solid and we clearly believe that we'll continue to return to the type of demand profile you saw in the first half of 2017. And I think longer term, we believe that the opportunity both in terms of our flexible business as well as our rigid business is very exciting in terms of e-commerce and some of the trends that we're seeing there. So healthy space, difficult quarter from a volume perspective, but I think the operating results were very solid in the quarter, exceptional, in fact.

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

Thanks for the details, so far. I guess, my first question broadly, Tom and Mark, I just want to nail down a couple of things in terms of volume. To Debbie's question earlier, are you actually now seeing an increase in Brazil in volumes in HH&S? And then, overall, in terms of Engineered Materials, you say you're expecting an improvement in volume in the fourth quarter. Is that what you're actually seeing to date? And then can you give a little bit of color on the new products, the $50 million, I think you said annualized revenue pickup that you have starting in the first quarter -- excuse me, in the fiscal fourth.

I'll start first with the Consumer Packaging conversation. We're not going to give specific details because frankly some of that business has just been awarded and ultimately the ink's become in the process of getting dry. At the appropriate time, we'll make that communication. But I will tell you $50 million on a secured business with long-term contracts from any given quarter is a significant milestone for that space and we're excited about it because there are number of growth prospects that we'll continue to pursue there. And let me just go into just a brief amount of detail. The strategy is very simple in Consumer Packaging. Difficult space, changing trends in terms of consumption, we get that. And obviously, you see that from many of the competitors. We're going to protect our core business. We're going to invest in advantage products inside that space. We're also going to ultimately focus on how we can do customer -- commercialization with customers around innovation. And we're in the process real-time of exploring the opportunities to expand this business internationally, specifically in China right now where teams are deployed and we're encouraged by the progress that they make right now. By no means, ready to declare victory, but I think there's a good strong momentum change in that business not based on word, but based on the success of these product closes. And I think the kind of the protect-and-pivot strategy they employ and they're pivoting around product that they feel and we've seen are advantage, where we're winning, deploying more resources against those and ultimately being more judicious in the application of capital in the areas that are showing small or less growth, so that's a component for CP. On South America, clearly, I use the analogy, if you're a fisherman, it's (inaudible) bouncing around the bottom of the creek bed right now, and that's really where that we do see improvements and trend lines going into quarter 4. They're subtle, but definitely we feel much more confident about where it's at and that the trend is more likely positive than negative in the near term for South America. Mark?

Yes, and George, I want to clarify something on CP. I apologize, you broke up a little bit. That revenue will not start impacting us until the last half of fiscal '18 and it will be more a run rate basis in fiscal 2019, just want to make sure that's clarified. And then just for Engineered Materials to put in perspective the strong quarter last year. As a reminder, AEP's revenue is a little over $1 billion a year and they did almost $300 million. It was like $295 million in the June quarter in a business that is not been a seasonal. So just to put some parameters around the size of that quarter last year that we're comparing to.

Okay. My other question is just bigger picture. Tom, if you think about your customers, and obviously they vary across your segments, what is the one or two things they tell you that is most improved about Berry given the combination of assets that you put together over the last couple of years? And what is it they tell you they still feel Berry needs to improve upon to become the company you want to be.

Listen, I'm going to start with how we judge ourselves and ultimately I'll say this and how I expect our customers to. If there's one thing we focus on relentlessly is continuous improvement and speed, that's all we focus on: how we ultimately continue to drive incremental value to our customers every day, think outside the box, anticipate the unmet need and do it in a faster pace. And that's -- when we think about the business, we think about how we align our incentive comp structure. It's all around motivating our people to drive change faster and have a greater grasp of the unmet needs inside the spaces that we play in, and I would say that's our objective. And the reality we're a large company today, but we want to act like a small, incredibly nimble company. That's we measure ourselves against, that starts with me, by the way, in terms of the decisions I make, communications that I have internally and externally and how we deploy resources. So it's a long-winded answer, but that's -- it's consistent. We, and they, expect us continue to evolve and drive speed and change that much fast because the markets that we're playing in are changing and morphing that much faster, so it's a component of our survival. So I'm betting on our team, I'm betting on the Berry legacy of performance and track record of success we've had and we'll continue to deliver on that.

Your next question comes from the line of Brian Maguire with Goldman Sachs.

Tom, a lot of questions on the volume weakness in Consumer, in Engineered Materials, but HH&S came in a little bit softer than what we thought as well. I think you reiterated the long-term growth rate expectation for 3% to 5%. When do you think we might get to the bottom end of that range? And anything in the quarter that you would call out? I wouldn't think there'd be a lot of destocking there, but just any unusual trends you saw in the quarter there?

Nothing unusual right now. We still continue to be bullish on that space. We obviously announced the addition of capacity in China based on the demand. We were pleased, in aggregate we saw about 1% volume growth increase. Difficult to present -- predict when we'll get to the 3%, but those teams remain confident. We're investing behind the macro trends in the space that we think are positive: aging population, rising birth rate, developing regions of the world, higher expectations in terms of health care and trends that are all migrated from North America to some developing regions of the world around health care and hygiene as well as specialty products. Like our filtration system. So we feel good, but no doubt about it, the volume growth at about -- in the nonwoven space in aggregate where we saw about 1% increase. But certainly, we're all focused on how we drive that to the 3% to 5%. The biggest component obviously is continuing to take advantage of the higher growth rates internationally. so we're being very creative in China with capacity utilization, demand load building in anticipation of new capacity coming onstream with the new announcement that we made just last week.

Brian, the only thing I would add is that segment did report in the first 2 quarters in the fiscal year a plus 2 and a plus 3, just as a reminder. So this quarter was actually the -- was the outlier in terms of being flat year-over-year.

Got it. And then just one back on Engineered Materials. Would you say that the AEP business is more prone to destock-restock cycles than the legacy Berry business was? Or this is just sort of an across-the-board thing you were seeing?

I think it's too new in the marriage to say that the legacy business was more prone to it. It's a component of a distribution-based business. Remember that over 60% of the business in Engineered Materials goes through distribution. So their ability to ultimately lever demand up and down real-time, it happens. It's a component of the distributor's value proposition. So I think it's a component of space itself. We're really pleased that we're returning in quarter 4 what we feel are normalized rates, and again, we've been very direct with our optimism in the space long term.

Okay. Just one last one, if I could sneak in on -- for Adchem. I know it's a small bolt-on deal, but should we expect sort of similar pre and post synergy margins as you got on AEP on the $40 million of sales there?

Yes, obviously, the scale of it is a little different, but yes, we're very excited about that transaction and certainly expect synergies from that transaction as part of this. And the margins are consistent with the rest of our business.

The Adchem is a company I've known for many, many years. We're excited to have it in the portfolio. It makes for what is already a very strong tapes business inside of Engineered Materials even stronger. And we believe ultimately the dynamics in terms of weight reduction and some unique aspects of the specialty portfolio that they bring to the table just makes our tapes business that much stronger, and we're a leader in that market space today. So really excited about that one. Glad we could pull that off.

Your next question is from the line of Mark Wilde with BMO Capital Markets.

Tom, I wanted to just talk a little bit about margins in Engineered Materials. If I recall, 5 years in front of the IPO, you were talking about getting sort of Engineered Materials to kind of mid-teens type margin and you've gone well beyond that. What have been the 2 or 3 keys on that?

Materials science is a key component. That's a business ultimately that our formulation know-how ultimately can incorporate different combinations of raw materials to create feature benefits, and in some instances, they maybe lower-cost raw materials giving those types of feature benefits. So we have a very active program on or around that. That's one. Secondly, scale. This is a business predominantly driven by polyethylene. We think long term, obviously, the dynamics for PE in North America are very, very favorable with us being a significant buyer of polyolefins. That advantages us. And equally important as those two, we have been acting as a leader in that market space in terms of managing price-volume trade-offs every day to maximize value in terms of margins where we need to and I think the team's done a good job. Not to mention that has grown. We have a business that is taking advantage of a substrate conversion, benefiting the shrink film and stretch film business and it's also I think long term going to have a terrific opportunity to participate even in a bigger way in e-commerce space.

Okay. And then just following up. I wondered if you could talk a little bit about M&A and sort of any predilections toward kind of offshore deals versus entry into some other alternative markets? And then also whether there are any other pieces of the portfolio that you might look at culling?

Wouldn't talk about any pieces of portfolio that we're culling, but we make decisions and take a look at our portfolio all the time. We, obviously, as a company, review our results, we review the short- and long-term performance and ultimately if we believe any pairing would have any value to shareholders, that's one. In terms of the opportunities for acquisitions, the pipeline is very robust not only domestically, but internationally. Again, we have a proven model in terms of M&A that we'll deploy. But clearly, in North America, there's plenty of opportunity, I think, and our strategy has just been to buy businesses that ultimately can add value to the portfolio that use light materials and that we believe we ultimately can properly synergize. And so where they exist in North America we'll take full advantage. The model's a little bit different internationally for us. Those opportunities are going to be more growth oriented as opposed to synergy oriented and we take that into consideration with an even sharper pencil, if you will, to make certain that we're making a prudent position that we can execute against. Clearly, we want you to know that as we think through those things, our commitments are real in that we're ultimately able to deliver on the expectations. So very prudent in that analysis. But the opportunity set, it's international right now, it's throughout the world, but there are different models by which we get those deals done based on both cost synergy realizations as well as growth.

Your next question is from the line of Arun Viswanathan with RBC.

Just a question on Engineered Materials again. So understanding that there was some destocking, maybe is it possible to identify if those occurred in any particular end markets? And if so, we've seen this before depending on resin prices. So if resin prices tick back up, would that imply that there would be an acceleration of demand and potentially a pre-buy in those verticals?

Certainly, possible. The majority of the destocking would have taken place inside the shrink and stretch businesses predominantly. That's where it occurred. And beyond those, the counter of that could also be true. If people are ultimately buying ahead of anticipated raw material increases, that's certainly a possibility.

Okay. And on the cash flow. I know you said you weren't changing the guidance there and your cash taxes should remain at around $200 million next year. So when you look at the bridge next year, you have some extra M&A gains coming. What else would drive free cash flow for next year above the $550 million level that you would achieve this year?

Yes, I think Arun, you got it right. Certainly, the benefits from the acquisition as well as not having some of the onetime costs that we had this year associated with getting those acquisitions completed and integrated, that should be below our number as we move into fiscal 2018.

And then one last one on M&A, if I may. The nonwoven industry still has several players in it. Would you look to consolidate a few more of those over the next several years if those opportunities come up? Or are you more focused in EM and other areas?

We have 3 outstanding businesses. We take a look at how we ultimately can increase shareholder value in all 3 of those. M&A is a component of it and it will be in all 3 of the businesses.

Your next question comes from the line of Jason Freuchtel with SunTrust.

Have you had any discussions with your resin suppliers yet about what the expected impact of additional supply will have on their pricing? And if the additional supply could contribute to higher margins for Berry?

We talk with our resin suppliers every day. It's an active ongoing conversation. Clearly, there's new capacity coming online in 2018. I wouldn't comment on in terms of what the value would be specifically other than we're a very large buyer of both polyethylene and polypropylene, probably largest in North America, and we think that's ultimately a good thing for the industry. And one thing for this group I think is important and we look at, the opportunity -- 80% of our business today resides in arguably is going to be the lowest cost manufacturing region in the world, driven by the advent of the shale gas business. And what that's doing ultimately to our raw material prices both I think it's going to be a good thing for the manufacturers of those raw materials as well as the converters. And I think Berry's scale advantages itself not only in the near term but long term. I think this is a good long-term trend for us. So we're really excited about it. We think that, while we continue to have the objective to globalize the business to give us diversity and access to higher growth in terms of the organic demand, our base business and where we're located, we think, puts us in a really good place for many years to come.

Okay. And can you remind us how much the onetime cost to achieve synergies are expected to be in fiscal 2017?

We had a total of $60 million included in our guidance for fiscal 2017, which includes both the integration costs, cost to achieve synergy as well as the cost to get the transaction completed with third-party advisers.

Your next question comes from the line of Chris Manuel with Wells Fargo Securities.

I'll try to ask 2 quick ones. But first, is the capacity add that you've announced for nonwoven material in China, how does that impact the whole system? I was thinking at one point in time you guys were leaning more towards buying some capacity in China and adding capacity in other regions of the world. But kind of walk through the process, are you able to then rebalance the system? Does that free up in other parts of the world? Or kind of what are you thinking there?

Yes, the capacity we're adding in China is new technology with a new converting capability that will have specific market end uses and we've also secured letters of intent on some of that demand that will run through that line. So the supply-demand trade off we're comfortable with because of the letter of intent tied to specific volume and output in that equipment. We're also saying that -- we're not saying that we're not going to do M&A. As those opportunities make themselves available, we'll consider them because we're a leader in that space, we expect to continue to be a leader in that space and we'll invest and act like a leader in that space because the growth dynamics are that strong for us right now. But certainly, China is unique in that it's a contemporary new technology for Reicofil that ultimately is going to give us access to certain markets that we're excited about and we've got some letters of intent around that capacity.

All right. And then the follow-up question, I guess, maybe more for Mark. Mark, what's left that you anticipate as an outflow under the TRA in 2018? Is that kind of $50 million, $60 million? And I guess, the real big picture question, though, is -- and I know you're not on the spot to want to give us guidance for 2018, but with some of the TRA being accelerated, I'm guessing with some of this capital going to be deployed into China and CapEx goes back up towards $320 million, how should we think about all the puts and takes between 2017, 2018 and with the extra synergies, with the extra not cause to go get synergies and a full year contribution from AEP, can 2018 cash flow directionally be up versus '17?

Yes, I think, Chris, great question. Again, CapEx, we would expect to revert back closer to the $320 million normalized number, assuming markets, demand, all those things, play out as expected. And the tax, again, we would expect to be similar in the $200 million range. And you mentioned the tailwinds that are coming. And again, I would just highlight the whole thing by saying our objective is to continue to grow our free cash flow every single year without giving specific numbers around 2018 yet, but we will on our next call certainly.

For all those participating in the call, I really appreciate it. We are very excited about the future prospects for our company. Thanks for taking the time to join us this morning. Thanks, everybody.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.