Berry Global Group Inc (BERY) 2017 Q4 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 earnings conference call. (Operator Instructions)

Mr. Dustin Stilwell, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Berry's Fourth Fiscal Quarter 2017 Earnings Call. Throughout this call, we will refer to the fourth fiscal quarter as the September 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 today, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question-and-answer session. (Operator Instructions)

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

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

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

Thank you, Dustin, and good morning, everyone. This morning, we'll be discussing several topics, including our fourth quarter and full fiscal year results, highlights from our 3 operating segments, our outlook for fiscal 2018 and more detail on our recently announced acquisition of Clopay. Afterwards, we'll be happy to answer any questions you may have.

As I conclude my first fiscal year as CEO of Berry, I'm very pleased with the performance and strategic position of our company. We delivered on our key strategic objectives such as achieving our long stated leverage goal of less than 4x, successfully integrating the AEP acquisition while exceeding our synergy targets and overdriving our free cash flow guidance. I would be remiss not to personally thank all of our investors for your continued support of Berry. But most importantly, I want to sincerely thank our more than 23,000 employees whose dedication is the key driver for our success. Their focus, hard work and commitment to our customers, day in and day out, is the backbone of our company.

Now turning to Berry's financial results for the quarter on Slide 3. Revenue and operating EBIT were both records for any September ending quarter and both were 16% above the prior year at $1,881,000,000 and $350 million, respectively. Adjusted net income was $0.87 per share, an increase of 19% from Q4 2016, and we generated a quarterly record of $278 million of adjusted free cash flow. I'm pleased to announce that our leverage at the end of fiscal 2017 was 3.8x, which was the lowest in the company's long history. This achievement was accomplished by our ability to generate consistent and dependable free cash flows year after year. We exceeded our fiscal 2017 adjusted free cash flow target by $51 million, finishing with a fiscal year record of $601 million.

As a baseline in our first year as a public company in 2013, our free cash flows totaled $238 million. Since then, we've provided annual free cash flow guidance and have been able to exceed it every single year, generating a compounded annual growth rate of over 25%.

Two acquisitions that we closed in 2017, AEP Industries in January and Adchem Corporation in June, were important contributors to our sales and earnings growth in the quarter and for the full year. The acquisition and integration of AEP into our Engineered Materials division has exceeded our expectations, as the results, to date, have validated our expectations of the synergy potential and scale advantages of the combined businesses. We achieved $80 million of annualized cost synergies overdriving our estimate of $50 million at the time of deal announcement. The employees that became part of Berry have played key roles in the integration and achieving these synergies, while providing high-quality products and service to our customers.

In 2017, we achieved an important symbolic milestone as we were ranked in the Fortune 500 list of America's largest public companies. From our humble beginning in 1967 in Evansville, Indiana with 3 employees and 1 injection molding machine, we've grown to more than 130 facilities around the world providing great jobs to over 23,000 employees. Berry has emerged as a global leader in providing value-added customized protection solutions for our customers around the world.

As many of you are aware, during the September quarter, hurricanes had a significant effect on oil, gas, transportation, retail and consumer markets across much of the United States. In our experience, the effects of this storm on our industry were the worst in recent memory. We had many employees and their families who were greatly impacted by these events. While there's a lot of property damage and work to be done ahead, the good news, our employees are safe. In Victoria, Texas, one of our Engineered Materials facilities was directly in line of Harvey and suffered substantial damage to the roof and structure. In addition, the facilities of many of our suppliers were also impacted by Harvey as well as Irma. Fortunately, Berry was well positioned to leverage our broad-base of facilities to minimize any short-term supply disruption to our customers.

Turning now to our highlights by segment. We had another strong quarter in our Engineered Materials division with EBITDA margins improving by 200 basis points to 19.4% in the quarter, including the integrated results from our acquisitions. The division benefited from synergies, including lower operating costs, SG&A reductions, sourcing advantages and higher market prices. Fines, we're lower as expected while we took steps to rationalize certain lower-margin business acquired from AEP. Net of those steps, the customer demand for products in our Engineered Materials division is growing 1% to 2%. As we closed on AEP in January of 2017, the year-over-year sales and earnings contributions will benefit the first half of fiscal 2018. We remain positive about the fundamentals of our Engineered Materials segment as reflected by their outstanding results.

Within our HH&S division, nonwoven product volumes grew during the quarter driven by growth in international regions and globally for our health care products. In Asia, our nonwoven business continues to experience growing demand in high value-added segments such as health care and hygiene and our assets continue to operate at high utilization rates. To support our customer growth in Asia, we announced last quarter the plan to add a state-of-the-art nonwoven line in China and the project remains on track.

Our Consumer Packaging division continued to face the same soft demand environment that we've now seen for several quarters. Our strategy in Consumer Packaging continues to focus on optimizing price, mix and costs. We've taken actions to reduce our cost structure and to align our resources consistent with consumer demand for packaged goods. These changes have helped mitigate soft volumes, and longer term, we remain confident that our cost actions and momentum with new products will generate improvements in the business.

Now I will turn the call over to Mark, who will review Berry's financial results in more detail, and then I will come back to summarize our strategy and open the call for questions. Mark?

Thank you, Tom, and good morning, everyone. I'd like to refer everyone to Slide 4. As Tom previously mentioned, Berry posted record net sales for any September quarter of $1,881,000,000, which was up $263 million over the September 2016 quarter, primarily due to incremental sales from the AEP acquisition that closed on January 20, 2017. From an earnings perspective, we achieved the September quarterly operating EBITDA record of $350 million, resulting in a margin of 18.6% of net sales and was an increase of $49 million over the prior year.

Acquisitions and organic sales volumes increased our operating EBITDA by $21 million. Additionally, positive product mix and price/cost spread added $18 million, while cost-saving initiatives and productivity improvements in operations and SG&A contributed another $6 million.

Now turning to Slide 5. Net sales for the full fiscal year 2017 was a record of $7,095,000,000 compared to $6,489,000,000 in 2016. This 9% increase was primarily due to the acquisition of AEP. Operating EBITDA for fiscal 2017 also came in at a record of $1,327,000,000. This $117 million or 10% increase in operating EBITDA from 2016 was a result of contributions from acquisitions, a reduction in operating expenses and an improvement in our product mix and price/cost spread.

Looking at the results of our operating segment starting on Slide 6. Net sales for our Engineered Materials division for the quarter was $686 million compared to $408 million in the prior year quarter. The increase was 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 a 3% decrease in organic sales volumes. The decrease in sales volume in the quarter was a result of 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.

Operating EBITDA in our Engineered Materials division was $133 million, representing an increase of $62 million or 87% over the prior year quarter. Acquisition volume for the prior year quarter contributed $25 million. Product mix and price/cost spread provided an additional $29 million, along with lower operating and SG&A expenses totaling $6 million.

Turning to Slide 7. Our HH&S division generated net sales of $596 million in the quarter, which was modestly higher than the September 2016 quarter. A favorable impact from currency translation, primarily related to the euro, was partially offset with lower selling prices due to pricing mechanisms in South America and base volume declines in heritage Berry businesses.

Our nonwoven products had a 1% increase in organic sales volumes, driven by our health care products. Our HH&S division recorded $106 million of operating EBITDA in the quarter compared to $117 million in the prior year quarter. The decrease in operating EBITDA was primarily a result of a $12 million decrease in product mix and price/cost spread.

As discussed on our last earnings call, a combination of factors, including inflation, currency and consumer demands, has continued to put pressure on our South American HH&S business. Despite these macroeconomic pressures, we remain confident in the growth dynamics of the region and our entire HH&S segment.

Next, as noted on Slide 8, net sales in our Consumer Packaging division decreased by 3% compared to the prior year period resulting from lower volumes, partially offset by an increase in selling prices due to the pass-through of higher raw material costs. Operating EBITDA was relatively flat for the quarter at $111 million.

For the full year and fiscal fourth quarter, sales and earnings were lower than last year, but the year-over-year gap narrowed in the last 2 quarters. Demand for overall packaged food products in North America remained soft, and we have taken proactive steps to diversify our business portfolio. Berry will continue to maintain its low-cost position while increasing our focus on markets and geographies where future growth opportunities are expected to be better in our Consumer Packaging business. Our culture is and has been focused on continuous improvement while striving for operational excellence as we have historically demonstrated.

Slide 9 provides a summary of our income statement for our fourth quarter and fiscal year 2017. Overall, operating income increased by $48 million or 32% over the prior year quarter. This increase was due to the items previously discussed that drove the $49 million operating EBITDA improvement. Interest expense was $66 million compared to the prior year expense of $69 million. This $3 million decrease is primarily a result of interest rate reductions we have achieved from proactive actions to lower our interest costs from completed refinancings.

During the year, we continued to voluntarily apply our free cash flow to reduce debt and made over $600 million of early principal payments on our term loans, at the same time as refinancing $4 billion of our term loans producing an annual cash interest savings of over $20 million.

Our effective tax rate was 24% for fiscal 2017. Based on current tax regulations, we continue to believe that our effective tax rate going forward will be 32%. 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, since our IPO, the company was a cash taxpayer with a 15% discount. We will pay $35 million in the December 2017 quarter, and we'll then only have $34 million remaining on this agreement that will be paid in fiscal 2019 and beyond. Our fiscal year 2018 cash taxes estimate, including the $35 million TRA payment as well as federal state and international taxes, is $210 million.

In wrapping up the income statement, our net income for the quarter increased 43% from Q4 2016 to $110 million compared to $77 million in the prior year period. Adjusted diluted earnings per share increased to $0.87 in the current quarter, a 19% improvement from the September 2016 quarter of $0.73. For the full fiscal year, our adjusted diluted earnings per share increased to $3.07, a 21% increase over the prior fiscal year of $2.53.

Next on Slide 10, the company generated a record $395 million of cash flow from operations in the quarter, up 36% or $105 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 capital expenditures and payments made under the tax receivable agreement was also a record for any quarter at $278 million, and we achieved a fiscal year record of $601 million. Using our September 29 market capitalization, our $601 million of adjusted free cash flow in fiscal 2017 represents an 8% adjusted free cash flow yield.

Our financial guidance, including underlying assumptions for fiscal year 2018 is shown on Slide 11. We have targeted our fiscal 2018 adjusted free cash flow at $610 million, which includes $965 million of cash flow from operations, partially offset by capital expenditures of $320 million and was reduced by the $35 million tax receivable agreement payment that will be made in the first fiscal quarter. This estimate assumes no impact to working capital, constant currency rates at the end of fiscal 2017 and flat overall volumes.

Cash interest is estimated to be $250 million, which assumes debt paydown throughout the fiscal year, and we are also assuming other cash costs to be $40 million related to acquisition integration expenses and cost to achieve synergies from the AEP and Adchem acquisitions.

Our fiscal year 2018 free cash flow guidance and assumptions do not include our recently announced acquisition of Clopay that Tom will discuss in more detail later in the call.

As the year is starting out, there has been some near-term inflationary pressure on raw materials and transportation costs versus the start of last year. We're taking steps now to increase productivity and reduce our costs and have implemented price increases to offset this pressure. I'll remind you that Berry has more than 70% of our revenue on contractual resin pass-through agreements. These agreements result in a modest earnings headwind due to timing lag when resin costs increase and a tailwind when prices fall. We would expect the recent raw material increases to result in headwind on working capital at the beginning of our 2018 fiscal year with market research expecting prices to fall as the year progresses. We continue to believe that the long-term dynamics of the resin markets will be an advantage to Berry.

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

Thank you, Mark. Berry has a long and successful track record of growing revenue, earnings and free cash flow and has strategically diversified our product portfolio over the last several years into higher growth markets and regions. Going forward, we will continue to focus on locating and identifying both organic growth and accretive acquisition opportunities within the highly fragmented markets in which we operate, while continuing to make volume price tradeoffs across the portfolio in an effort to maximize the company's earnings. This strategy has resulted in decades of success for our partners, shareholders and employees.

With respect to acquisitions, our pipeline continues to be very robust with global opportunities in each of our 3 segments. With our leading portfolio of products, touching consumer and industrial markets, we feel there is, and will be, ample opportunity to continue to find accretive acquisitions while applying our proven, conservative and disciplined approach. Our successful track record and strategy to uncover and acquire businesses with light materials along with our ability to successfully integrate these businesses in a timely manner and efficiently realize maximum synergies is a core competency of Berry.

On Slide 12. Earlier this morning, we announced the definitive agreement to acquire the Clopay Plastic Products Company, Inc., a subsidiary of Griffon Corporation for $475 million in cash. Clopay is a leader in the global supply of printed breathable films as well as an innovator in the development of elastic films and laminates with product offerings uniquely designed for applications using a number of markets, including hygiene, health care, construction and industrial protective apparel. Clopay has nearly 1,500 employees with a footprint serving markets across the globe with locations in the United States, Germany, Brazil and China. We are very excited about the Clopay team becoming part of the Berry family. Clopay's fiscal 2017 results delivered $461 million in sales and $53 million in operating EBITDA.

Turning to Slide 13. I want to highlight a few of the top strategic reasons why this acquisition will create incremental value for our shareholders. The combination of Clopay with Berry's HH&S division strengthens Berry's position within the faster growing Health & Hygiene markets with 7 facilities located throughout the world. Clopay broadens our presence as a global supplier to many of the leading consumer and industrial product manufacturers, which Berry already supplies with other products. Clopay will give us new capabilities in the production of technical films where Clopay is a known innovator with patent protected breathable hygiene products. Together, we will be able to optimize complementary production capacity, share technical resources, reduce material and converting costs and better serve our domestic and international customers from an expanded footprint within a portfolio of products that is one of the most comprehensive in the industry. We estimate we will achieve annual cost synergies of approximately $20 million, which should be realized over the next 2 years. The purchase price, including our expected cost synergies along with the tax basis step-up value, represents an adjusted EBITDA multiple of below 6x. We will provide updates to the market on our first fiscal quarter call in early February.

Regarding organic growth. I'm very excited about our momentum and the pipeline as we have made significant progress over the past quarter in each of our 3 segments and expect our results to reflect this positive momentum in the back half of 2018. We believe that our Engineered Materials business will continue to improve with our product protection and low security solutions as we address increased demand with our traditional distribution partners and growth markets such as e-commerce.

In addition, our investments in high-performance films are improving our product mix as we grow with converters and flexible packaging through substrate conversions in attractive end markets. The recent acquisition of Adchem has expanded our tape products offerings and enabled an effective commercial alignment to take advantage of growth in the automotive and construction markets. Furthermore, the continued trend to move from other substrates such as metal banding and corrugate to competitive new film technology should benefit the Engineered Materials segment in the years ahead.

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 such as China. We continue to be excited with our growth opportunities across our portfolio of applications, such as hard surface disinfectant wipes and specialty air filtration.

In our Consumer Packaging segment, we're excited about the globalization opportunities we have in addition to the positive momentum in our organic volume wins in North America we spoke about on our last earnings call. A key priority as we design new products are focused on market demographics such as better connectivity with millennials and seniors. Designs that enhance transparency, sustainability and softer touch are key features desired by these demographics. We will continue to uncover safer, cleaner, fresher opportunities to replace other substrates such as glass, paper and foam, offering a compelling value proposition towards new market needs while ensuring overall cost effectiveness.

Finally, Berry will continue to take the 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 confident that the people of Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important.

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

(Operator Instructions) Your first question comes from the line of Tom Narayan, RBC Capital Markets.

Congratulations on the deal. I -- my question has to do with volume expectations into 2018. I know your free cash flow guidance calls for flat volumes. You had the Engineered Materials destocking last quarter, consumer products weakness in industry volumes, and I know Nielsen is reporting that comp's easing there, HH&S is growing. Just curious what is behind your view on flat volumes for 2018 amidst the down 2% in fiscal 2017.

As I just stated in the opening comments, we remain excited about all 3 of our divisions. Our HH&S division continues to be very well positioned in a global business that we think is well positioned. Our Engineered Materials business as we talked about has continued to be a leader in their space. They have made volume price tradeoffs. But net of those actions, consumer demand continues to grow 1% to 2%. And inside of Consumer Packaging, we had a very good win rate with a $50 million in new closes, as we mentioned before, but the opportunities in terms of addressing some of the new consumer trends that we're seeing some traction on and around do excite us. We also mentioned in our opening comments relative to the globalization, by no means are we declaring victory. But our target position and the business that we are closing internationally around Consumer Packaging meets our expectations from a margin perspective, and the pipeline continues to build. But again, we've made -- we're by no means declaring victory there, but we feel very, very good. And frankly, as leaders in this space, we believe this approach has been instrumental to allow us to generate the kind of growth rates that we have in this business over our 50-year history.

Your next question comes from the line of Scott Gaffner, Barclays.

Tom, just a quick follow-up there and then I'll get to my question. So what are the -- what sort of volumes are you expecting by segment for 2018 that rolls up to the flat volume for the total company?

We really -- the long-term growth objectives that we stated in the prior calls have not changed. We're still expecting 1% to 3% for Consumer Packaging, Engineered Materials at 1% to 3% and HH&S at 3% to 5%. Again, the 3% to 5% at HH&S is really indicative of our opportunity that we're investing in to increase our footprint there, which is a work in process.

Okay. And then Mark, if I look at the working capital, you had $55 million of positive working capital performance in the fourth quarter, which was obviously much better than the flat guidance you'd given before for working capital. Can you talk about sort of what drove that? And then on a go-forward basis, the flat working capital ended 2018, is that a bit of a stretch given some of the gains you've made in the fourth quarter? Or what sort of resin assumptions do you have included in that working capital assumption?

Okay, sure. Yes, in terms of working capital in the overdrive there, we've been -- obviously, our teams work diligently to do that on a regular basis, and we've been fortunate, I think, gosh, in each of the last several years. We've had a positive number there while targeting 0. Part of that tailwind, quite honestly, has been the volume. The volume hasn't been that strong, and so the working capital needs have been less. I would say also there was a modest amount of impact from taxes, but we would expect to have that same impact next year so it wouldn't be a year-over-year headwind. It would be a working capital benefit that we would get this year that would repeat going forward or remain the same, I should say. And going into '18, I think we'll start off the year, as we talked about, with resin pricing putting some pressure on the short-term working capital, and then we would expect that to bounce back as the year progresses.

Your next question comes from the line of Tyler Langton, JPMorgan.

Just had a question on Clopay because the margins look -- excluding synergies, look to be like around 11.5%, which are a little bit below the 19% rate for HH&S. Can you just talk a little bit about what -- that mix, is it cost, what kind of drives those margins and kind of what the volume growth Clopay has seen?

Yes, I think there is certainly a portion of both. We think the scale that Berry provides, is consistent with our past acquisitions. We've achieved about 5% of sales -- of target sales as cost synergies. So i.e., taking a company that's making 11% to 16% in that example. In this particular case, given the international element of the business as well the carve outs, we do expect that to be modestly lower than our average of 5% of revenue per cost synergies. And then that remaining delta that you referenced, I think mix would be a fair reason for why and I think part of that being the international component driving that overall number down due to the international mix element.

Got it. This is a quick follow-up, just for CapEx. The $320 million that you talked about for the company going forward, does Clopay increase that? Or what sort of CapEx should we assume for the deal?

We're very fortunate, this acquisition, Griffon and the parent company, as well as the operating business, that this was a well-invested business, and so we don't expect a significant capital need going forward with that business. Obviously, there will be some incremental capital to maintain the equipment and facilities, but we don't expect that to result in a material increase to our capital plan going forward.

Yes, that capital investment inside of Clopay has occurred over the last several years. And as we said in our comments, we're excited this -- the converting capability that we purchased from Clopay, we believe is advantageous to the legacy Berry portfolio as well, along with the other items we noted in terms of the deal rationale. So very excited about that. I think their management team did a terrific job in preparing this business and setting this business up for future growth. So we're fortunate in that regard.

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

This is actually Gabe sitting in for Chris. Another sort of question in and around the acquisition. It looks like it had kind of been built a little bit through acquisition itself and from what I can ascertain, maybe a little bit of a concentrated customer base. Can you elaborate on that a little bit and then maybe kind of how that's playing into your thought process for the synergy figure and whether or not -- we've seen with a couple transactions where that number has proved conservative? Is this a realistic expectation for 2018?

Well, we've really used a very conservative and disciplined approach for many, many years relative to synergies. At this time, that's our outlook from a synergy expectation perspective. The customer footprint, we're excited about it. We're excited about it because they are customers we know, we're aware of. We meet them on a regular basis. And frankly, this combination with Clopay gives us one of the most dynamic portfolios in the space and truly provides a one-stop shop for one -- some of the world's largest consumer hygiene and health care customers. So really excited about that.

Tom, just a quick follow-up. I mean, can you maybe talk about customer concentration relative to your existing business? I mean, I know you guys are very well diversified across the Berry platform, but is it any different?

I would say, very similar to what we saw and very similar like customers that we're serving. There's not many anomalies where they were serving someone that we weren't. So fortunate in that regard. It facilitates, obviously, the discussions with end-users and no big outliers.

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

You talked about -- I think, we knew that Clopay was exploring options for sale. Can you talk about the process, the due diligence and then just a little bit more on how you expect to achieve the synergies?

Well, the process, it began quite a few months ago. Listen, fortunately, Berry is well-known as a prospective and inquisitive acquirer in the marketplace. The similarity of the portfolios and frankly, the seriousness by which we take these processes, I think, was an advantage for Berry. And the synergy realization, ultimately, is -- it was laid out in the -- in our opening remarks. Tremendous opportunities across the portfolio, not only from how we manage the overall cost profile of the combined business, but equally important, the one-stop shop capability now we're offering the marketplace with both breathable and nonbreathable substrates.

Yes, Debbie, I would just say, we obviously completed more than 40 acquisitions, and I would say our methodology for doing diligence, as well as integrating the business and achieve synergies has not changed. And so this process will follow the same methodology we followed for dozens and dozens of prior transections. It's proven successful, and so we're going to continue to use that methodology.

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

I believe you indicated in the press release that the tax basis step-up value is expected to reduce cash taxes. I think it -- by my math, it looks like you're assuming the deal reduced cash taxes by about $25 million, is that correct? And when will that amount benefit free cash flow on a quarterly basis?

Sure. Jason, it's Mark. So the -- I'll try to answer this succinctly. The amount is a present value amount that we used, and it's slightly higher than the amount that you gave. But the absolute dollars are obviously significantly more than that because it's over a 10- to 15-year period, and they will begin as soon as the transaction is completed.

Okay. And are you still expecting to utilize about $50 million in NOLs in fiscal '18?

Yes, that's correct. Yes, from the event of acquisition, yes.

Your next question comes from the line of Anthony Pettinari, Citi.

Just a couple of follow-ups on Clopay. Can you comment on how much resin they buy, what types of resin and are their pass-through mechanisms similar to Berry's? And then Tom, you talked about the complementary products. It seems like there'd be some sales synergies. Can I just confirm that the $20 million number does not include any sales synergies?

The $20 million does not include any sales synergies. We're not going to comment on the specific raw materials that they buy. And they have similar pass-through mechanisms as Berry has in terms of raw material increases and decreases.

While we wouldn't want to disclose the specific quantities as we don't think that's public information, we can say that it's mostly polyethylene-based resins.

Okay, that's helpful. And then in HH&S, South America, you continue to see some headwinds there. Can you just give a little bit more color in terms of the competitive environment that you're seeing in Brazil? I mean, it seems like some consumer categories are recovering, but others continue to struggle. Can you just talk about the demand environment there, the pricing environments as you kind of get to the end of the year? Are you seeing any signs of improvement?

Yes, happy to. Relative to South America, we're very fortunate. We're a leader in that region, and we believe the long-term dynamics for our portfolio continue to be very favorable. In our view, we believe the region's bottomed and continues to slowly improve. It will slowly improve especially with the growing health care and hygiene markets that we serve. And similar to what you've had in parts of Asia, the increase in the middle class and our renewed preference around quality performance is important. The areas that are slightly -- starting to improve is really around currency and inflation and consumer demand, but we would expect to see South America see some diminishing pressure as we proceed through full year 2018.

Your next question is from the line of George Staphos, Bank of America.

Good luck with Clopay. My first question on Clopay, you mentioned, Tom, breathable films. So do you have the ability to take that into the food market because some of these films would obviously work well with some of the larger trends that are occurring in the market these days. Any thoughts on that? Or is that kind of a nonapplicable revenue synergy potentially?

So actually, a terrific question. I think there's opportunities to parlay the technical knowhow, clearly, between our Engineered Materials division as well as Clopay with this acquisition. But in terms of barrier technology, yes, we will definitely look to share best practices throughout the company as we do with all acquisitions. And it's one of the components that's a soft benefit with all the acquisitions we've done. We clearly have an opportunity to have a snapshot of a best-in-class provider from a technology perspective, understand what their processes are, translate the good aspects of those processes throughout all of Berry, and it clearly creates an enhancement for each of our divisions. So I think it's a great question, and we'll certainly look into that. But I think there will be because there's actually very good knowhow, in our view, inside the Clopay organization from a technology perspective.

Okay, I appreciate the detail there. My next follow-on, and then I'll turn it over. And recognizing, I'm taking your words here and making some assumptions. But if I assume the $4 million EBIT negative from base volume declines was largely, as you said, the fact that you walked away from business that you felt was not economical, and that's my phrasing, not yours, but I think I'm relatively close there. And then I take the percentage change you ascribe to that for baseline declines, I get like $32 million of revenue associated. When I look at the $4 million and the $32 million, I don't have a terrible incremental margin on that volume and it doesn't necessarily reconcile with walking away from low-margin business. So help me understand the interplay between walking away from low-margin business and how it translates into your numbers? And overall, just on volume, what was the effect of storm? Do you have a figure on that on revenue?

I think the latter part of the question was difficult, obviously, to quantify the exact impact from the storms. We're certainly working with our insurance carriers on quantifying the impact. That work is still in process to identify the interruption that was caused there. So we don't -- while we don't have a number, it's obviously included in our results, but difficult to quantify. And again, we're working through the details of that with the insurance provider currently. In terms of the second part of your question, I mean those are decisions that our management teams are making every day in terms of how to price products. And so I would tell you, it's probably not as mechanical, I might suggest as you might think, and we're evaluating those every day. And I think our teams do a great good job of making the right decisions there.

And those processes, George, are -- they're fluid. And as Mark said, we may make a given-decision based on a need inside the business at a point in time, and the opportunity will present itself to ultimately seek that business at a later period should we deem it appropriate based on our needs and based on the market and where it's at.

Okay. If you take -- if you get an insurance recovery, you'll disclose that in subsequent calls, correct, and in releases?

Yes, to the extent, it's material we would, George.

Your next question comes from the line of Edlain Rodriguez, UBS.

Just one quick question on strategy. I mean now that you have reached your leverage target ratio of below 4x, what are the key priorities for cash going forward besides bolt-on acquisitions? Essentially, where do a share -- a potential dividend fit into the equation?

First and foremost, our decision-making, we always seek to provide the greatest return to our shareholders. That's, first and foremost, the #1 primary concern. Berry is very, very fortunate to -- yes, we met our leverage target, we also are a very strong free cash flow generator and it gives us a tremendous amount of options. With that regard, we meet with our board on a quarterly basis to review all the different levers that we can pull relative to capital allocation. We focus on those that we believe will generate the greatest shareholder value with that capital allocation and make the decisions at that time. Clearly, I would argue that, throughout our history, there has been more shareholder value created for our shareholders at Berry based on our ability to -- and on this proven track record and disciplined approach of identifying and acquiring acquisitions and successfully integrating them, generating maximum synergies in a timely basis than any other possible allocation strategy we could deploy. That being said, the markets are dynamic. The leadership team along with the board will evaluate that each quarter to determine what's the best use for that cash.

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

Just a couple of questions on resin and the assumptions in the guidance. If you could just kind of lay out, is the guidance sort of predicated on polyethylene and polypropylene prices being at current levels or maybe like prior to the hurricane levels or end of fiscal year '17 levels, just kind of what assumptions you've got in there.

Yes, given we're in our first fiscal quarter now, clearly, we had budgeted flat resin where we ended 2017 at relative -- clearly, with the hurricane, we saw an inflationary period at the last part of the quarter that we're working through now. But the outlook, clearly, is that resin increases will dissipate in the back half of 2018. That's not my view. It's really -- indices are suggesting that would be the case, and we continue to believe that. For Berry, we had 80% of our business in what we believe is the lowest cost-producing region in the world. And given the increased capacity on polyethylene, we think that will be an advantage to convertors like ourselves for some time.

So just to clarify, to hit the guidance, you would need resin to go back to sort of pre-hurricane levels? Or you just need it to kind of stay at the current level of that?

Yes, I would say, look, we've done a nice job over the years of mitigating the impact of resin cost on our earnings. And so to the extent it did or didn't, I wouldn't expect it to be a large enough impact to change our guidance.

As we've talked about before, with 70% of our business being tied to escalators, deescalators, it's really more of a lag. So not a significant issue.

Okay. And just following on that, any way to quantify the hit to 1Q? Or maybe another way, should we think about the seasonality of the earnings or the cadence of it being a little bit different than prior years given the lag in the pass-through mechanism you talked about?

Yes, our earnings are typically the strongest in June, followed by September, followed by March, followed by December. And I would expect this year, based on what I know today, to play out in a similar manner this year. And not the (inaudible) significantly -- I guess, I will just add to that, and not significantly different from an allocation perspective in the past.

Okay. And just one last one. Any cash cost to achieve the synergies and sort of timing on progress maybe at the end of fiscal '18, what kind of run rate you think you could be at?

Yes, sure. We have historically, it's been about 1:1, our costs to achieve synergies have been pretty much dollar-per-dollar relative to synergies. We'll certainly give more detail on that on our next call, but that's been our historical average, that's been pretty accurate. And in terms of timing, I think that's the second part of your question. Usually after the second year, we're fully realizing all the synergies.

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

I just wanted to follow up to, I think, Gabe's question from earlier. Just based on Griffon's filings, it looks like one of Clopay's customers has accounted for half of Clopay sales over the past 5 years, so it appears to be pretty significant customer concentration. Did that factor into your thinking at all about the deal?

Obviously, we take a look at customer concentration, but we're more focused on what value this deal can create in terms of the enhancement of our portfolio with the breathable technologies, especially so many of which are patent protected along with the ability to be, not only a domestic supplier, but enhance our global capability to provide value. So yes, we obviously recognize and understand it. But our job each day is to find ways to deliver value to our customers regardless of the size of the account, and we'll continue to do that with this acquisition.

And just one on Clopay sales. It looks like they've declined in each of the past 4 years owing to some combination of volume declines, FX and maybe other factors. Can you just talk about what's happened to Clopay over the past 4 years, sales-wise and EBITDA-wise?

Clearly, it's a dynamic market that we play in. Different companies make choices in terms of volume price trade-offs, and they have different ebbs and flows with particular customers. At this stage, it would be unfair to talk about some of the specific rationales which drove that performance. What we do know is that we're going to work very diligently with that team to close this transaction as soon as possible. Given the fact we have common customers and unique customers, we're really looking forward to talking about the synergies between those 2 companies to see how we can come up with additional ways to penetrate and generate more growth in both health care and hygiene. I am -- we're excited about it. We think this is a wonderful transaction that will reside inside our HH&S business obviously, and that team is poised and ready to execute and deliver on this integration in as fast a way they possibly can.

Thanks, and just pro forma leverage at deal close. What do you expect it to be?

It's about 1/10 impact. So depending on the timing of the close, obviously, we've been deleveraging about half a turn a year. And so just depending on the timing of when it closes, obviously, the absolute number could change. But in terms of the math, it's about 1/10 additional leverage.

Your next question is from the line of Anojja Shah, BMO Capital Market.

I just wanted to go back to the consumer for a second, the consumer segment. You mentioned that you're seeing a lot of strength in international markets. Can you give us a little more detail there? And then also you're addressing growth opportunities in the U.S., I believe you said. Can you let us know where you're seeing growth in the U.S. there?

Yes, happy to. So first and foremost, the comments on international was related to the investment we've made in resources, determine if we can translate successes in North America into Asia. They have been generating closes in business, consistent with the margin expectations that we have as a company while it's still a very small business for Berry. We're encouraged as the target pipeline continues to be quite robust, and we'll continue to monitor it to see if it's something also that we feel is significantly scaled. But so far, the opportunity for Berry to bring value in the region looks favorable. Again, the experiment is not over yet. Relative to North America, yes, we talked about on the last call, the Consumer Packaging team close $50 million of annual revenue. It's seen some success in areas like food service inside of our health care product line. And frankly, globally, Berry has the ability between India, Europe and the U.S. to now serve international customers with health care products. And we're going to continue to research how we can best deploy those resources inside our Consumer Packaging business. The -- as we talked about in the announcement, we're focused on what it is that the demographics are looking for, finding a way to pivot more of our business to higher growth areas like health care and hygiene. And again, with 40% of the company's revenue now being tied to those spaces, we think it's the right pivot that we've made. While we still very much value our food business, which is generating very reliable, stable, dependable cash flows with products people buy every day, our job is to find a way to differentiate that and continue to access some of the higher growth regions in ways that we talked about with millennials, seniors and taking advantage of e-commerce.

Your next question comes from the line of Ghansham Panjabi, Baird.

On your flat core volume growth outlook for 2018, should we expect sort of a decline in the first half of 2018 followed by an improvement in the back half as your growth initiatives kick in? Or do you expect it to be relatively uniform throughout?

Certainly, while we assume flat for our cash flow guidance, certainly the management team is not accepting flat and we're certainly driving for better results. And I think your point around, potentially, volumes being more back loaded is being our expectation is reasonable. Given we're still going to have to be lapping some of these AEP-related integration decisions as well as the Consumer Packaging business that's coming, it will be ramping up as the year progresses.

Okay. And just as a follow-up on the 30% of the portfolio that's noncontracted from a pass-through standpoint. Can you just update us on how your pricing initiatives are progressing on the context if your customers probably looking at an expected decline in resin as 2018 gets underway?

Yes. One, as Mark said, and I believe it was in his section of our commentary, we've executed on price increases, justified frankly, because the hurricane drove not only increases in raw materials, but also transportation and freight were a significant driver. And we very quickly and proactively took steps to mitigate that via price pass-through. Any changes that are anticipated we'll evaluate and deal with when it actually happens.

Your next question is a follow-up from the line of George Staphos, Bank of America.

First question I had is on volume, and so I just want to come back. The new wins in consumer, I think at one point in time -- and maybe I'm not recalling correctly, I think at one point in time, you'd said it would be more of a really back-end loaded realization in 2018. Are you seeing -- now you said back half, are you seeing maybe a little bit more volume pulled forward on these new products? Or is it more or less the same timing? And the second part of that question is, can you review -- if you had mentioned already, I missed it, what the actual base volume was, percentage-wise, for each of your segments in the fourth quarter, recognizing there was storm and other effects in that number -- or in those numbers? And then I have one follow-on.

Yes, what we said in the CP, the new closes of $50 million in annual revenue, we expect that to start shipping in the last half of 2018. So yes, it's back half of the fiscal year.

So no change there in terms of timing...

(inaudible)

Same timing. Got it.

Correct.

And then on the core volume in the quarter for each of the segments?

Yes, they were all right around minus -- through CP, it was minus 3; EM, minus 3; and HH&S, minus 1. And again, keep in mind, George, that uses resin weight as the metric. And given lightweighting, the actual volumes, if you will, on a unit basis are higher than that.

So that's...

No, a really conservative, probably way of looking at it.

Okay. And then my other question, interest expense. The refinancing you said will save $20 million. How much of that do you actually net in 2018 fiscal versus fiscal '17 where you probably got some benefit already?

Yes, there is certainly some that was realized in '17. Our year-over-year interest expense, I think goes down to $250 million was our expectation for next year. So that should help you in terms of your modeling. And we're happy to help. We do have some incremental LIBOR rate increases built in. I think we have around 50 basis point of an increase built into the numbers. So depending on how our interest rates shake out, that should be a -- it should ultimately prove to be a conservative number.

Thank you. At this time, I will hand the call back over to Tom for closing remarks.

I want to thank everyone for your continued interest in Berry. We look forward to talking to you during our next call. Take care.

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.