Berry Global Group Inc (BERY) 2018 Q2 法說會逐字稿

Good morning. My name is Charlie, 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 now begin your conference.

Thank you, and good morning, everyone. Welcome to Berry's Second Fiscal Quarter 2018 Earnings Call. Throughout this call, we will refer to the second fiscal quarter as the March 2018 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 this morning. 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 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, 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 fiscal second quarter results, highlights from our 3 operating segments, an update on the Clopay acquisition and our expectations for the remainder of fiscal 2018. Afterwards, we'll be happy to answer any questions you may have.

Turning to the Berry's overall financial results for the March 2018 quarter on the Slide 3. I'm proud to report that we had another quarter of solid financial results. Quarterly records were achieved for any March-ended quarter for revenue, operating EBITDA and adjusted EPS of $1,967,000,000, $350 million and $0.84, respectfully (sic) [respectively].

Revenue increased 9% over the prior quarter, highlighted by strong organic volume growth from our nonwovens, tapes and foodservice products. Consistent with our historical track record, we were able to largely offset cost inflation and delivered the solid results from the quarter, recording a 4% improvement in operating EBITDA from fiscal Q2 2017. Our quarterly adjusted earnings per share represents a 12% improvement over last year and an impressive 5-year compound annual growth rate of over 20%.

Looking at the highlights, specifically by segment. We had another solid quarter of sales and earnings within our Engineered Materials division, as revenue increased 6% and operating EBITDA improved 17% compared to the prior year quarter. The division continues to benefit from the AEP and Adchem acquisitions completed last year, including cost synergies from sourcing, manufacturing and SG&A.

Our legacy tapes business had another strong quarter, with growth in organic volumes and earnings. Similarly, our recently acquired tapes business, Adchem, saw improved results which provided new sales channels and product offerings in the growing specialty tapes market.

We're also excited about our recent investment in value-added multilayer film supporting growth in e-commerce, as our film technology provides an opportunity for our customers to provide a more cost-competitive packaging solution.

Additionally, we continue to see opportunities with our food and beverage customers to take share from other substrates with improved film performance, eliminating the need for additional packaging. We're also investing in our innovative protection solution product offerings, which provide enhanced load containment, ultimately reducing the breakage, damage and loss incurred in the transportation of goods.

The fundamentals of our Engineered Materials segment remain positive as reflected by another solid quarter.

Our Health, Hygiene & Specialties division recorded a strong revenue growth of 18% as well as a 3% improvement in operating EBITDA, including the impact of the recently completed acquisition of Clopay. From an organic volume growth perspective, excluding South America, our nonwoven product volumes grew 2% compared to the prior year quarter, with positive organic volume growth in each of our Health, Hygiene and Specialties nonwoven businesses.

Geographically, North America, Europe and Asia all saw positive volume growth. We remain excited about the overall nonwovens market and believe, with the ensuing rise of the middle class and higher GDP rates, demand will grow in developing countries in high value-added markets, such as health care and hygiene.

Specifically, our Asia business, through the first 2 quarters of fiscal 2018, is up over 14% versus the comparable first 6-month period of ownership and continue to experience growing demand and high utilization rates supporting our investment decision in a state-of-the-art nonwoven line in China.

Our new $70 million asset will be the first of its kind in the region and will provide significant incremental capacity for Berry serving the Asian market. This investment is targeted to meet forecasted market and customer growth and will be focused on 3 new applications in the hygiene and health care markets. We're pleased to report that the project is progressing as expected and anticipate the new line to be in production by the end of fiscal 2019.

Specifically, we've committed over $130 million of capital to support the growth of nonwovens over the last 4 quarters. We remain focused on high-growth markets and applications where we are partnering with our customers in the commercialization of products and feel confident these investments will promote our longer-term growth expectations on our nonwovens business.

We continue to be excited about the acquisition and integration of Clopay that closed February 6, 2018. The joining of Clopay with Berry's Health, Hygiene & Specialties division strengthens our position within the attractive health and hygiene markets and broadens our presence as a global supplier to many of the leading consumer and industrial product manufacturers.

The integration is going better than planned. I want to welcome and thank the Clopay employees who became part of Berry. Proven by the positive volumes and earnings growth achieved during the quarter, the Clopay team has surpassed our initial expectations and have done a tremendous job executing the early stages of integration, while providing high-quality service to our customers.

Additionally, we're working with our global customers to provide an enhanced product offering that reduces costs and provides improved performance in our global hygiene films offerings.

On the cost side. We're accomplishing our initial objective of reducing material and SG&A cost, and continue to work on further cost reductions and identifying new business opportunities. Due to the complementary nature of the business with our Health, Hygiene & Specialties segment, it has created an opportunity for synergies in both the legacy HHS business as well as Clopay.

Based on the progress to date, we are increasing our annual cost synergy target to $40 million from our original guidance of $20 million when we announced the transaction. These synergy opportunities are providing cost benefit to both the legacy Clopay business as well as Berry globally.

As with past acquisitions, we are identifying the best assets and processes within the combined company. As an example, our teams have identified low-cost technology in the Clopay South America site with available capacity, and we're working diligently to fill that open capacity with legacy Berry business.

To summarize, I'm pleased with the results to date from Clopay and even more excited about the future opportunities.

In our Consumer Packaging division, volumes were relatively flat in the quarter. Our foodservice products reported solid growth in the quarter, driven by stronger demand at quick-serve restaurants and convenience stores. We are partnering with large multinational customers within our core foodservice product portfolio to address unmet needs and have made significant investments introducing new proprietary technology advanced solution to the market at a lower cost with improved functionality and sustainability.

These new products will offer a new consumer experience through premium design and sustainability. This project remains on track from a cost and timing perspective, and as we've stated on prior calls, we expect these offerings to benefit the company starting at the back half of fiscal 2018 and into early 2019. And I look forward to providing more details in future calls.

In addition, we continue to innovate and provide premier health care packaging for a wide range of solutions, from blood diagnostic vials to unique senior-friendly closures. We continue to look for opportunities where we can provide advantaged products in targeted markets, and I'm pleased to report that we are seeing a stronger pipeline and an improved hit rate in our health care and specialty rigid plastics projects.

Additionally, I think it's prudent to remind our investors of Berry's consistency and dependability as a free cash generator, irrespective of resin cost volatility, consumer demand or macroeconomic conditions. Our products are used every day in consumer-centric product categories, such as diapers, personal care, health care, food and beverage.

We at Berry remain committed to being a low-cost manufacturer in the fastest-growing substrate with high-quality products and service to our customers and believe that the use of plastic-based products will continue to grow as they have for the past several decades, with clear cost and performance advantages to support this expected growth.

Our suppliers are committing billions of dollars in capacity additions with the benefit of low-cost raw material in the United States.

Now I'll turn the call over to Mark who will review Berry's financial results in more detail, then I'll 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 a quarterly record net sales of $1,967,000,000, which was up $161 million or 9% over the prior year quarter, primarily attributed to incremental sales from recent acquisitions, along with selling price increases to pass-through higher material and transportation costs.

From an earnings perspective, we achieved a March quarterly operating EBITDA record of $350 million, an increase of $14 million over the prior year. The increase was primarily attributed to acquisitions and lower SG&A expenses from synergies and cost reductions. These positive contributions were partially offset by cost inflation, including polypropylene resin, impacting our Health, Hygiene & Specialties and Consumer Packaging segments.

Each of the 3 business segments were affected by higher cost for both raw materials as well as transportation. Overall, net inflation was 6% in the quarter, with some categories up as much as 20%.

From July of last year through January 2018, market resin prices for polypropylene increased 7 consecutive months, up over 30% on a year-over-year basis, primarily impacting our Health, Hygiene & Specialties and Consumer Packaging businesses. These resin price increases result in resin lag headwinds for us in both the December 2017 and the March 2018 quarter. However, we expect a modest tailwind in the June 2018 quarter with recent market price decreases in polypropylene.

Looking at the results of each of our operating segments, starting on Slide 5. Net sales for our Engineered Materials division for the quarter was $655 million compared to $620 million in the prior year quarter. The increase was primarily attributed to the AEP acquisition, along with an increase in selling prices due to the pass-through of higher raw materials and transportation cost, partially offset by softer volumes in the quarter.

We continue to take steps to rationalize the business associated with the acquisition of AEP. And as communicated previously, we expect the June quarter to be the last quarter where the year-over-year volume comparison will be impacted by these decisions.

Operating EBITDA in our Engineered Materials division was $127 million, representing an increase of $18 million or 17% over the prior year quarter. The increase was primarily driven by acquisition volume in the quarter and lower SG&A expenses from synergies and cost reductions.

Turning to Slide 6. Our Health, Hygiene & Specialties division generated net sales of $706 million in the quarter compared to $597 million in the prior year quarter. The increase of $109 million or 18% was attributed to the Clopay acquisition, a favorable currency impact and an increase in selling prices due to the pass-through of higher raw material cost.

The division recorded a $110 million of operating EBITDA in the quarter compared to $107 million in the prior year quarter. The increase in operating EBITDA was primarily a result of the Clopay acquisition, lower SG&A expenses and the favorable impact to currency, partially offset by cost inflation.

The primary raw material of this division is polypropylene, and as we stated on our last conference call, with the cost increases noted earlier, we experienced a timing lag in passing through these raw material costs. We are working with our customers to shorten this timing lag, and I am pleased to report that we made good progress in the quarter.

Additionally, as noted earlier, recent decreases in the market prices for polypropylene will provide a modest tailwind in our upcoming June quarter. Additionally, just one of the many actions we are taking as part of our continuous improvement culture to maintain our low-cost position and provide future earnings growth was the recent consolidation of one of our facilities in Mexico, which will drive an annual operating EBITDA cost savings of over $4 million.

Next, as noted on Slide 7, net sales in our Consumer Packaging division was $606 million in the quarter, which was $17 million higher than the March 2017 quarter. The improvement was primarily attributed to an increase in selling prices due to the pass-through of higher cost.

Operating EBITDA in the quarter was $113 million compared to $120 million in the prior year quarter. The decrease was primarily driven by higher resin, other raw material, transportation and manufacturing costs in the quarter, partially offset by lower SG&A expenses.

A portion of our year-over-year cost increases included expenses incurred in the March quarter as we made substantial progress on the start-up of new business that we have discussed on our prior conference calls. We anticipate these start-up costs as well as the timing lag headwind related to the pass-through of polypropylene cost increases, to subside in the June 2018 quarter, similar to our Health, Hygiene & Specialties business, and continue to expect our results in Consumer Packaging will improve in the back half of the year.

Slide 8 provides the summary of our income statement for our second fiscal quarter. Overall, operating income increased by $13 million or 7% over the prior year quarter. This increase was due to the items we previously discussed that drove this $14 million operating EBITDA improvement.

Interest expense was $66 million compared to the prior year expense of $67 million. This decrease is primarily a result of interest rate reductions we have achieved from proactive actions to lower our interest costs from completed refinancings, partially offset by a higher market interest rate and the new debt associated with the Clopay acquisition.

We have continued our efforts to refinance our debt to reduce interest expense where opportunities are available to lower our cost and strengthen our balance sheet. We are pleased with our progress and have increased our interest coverage ratio, calculated as operating EBITDA divided by annual interest expense, to 5.2x from 2.4x at IPO.

Additionally, we have continued to strengthen our balance sheet over the same time period by reducing our leverage ratio of net debt divided by adjusted EBITDA from 5.2x to now 3.9x.

We have repaid $117 million of our debt through the first 2 quarters and made an additional $100 million early term loan principal payment in early April after quarter-end, and anticipate reducing our debt leverage ratio to 3.5x by fiscal year-end.

As we mentioned last quarter, U.S. corporate tax legislation was passed during the December quarter, and Berry was a clear beneficiary with approximately 80% of our revenue in the U.S. The new legislation not only will provide additional capital to the company to create incremental shareholder value but should also generate positive economic stimulus for our customers and consumers alike.

We continue to estimate that the new tax legislation will provide a $50 million annual benefit for the company on an adjusted free cash flow basis and accretive to earnings by approximately $0.35 per diluted share. This tax savings is equivalent to the addition of $350 million of annual revenue at our average margin without the need for any additional investments.

These tax changes also provide us greater flexibility to utilize global cash to invest in the most optimal locations. From an income statement perspective, we are estimating our effective tax rate to be 25%, excluding the onetime tax reform adjustment.

In wrapping up the income statement, our net income for the quarter increased 25% to $90 million compared to $72 million in the prior year period. Earnings per diluted share increased by 22% from $0.54 per share to $0.66 per share in the March 2018 quarter. Adjusted earnings per diluted share increased to $0.84 in the current quarter, a 12% improvement from the March 2017 comparable quarter of a $0.75.

Next on Slide 9, the company generated $132 million of cash flow from operations in the quarter. We have intentionally invested additional capital into building inventories in certain product categories for new products and customer projects, while also putting ourselves into a better service position for our seasonally stronger June quarter.

Net capital expenditures in the quarter were $90 million as we incurred spending on cost-reduction initiatives as well as the growth project Tom referenced.

In the first half of fiscal 2018, we have invested a record level of organic capital to support the new product launches and growth initiatives that we have discussed the past few quarters, and look forward to the expected sales and earnings growth from these projects in future quarters.

Our adjusted free cash flow, defined as cash flow from operations less capital expenditures and payments made under the tax receivable agreement, was $526 million for the 4 quarters ended March 2018.

Our financial guidance, including underlying assumptions for fiscal year 2018, is shown on Slide 10. We are reaffirming our fiscal 2018 adjusted free cash flow at $630 million, which includes over $1 billion of cash flow from operations, partially offset by net capital expenditures of $340 million and the $37 million tax receivable payment that was made in the first fiscal quarter.

Within our guidance for cash flow from operations, we are assuming other cash taxes of $130 million, which includes the TRA payment made in the December quarter. Other cash uses are expected to be $50 million, primarily related to items such as integration expenses and synergy realization costs associated with the Clopay and AEP acquisitions.

Our $340 million of expected capital expenditures includes $120 million for maintenance and $40 million for product redesign, with the remaining $180 million allocated to product innovation, organic growth and cost-reduction projects.

Cash interest is still estimated to be $250 million, which assumes debt pay-downs throughout the fiscal year, and we are also assuming working capital usage of $40 million in fiscal 2018 related to the inflation mentioned earlier.

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

Thank you, Mark. As I stated earlier, we are very excited with the progress with the Clopay acquisition. The combination of Clopay and our Health, Hygiene & Specialties division offers the opportunity for meaningful value-creation for our shareholders. Our initial expectation was to achieve $20 million in synergies, and through the hard work of our teams, we've substantially increased our cost synergies to $40 million.

With respect to further acquisition opportunities, our pipeline continues to be very robust with global opportunities in each of our 3 segments. The overall global packaging space remains fragmented, where Berry, at $8 billion in pro forma annual revenue, is one of the largest in the world.

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. A key component of this strategy is being very diligent and methodical in evaluating opportunities and determining which acquisitions are the best fit for our company.

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.

We work to identify the best people and the best practices of each acquired business and apply those resources and practices to the entire enterprise. Accordingly, Berry represents the integrated processes, people and physical assets of the 44 acquisitions completed to date.

In terms of valuation, if you look historically at our past 15, including 3 of our large most recent acquisitions, we've averaged a 5.2x post-synergy multiple, with annual cost synergies averaging 5% of revenue of the acquired business. This historical disciplined track record is the foundation of what has led Berry where we are today, providing consistent 10-year compound annual growth rates over 20% on revenue, EBITDA and shareholder return, and why we believe we have a very bright future ahead.

With respect to guidance, as Mark mentioned, we've reaffirmed our 2018 adjusted free cash flow target of $630 million. We will continue to work diligently to offset with increased selling prices, driving earnings growth through a focus on cost-reduction initiatives as well as grow our business organically and through strategic acquisitions.

We're extremely proud of our history and predictability as we've exceeded our free cash flow targets every single year as a publicly-traded company.

Before I turn the call over to the operator for questions, I want to take a moment to discuss plastics and the possibilities of plastics. Plastics improve lives every day, period. Recently, I spoke at the World Petrochemical Conference and encouraged our industry to take a more collaborative role in promoting plastics and its possibilities.

At Berry, we're doing the same by creating awareness and educating our employees of the benefits that plastics provide. We launched an internal program called Plastics Ambassadors to lead education and advocacy among employees and internal stakeholders to drive a unified voice.

Plastics Ambassadors is focused on empowering our employees with facts around the possibilities of plastics and the positive impact of our industry. Whether it's used in health care, medicine, food storage and spoiling-protection products, cellphones to cars, plastics is one of the most versatile materials on the planet. It has a lower carbon footprint and consumes less than half the energy of known alternative and has less than a quarter of the weight. The benefits are endless.

Each and every year, Berry, along with our customers and suppliers, continue to develop new ways to manufacture our products using less resin through our technology advances and material science expertise. Additionally, we will continue to work with partners, like the Plastics Industry Association, to communicate the benefits of plastics and how to recycle plastic products properly.

Our long-standing Earth Day program allows us to impact over 1,000 third graders each year as they tour our Evansville facility, and we teach them about plastics and how to recycle. Our Plastics Ambassadors program, along with help from our industry partners, allows us to drive a unified voice and improve the perspective of plastics around the world.

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 to ultimately maximize shareholder value. 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.

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. Operator?

(Operator Instructions) Your first question comes from the line of George Staphos.

I want to ask a first question, really, in terms -- looking at the underlying trends related to your guidance. So on the one hand, you raised your Clopay synergy target by $20 million, although maybe more that will flow into fiscal '19 and fiscal '18, nonetheless. That's one point. At cash taxes were reduced $30 million. I believe, previously you're at $160 million, now you're at $130 million. Yet the free cash flow guidance didn't change. Are there offsets anywhere else? Does this imply maybe lower EBITDA than you were looking for earlier in the year? Help us first with that question. Our second question is, I remember from the last quarter call that the view was that the negative price/cost in Brazil in HH&S would be effectively 0 for the June quarter. Is that still your view?

With respect to your first question, that's correct. We increased our guidance relative to the synergies from Clopay. We continue to be excited about that acquisition. But the timing of those synergies are such that the impact on fiscal '18 is not significant. The larger impact will be to fiscal '19. With respect to your second part about taxes, one of the exciting parts about the tax reform was the accelerated deductibility of capital expenditures. And that benefited us from the Clopay acquisition as well, which is what's driving the majority of the decrease in our guidance with respect to taxes for fiscal 2018. We're still buttoning up those numbers, but we feel good about the guidance that we've provided there with respect to the $130 million, which is being offset by the inflation and the timing of recovery of costs, which is why the free cash flow guidance is being held. We remain committed to fully recovering cost inflation. It's just a function of timing and getting those costs passed through.

And George, your second question relative to Brazil. First and foremost, we reinforced our leadership position in Brazil with the acquisition of Clopay. It's given us enhanced capability to serve our end customer base in the region right now. We talked a little bit during our remarks relative to our ability to access lower cost converting capability with this acquisition. And though we see the South American market continue to bounce along the bottom, if you will, and though our performance is consistent with our end customer base, we still have very high regard for the region. And we believe with rising GDPs, rise of the middle class, we'll benefit from increased sell-through in the region.

So Tom, just to clarify. Are you at a 0 on price/cost in fiscal 3Q versus what you had in the previous relatively large negative in the prior quarters?

We continue to work with the customers relative to the terms and conditions of the purchases and sales agreements we have in place. In non-resin items as well, where we've seen inflationary impacts in both other raw materials as well as freight, for example in the U.S., but in that country, we'll ultimately work on all those aspects within the terms of the agreements, and in some cases, seeking and receiving early relief from that. But that will take place throughout the back half of fiscal 2018.

Your next question comes from the line of Chris Manuel.

If I can just follow-up on the last part of that for one second. I mean, when we think about recovery of -- I think, Mark, you indicated at the end of the quarter you were 20-ish behind when you guys -- I remember last quarter, you talked about price/cost being more neutral this quarter. So when I think about what is kind of a soft cut to the EBITDA number, even though free cash flow has maintained, can you walk us through kind of cadence to recovery? Or was there an opportunity just to restore margin? Or is there an opportunity to actually get some of that back, if, as you suggest, the polypropylene prices are beginning to fall? Can you maybe help us with how that plays through and what that might mean for '19?

Just a quick comment. I think it's important to recognize that what we're seeing in terms of the inflationary environment is not something special, new or unique to this industry. This was pretty significant during the '13, '14 period. And we clearly believe that we will continue to be able to generate margin as we have historically in the 18% to 19% range, irregardless of what's happening in the macroeconomic environment. I don't think it's any different in this scenario as well. So this is not an unusual circumstance. We work with our customers on the pass-through of the raw materials, both resin, nonresin and freight. And the nonresin and freight piece, ultimately, there's additional complexity because many of those items are not covered on purchase and sales agreements, so they're one-off negotiations. But it's proceeding well. The customers understand the drivers of the inflation. And as we have historically, we are fully committed to offsetting inflation with price in the marketplace.

Okay. That's -- but again, from a timing perspective, it might not be this fiscal year, it's a '19 event, is that right?

I would say we're continuing to work on it on a regular basis. And so it's not a -- it's not as though there's this step change date function, it's an ongoing exercise that our businesses are going through working with customers to improve that relationship. And as you mentioned, we did get relief from polypropylene in February, March, which will benefit the June quarter.

Okay. The second question I had, had to do with kind of volume trajectory. And I appreciate that, I guess, most of the issue down in Brazil is behind you at this point. But you've talked about some new business wins. I think, if memory serves, it was $60-ish million in your consumer and 60-ish -- $50 million, $60 million potentially in your HHS piece as well. The -- is it your expectation -- and again, I mean, I know I asked you this last quarter, but I just want to make sure that it's still on track. Is it your expectation that for the balance of your fiscal year, i.e. Q3 and 4, that you can actually get back to flat volumes or potentially positive, Tom? How do you think the cadence falls there?

Yes, that's our assumption, that we get back to flat volumes in the back half of fiscal 2018. You mentioned Consumer Packaging. Specifically, it's a $70 million investment we made here in our headquarters manufacturing facility tied with the foodservice space. Our success in terms of growth in foodservice in the quarter was low double digits. So it's the second consecutive quarter where we've seen very positive growth. We believe we'll begin to see the volume impacts of this capital investment in the back half of '18. Project is 100% on track, on time, on budget. And ultimately, the collaboration with our top 5 quick-serve restaurants companies, exploring this new technology, has been tremendous. This product for the marketplace offers not only a cost reduction but a sustainability play, and addresses concerns that the marketplace specifically articulated in terms of needs that were currently being unmet that we're meeting. So we're very excited about the prospect of this investment. It's tied to core the thermoforming technology. And consistent with what we said in past calls, our capital investments will be made and directed towards specific targeted markets, with partner customers tied to letters of intent that ultimately will increase the likelihood of success and reduce the risk of any type of failure on assets that are as flexible as we can possibly manufacture and make them. So CP investment's exciting. And again, it's -- it will be nice turn in that business in the back half of '18 as our forecast.

Your next question comes from the line of Anthony Pettinari.

On the M&A pipeline, you've been under 4x for, I guess, 3 quarters now. Can you talk a little bit about the pipeline and the M&A environment? And there are a couple of large assets that were acquired or were announced to be acquired over the last month or so. I guess, first question, when you look at North American consumer business, understanding that you've been kind of moving away from that in recent years. And then second, would you look potentially at share buybacks if you remain somewhat underlevered and you're not seeing targets in the market?

We -- first and foremost, we review capital allocation every quarter with our Board of Directors. And relative to Consumer Packaging, Consumer Packaging is an integrated, integral component of Berry Global. It's over a $2 billion franchise. 20% of our business still resides in food and we're a leader in that space. But relative to capital allocation, M&A, overall, is very attractive right now. There are many opportunities in what is a very fragmented market, not only in North America, but around the world. And I would make note, our disciplined approach to identifying, acquiring, synergizing acquisitions is a core competency to our company. And what you saw recently with the Clopay acquisition was a terrific example, where we were able to steal shamelessly great ideas from the acquired company and translate it across the entire franchise. That type of discipline, that type of commitment to translation and not have an ego about where the idea came from is a cornerstone to our success. And when you look at the past 15 deals and you look at the post-synergy multiples in the low 5.2 range, it's a good track record, and we're not going to lose that disciplined approach. We have no problems putting pens down relative to an acquisition if we believe it's become overvalued because the market is so fragmented right now. And I would say, today, it is fragmented and there's as many opportunities today as there's ever been.

Great. That's very helpful. And then you made some comments on sustainability in plastics that were helpful. It seems like this year we've seen increased regulatory scrutiny on single-use plastics, mostly in Europe, but I guess from city governments in the U.S. Those seem to be focused on bags and cups. I guess, first question, is there any potential earnings or volume impact that you've seen from some of those regulatory actions? And then second, from a broader perspective, does this change how you think about potential M&A in Europe or the attractiveness of consumer businesses in Europe?

Good question. Certainly, the heightened awareness relative to environmental impact, sustainability is important. And it's frankly why I took a proactive stance, agreeing to speak at World Petrochemical in front of 1,600 of the petrochemical industry's top executives, to say we need to start speaking with a common collective unified voice. And I'm thrilled that since that engagement, the discussion and dialogue about unifying the message around the possibilities of plastics and how it makes people's lives better every day continues to improve. We've had no share loss, if you will, as a result of the conversations that have been happening around sustainability. I would argue, in fact, we have gained share from other substrates. And we're ultimately benefiting from providing advantaged products similar to what we discussed in the Consumer Packaging business in the foodservice space to address that market concern. Relative to trends, I think as better education, better discussions come together relative to disposal, reclamation, reuse and reduction. It will be -- I think we can turn this into a positive. And I would note, Berry is a -- has a core competency in terms of waste reduction in its product development DNA. We do it every year in the range of 1-plus percent, and that is a component of the reducing the weight and the amount of use of certain products, which is a requirement from our end customers and something that we're very good at.

Your next question comes from the line of Ghansham Panjabi.

I guess, first off, on the Engineered Materials segment and the 3% volume decline, you're obviously seeing nice growth in the portion of that segment in tapes. Can you, first off, quantify just how much tapes are growing? And also, how much of a decline in EM would you attribute from what is purposeful related to the AEP integration? Just trying to get a sense as to what the end markets are doing versus what your internal initiatives might be impacting as well.

Engineered Materials, we -- in previous calls and in the -- after the June quarter we'll lapse most of the actions taken relative to AEP in terms of volume price trade-offs. You noted the tapes' success that we have and frankly consistently having. This is a business growing the mid-single-digits, and it's a product portfolio that we've got an advantaged position, especially with the recent Adchem acquisition that we just completed, giving us access to the specialty tape market. This is a business, frankly, Ghansham, that we make volume price trade-offs all the time. As an industry leader in this space, as an industry leader with a low-cost position, we make decisions every single day based on what we think's going to be the best impact of shareholder value, and it's part of really how we manage that business day to day. But I would argue that the opportunities in EM, both in the terms of what we're doing in terms of load management and reducing breakage, loss and damage, the investments we're making in converted films to participate in the e-commerce space, the continued franchise success of our tapes business as well as load management capability, there's a lot of great prospects for this business for the long haul.

So again, if you strip out AEP, some of the initiatives there, what do you think Engineered Materials, on a stand-alone basis, normalized, if you will, what do you think the volume profile is for that end market?

Low single digits.

Okay. And then my second question on the nonwovens and the growth in markets outside of South America you referenced. I guess, what's driving that? Large CPG customers are calling out weakness in many different subcategories there, which categories and end markets are you seeing the most growth in?

No problem, Ghansham. We've talked a lot about the strategy around our HHS business is to get higher penetration in developing regions of the world where the growth rates are higher. It's consistent with the nonwovens' investment that we've made in China, where we have -- continue to experience mid-single-digit growth rates there consistently, the investment in China relative to our filtrations business in terms of air filtration and further enhanced investments in the wipes space. Wipes continues to be good. Health care continues to be good. Specialty air filtration continues to be good in that space. And frankly, really, with the exception of the -- of what we're seeing in South America, all regions are showing positive growth. And again, we feel bullish as we continue to see rise of the middle class, increased rates of birth around the world, that will benefit Berry Global.

Your next question comes from the line of Scott Gaffner.

Just going all the way back to the beginning. I didn't exactly hear the response. But in response to George's question around the EBITDA guidance for 2018. Did you reduce the EBITDA guidance for 2018? And if so, is it mostly a price/cost issue or a volume issue?

Yes, Scott, we don't give specific EBITDA guidance. But as you pointed out, we do provide cash flow guidance and we did reduce our tax rate as well as hold cash flow guidance. And so there's a timing impact of passing-through inflation that's factored into that guidance. So as polypropylene has subsided and we're continuing to work with customers to pass through that inflation, there's a timing impact to that, which has been reflected in our updated guidance.

Okay. Understood. But so volumes though are still coming in as you would have expected for the full year?

Yes. We're continuing to assume flat guidance for the back half of the year. The first half was slightly weaker than our guidance assumption at the beginning of the year, modest impact in the aggregate. But I would say, slightly weaker with the improved projection going out into the back half of the year.

Okay. And...

To reiterate what Tom said, right, earlier, which is we've invested a lot of organic capital, right, record level of organic capital in the business that's backed by customer agreements. And we're confident and look forward to the earnings growth and sales growth associated with those investments. Obviously, there's a timing lag associated with that, and you have to get the capital in, and -- which will benefit us in the back half of '18 and going into fiscal '19.

Okay. And Tom, a little bit of a different take on acquisitions. I mean, just given where we are in the cycle, is there anything in your businesses or anything in the market that maybe gives you some pause take on another deal here at this point in the cycle as it is sort of the peak of the cycle? Any thoughts you have there to maybe slowdown on M&A versus continue?

No, it's -- listen, it's created more shareholder value than, really, any other form of capital allocation. Our priorities continue to be -- we'll remain inquisitive in terms of M&A. We'll pay down our debt. We'll invest in high IRR capital investments in our company, and we'll continue to consider share buybacks and dividends as tools that we can use for the company. But clearly, the M&A environment continues to be robust. And as Mark said, we're continuing to invest at a record level right now in growth projects tied to specific markets with specific end-use customers tied to letters of intent that we can further our growth organically. So -- and we'll be disciplined. Even though a lot of folks talk about where we're at in a given cycle, we continue to see opportunities. Our disciplined approach will not change, and it's always centered around how much shareholder value will it create.

Your next question comes from the line of Deborah Jones.

I just had a couple of questions on a few items that were already addressed. The inflationary component that changed your assumption for this year driving your cash flow guidance. Should we expect that you can fully recover that in 2019, the $30 million [downturn or somewhere] around that?

It would be timing. And so Debbie, it would not come back until costs moderate. Obviously, we're working every day to continue to reduce our cost structure, and we're investing capital, working diligently to improve productivity every day. So we would assume that we would have incremental cost savings associated with those actions. But in terms of getting the money back per se, that wouldn't happen until the cycle changes. Which these things do go through cycles. As Tom mentioned, this is not unusual. And so we'll continue to work through it, pass through the cost. But it wouldn't be like a bounce back, you will just get back to 0.

Okay. So the idea just being that your contracts will flow through on the resin side but there are some other incremental costs that may be a bit more challenging to pass through?

And we're continuing to work diligently to recover those.

Okay. And then just on the Clopay guidance change, you addressed a number of items that are leading to the uptick in the guidance there. Could you just highlight 1 or 2 kind of what's the key drivers of the $20 million uptick. You mentioned some positioning in Brazil. It just wasn't quite clear to me what gave you that much more optimism.

Just a couple. So relative to Brazil, they had a conversion capability that was actually lower cost than what we had inside our existing facility. It had available capacity on it. So we're transitioning business from one of our legacy Berry facility to the Clopay facility, taking advantage of a lower converting cost. That's an example there. Relative to SG&A, typical to what you might expect, opportunities around process improvement, overall. And I think with Clopay, we looked at not only the Clopay business, but holistically our HHS business, and said, "How can you use the footprint of Clopay, the people, the resources, the best practices and afford ourselves an opportunity for a reorganized HHS as a whole and use this as the impetus to do it?" And we've taken full advantage in terms of people, processes, facilities, in terms of where products run and don't run, how we streamline account coverage and deliver value to our customers. So it's a whole host of things. But we're really excited about it. And then as I think we've talked about before, every opportunity we have to do an acquisition gives us a -- basically a statement in terms of our level of competitiveness. And we remain committed to and believe that we're a low-cost provider. We'll continue to maintain that position. And the decisions we make every single day will be focused on how we create more shareholder value.

Your next question comes from the line of Adam Josephson.

Mark, one last question about the EBITDA. So I know polypropylene prices, as you mentioned, came down in February and March. So subsequent to your last call, your polypropylene costs have come down, right, so -- and polyethylene hasn't moved. So I guess, what change with respect to your inflation expectations for the year, when, if anything, I would've thought inflation would've been slightly more benign than you would've thought 3 months ago?

Yes, I think that's fair in polypropylene. Obviously, we have a lot of cost in our business outside of that particular item. But that is true for polypropylene. Obviously, difficult to predict how the balance of the year is going to play out. But overall, inflation for us in Q1 was I think around the 3% on a net basis. And then Q2, it jumped to 6%. So it doubled year-over-year. Those are including things like transportation, other raw material costs. And really across all of our cost categories, that was impacted. So it wasn't a specific polypropylene-related item, it was more driven by the other costs.

And just related to that, Mark. If inflation was 3% in 1Q and 6% in 2Q, roughly, what are you expecting this quarter?

I don't have the exact number in front of me, Adam, but I would expect some moderation, to your point, relative to polypropylene. And so I would expect our price/cost spread as a result to that to improve year-over-year on a quarterly sequential basis.

Okay. And just one more on inflation, Mark. What are your expectations for polypropylene and polyethylene? Do you expect them to move much from April onward?

We don't -- obviously, very difficult to predict that. There's people that do that for a living, trying to project expected market prices for resin. I don't think we're in a position to give any better guidance than they do. But we just work diligently to maintain our low-cost position. Resin for us is a pass-through. We continue to believe we're in -- most of our business is in the lowest-cost region of the world, with 80% of our business in the U.S. As Tom mentioned earlier, it's a great substrate. But in terms of predicting whether or not it's going to go up or down in the short term, I'll probably leave that to the experts.

And just one last one along those. I know the company has talked in the past about this wave of polyethylene capacity hitting North America, right, around now, and there's been a lot of discussion about how polyethylene is bound to fall pretty significantly at some point because of the -- are you in that camp still? Or has it taken so long for this to happen that you're not certain whether it will -- perhaps this won't actually happen after all?

No, we -- I would say, first and foremost, the billions of dollars of investments that's been made by the petrochemical companies in polyethylene capacity is, first and foremost, a great sign for our business and our industry. (inaudible) of deployment of this capacity. It's probably not spoken of enough. But in talking with many of the companies that have deployed new capacity, some groups take as much as 2 years to get to full run rate of those crackers. Some are at varying stages. So you have not seen yet the full benefit of all the capacity. And I should also state that the impact of the hurricanes had a tremendous impact on that start-up. And it's still being felt today, believe it or not. So no, we still believe it's a great thing for the industry. We believe Berry will do its best to ultimately compete in the marketplace and we think this is a great reflection for our industry. And that we think, as a low-cost producer, we're going to find ways to create that value for our customers.

Your next question comes from the line of Brian Maguire.

This is actually Connor Robbins sitting in for Brian today. Just wanted to follow up quickly on Adam's question, just talk about resin and it's potentially coming down a little bit more. Is there any potential for the working capital assumption of cash use of $40 million to be maybe a little bit conservative if resin continues to moderate?

Yes. On our last quarter, the resin market was such -- it's about $7 million. Let me step back and say it's about $7 million if all resin grades go up by $0.01. And that math would have implied slightly larger headwinds than $40 million on our last call. Obviously, the polypropylene decreases bring that back in line more with the $40 million assumption, which is why we didn't update that. Obviously, we're going to work diligently to meet that. We've got a positive working capital impact the last several years. We're going to work diligently to do better. But the inflation that we've had so far this year would imply a use of $40 million for fiscal '18.

Okay. Got you. That's helpful. And then kind of on the same lines, just looking at the margins in each segment. Wondering if you could give any details on what your expectations are for the next 2 quarters considering Engineered Materials you've been doing a little bit more of a printing of lower-margin businesses, which might be helping get those margins up. And just wondering if you could give more details of where you guys are expecting margin in the last 2 quarters.

We're a continuous improvement culture, I can assure you. So the expectation is that we will -- any negative impacts that we [meet] -- that we've met relative to raw materials will offset with passing those -- that inflation on to our customers. And coupled with process improvement, it's always the objective to increase our margin profile. So it hasn't changed a bit. We expect and we hold our businesses accountable to grow those margins each and every year. And as we've done in a variety of different inflationary environments, macroeconomic cycles, our margins continue to be maintained in the 18%, 19% range for quite some time now. So we don't expect that to change.

Your next question comes from the line of Arun Viswanathan.

Just trying to understand your confidence level in the volume growth. We've gone through several quarters of kind of below expectation volume growth in HH&S and EM. Consumer Packaging looks like it's doing better and maybe benefiting from some of your recent wins. But on HH&S and EM, when can we expect those volumes to get better? I know that the [calling] should be done soon in EM. But HH&S, I mean, what would it take for you guys to kind of go back to your plan of low single-digit growth or 2% to 4% growth there?

Well, we saw inside of our HH&S business, when you exclude South America, we were in -- we had positive growth inside the HH&S business. And we continue to believe, with the investments that we're making in developing regions of the world, it's only going to accentuate that opportunity. And we believe the Health, Hygiene health care space, specialty materials inside that business, are poised for growth and consistent with the record amount of CapEx we spent in that business, $130 million over last 4 quarters. In terms of Engineered Materials, we've talked about the volume price trade-off that we chose to make. We continue to believe we're a low-cost provider and we'll make the decisions on businesses that we win and we lose based on the shareholder return and shareholder value that creates as well as making certain that we provide discipline to the industry segments that we're leaders in. And as you said, inside of Consumer Packaging, similar story. We've made real investment in targeted applications. We're going to see the benefit inside the foodservice space. Our target positions within the health care space for CP continue to grow, and our hit rates are growing there as well. So we're taking the necessary steps to complement what we've done from an M&A perspective with organic growth strategies tied to specific capital investment that the teams are accountable to deliver against. And we feel good about that right now in all 3 spaces.

Is there -- and just as a follow-up. I mean, do think that there has been any more pressure or any more difficulty in raising prices to offset the raw material pressure in the face of weak volumes? And so if you do see volumes recover, you could see that price/cost capture also improve?

So first and foremost, as we said, this is no different than what we've seen in recent cycles. We're able to deliver and execute against raising price. Anybody on the phone that's ever been presented and worked through price increases, it's never easy. It's hard work. But we're capable and we've done it historically. We'll do it now. And relative to demand, listen, we're in a competitive space that's still very fragmented, and we're a low-cost provider. Being a low-cost provider, we ultimately can determine what we win, where we win. But I think the key is making certain that we do it in a disciplined manner, maintaining the margin expectations that you've grown to expect.

And just lastly on cash flow. Looks like you've done free cash flow around $67 million through the first half of this year. There's a lot of puts and takes, I guess, in your free cash flow this year to get to that $630 million. I'm just curious, looking out into 2019, if you see lower CapEx and some other slight improvements, how do you feel about 2019 free cash flow? I mean, should we assume that it's going to be comfortably above what you achieve in 2018?

Yes, Arun. We focus on daily -- on our cash flow daily. We've grown our cash flow every single year as a public company, and it's an important metric for us that we'll continue to focus on.

Your next question comes from the line of Mark Wilde.

Just a couple of clean-ups. Is it possible, Mark, to get some sense of how much headwind do you think kind of just freight and transportation created this last quarter?

Yes. I don't have the numbers in my fingertips, Mark. And obviously, it varies by customer and by how they're shipping. We feel like we're advantaged from a footprint perspective versus our competition, right? Many of our competitors have single locations or a couple locations. So we look at it as a long-term advantage in terms of the footprint that we have with 130 sites globally, many of those located in the U.S. where we can be closer to customers than a lot of our competitors. So long term, we view it as a competitive positive. But in the short term, obviously, we're working to pass-through those costs to our customers. I apologize. I don't have the numbers at my fingertips to quantify it for you.

Okay. And then just actually following on that footprint and sort of given the volumes we've had recently, any thoughts about sort of further footprint moves here in North America in the next, I don't know, 2 to 4 quarters?

We continue to evaluate opportunities as they present themselves. We just completed one in Mexico where we successfully consolidated a facility, and it's an ongoing basis. It's never really, Mark, part of a project or initiative. We ask ourselves at every opportunity to assess if we can further continuously improve and drive performance improvement results, and it hasn't changed. So that's just one example of one that just was completed here last quarter.

(Operator Instructions) Your next question comes from the line of Chip Dillon.

This is Salvator Tiano filling in for Chip. So the first question, and I know you already [talked] plenty on the guidance, and we know what has changed in terms of resin prices. But what I would like to understand a little bit is since the last time you offered this $630 million figure, it was pretty much in the middle of your fiscal quarter. So what was different then, since you had already experienced half of the performance and you didn't feel that you had to change that figure then and you did it only now?

Yes. Now just, again, inflation and the recovery of inflation and the timing lag associated with that. And then again, just a modest impact relative to the slightly weaker volumes in the first half.

I'm sorry, I didn't catch the last part of the answer.

We just -- the volumes in the first half were slightly weaker than expected for the full year.

Okay. Understood. And my second question is, obviously, the stock is not doing great today and has come [off] recently. How does that change a little bit your capital allocation priorities? You -- always M&A seems at the forefront, but is there a point where buybacks are much more attractive and there's no sense in looking for acquisitions anymore?

We review that quarterly with our Board of Directors. We outline what the opportunities are in terms of debt reduction, capital investment, M&A, share buyback as well as dividend. That's reviewed every single quarter. I'm not at liberty to share specifically our intention there. But we continue to believe that we've got opportunities to continue to invest in high IRR capital investments, debt reduction, M&A, along with share buyback and possible dividend deployment. All those are available to us, and we review those with the board every quarter.

Perfect. And a small one, I don't know if you mentioned it earlier. You discussed kind of the volume-price trade-off in Engineered Materials, and I assume that helps you have a positive price/cost spread. Is there kind of an indication what would have been that price/cost spread if you have not pushed for price over volume kind of if you had taken the approach in the -- that you had in the other 2 segments?

Yes. I mean, I guess that would be speculation to try to apply hindsight to that. But I mean, we're looking to maximize earnings every day and we're continuing to make those decisions to do what we think is best for our shareholders, and we'll continue to do that.

Your next question comes from the line of Edlain Rodriguez.

This is Josh Spector on for Edlain. Just a question in terms of M&A opportunities. Does the change in the U.S. tax laws impact your outlook at all for opportunities within the U.S.? So I guess -- I mean, as I understand it, if you acquire U.S. assets, maybe not necessarily a full company, there's the potential for you to expense the majority of the cost in the year 1. Is that something that factors into your thinking at all or create any new opportunities and might not have not screened as well in the past?

Sure. Yes, I mean, that would certainly be a consideration. As we consider acquisitions, that would certainly be included in the IRR calculation, the rate as well as the timing of all cash flow items. So yes, absolutely, that would be considered as we consider M&A targets in our modeling.

Would you say it has expanded the opportunities set for you? Or kind of no change?

I wouldn't say change -- I wouldn't say there's any change relative to the opportunity set. But again, that certainly, everything else being equal, would make those opportunities more better returning than what they were prior to the reform. No different than our own -- no different than Berry's own cash flow organically improved as a result.

There are no further questions at this time. Presenters, I'll return the call back over to you.

Thanks very much. I want to thank everyone for their interest this morning in Berry Global. We very much look forward to speaking to you during our next 3Q call. Take care.

This concludes today's conference. You may now disconnect.