Berry Global Group Inc (BERY) 2018 Q4 法說會逐字稿

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

Mr. Dustin Stilwell, sir, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Berry's Fourth Fiscal Quarter 2018 Earnings Call. Throughout this call, we will refer to the fourth fiscal quarter as of September 2018 quarter.

Before we begin our call, I would like to mention 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, I remind you 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. I want to thank you all for your interest in Berry and welcome you to our fiscal 2018 fourth quarter and year-end conference call. This morning, we'll be discussing several topics, including an update on the Laddawn acquisition; fiscal fourth quarter and 2018 results; highlights from our 3 operating segments, including investments in both organic growth and cost reduction; as well as our expectations for fiscal 2019. Afterwards, Mark and I will be happy to answer any questions you may have.

First, I'd like to welcome the 380 employees of our recently completed acquisition of Laddawn. Laddawn is a manufacturer of blown polyethylene bags and films with a unique to industry e-commerce sales platform, which can be viewed at www.laddawn.com. The team has a proven track record in delivering strong organic growth with over $145 million in net sales, and we expect to add annual cost synergies of $5 million. The business adds 5 manufacturing facilities spread across the United States and is operated within our Engineering Materials segment. I'm extremely excited with what Laddawn's proven web and mobile sales platforms has brought to Berry, and we believe Laddawn's highly technical online capability will support immediate growth via this e-commerce platform to assist in quicker customer response times and small order fulfillments for the faster-growing small and mid-sized customer base. The combination is exceeding our expectations and we will soon be adding other Berry products to this platform.

Turning to Berry's overall financial results and highlights for the fourth quarter and 2018 fiscal year on Slide 3. During 2018, we were met with significant inflation across many of our key inputs, which created a short-term pressure on our earnings. But we feel positive about what we've accomplished throughout the year and our outlook for the future. We completed 2 strategic acquisitions, initiated a share repurchase program and made investments for future organic growth, while generating record sales, operating EBITDA, free cash flow and earnings per share.

For the fourth quarter, sales grew 9% to $2,054,000,000. For fiscal 2018, we generated $7.9 billion of net sales, an 11% increase, with all 3 businesses delivering net sales growth in the year. Operating EBITDA was $1,380,000,000, and our adjusted earnings per share was $3.37, an increase of 10% and an impressive 5-year compounded annual growth rate of 23%. We continue our track record of exceeding free cash flow guidance, generating a fiscal year record $634 million of free cash flow in 2018. Each year, we communicate our free cash flow guidance to you, and I'm extremely proud of our team successfully exceeding the goal each and every year. Our focus on growing our cash flow and allocating it effectively towards maximizing shareholder value remains unchanged.

Looking at some of our highlights. Our Consumer Packaging business reported strong organic sales growth in the quarter and fiscal year of 8% and 5%, respectfully (sic) [respectively], led by our foodservice products, driven by a stronger demand in quick-serve restaurants and convenience stores, along with stronger overall end market demand for certain products. We're encouraged by the momentum of the division delivering 4 consecutive quarters of positive organic sales growth. Our investment in advantaged products, such as our new polypropylene drink cup and lid, and our focus on faster-growing end markets have proven successful. Our drink cup offering provides a fully recyclable patented design that maintains rigidity, provides clarity for our customers' products and reduces weight. We believe these attributes were instrumental in customers' decisions to convert and roll out nationwide our new all-clear cup and lid combination to reenergize their drink cup offerings.

Our Health, Hygiene, and Specialties division recorded strong quarterly sales growth of 21% as well as a 16% improvement in operating EBITDA, including the impact of the recently completed acquisition of Clopay. The division reported sales growth each quarter in fiscal 2018 totaling 15% for the year and grew 3% organically in the fourth quarter. The integration of Clopay is going as planned, as previously noted, and we will generate $40 million in annual cost synergies, with about half of this amount incrementally benefiting fiscal 2019. This business has brought great people to our Berry family, along with leading film technologies into Berry's large product platform, serving our global hygiene customers.

Inside our Engineered Materials division, we delivered strong sales and operating EBITDA growth through fiscal 2018 of 13% and 12%, respectfully (sic) respectively . It was a very busy year as this business completed systems conversions related to AEP and Adchem acquisitions and successfully completed the acquisition of Laddawn in late August. This business also brought on great people and new technologies that will further benefit our distribution business in the years ahead.

As you recall, last quarter we announced a new share repurchase authorization of $500 million and kicked off the program, purchasing $35 million in Q4. Our financial performance and balance sheet has strengthened considerably over the past several years and are now in a solid position to return cash to shareholders while still maintaining financial flexibility to execute our strategic plan, further strengthen our balance sheet and invest in future growth. We expect to continue to execute on our share repurchase plan in fiscal Q1, given current attractive market conditions and valuations. We will continue to update you quarterly on our progress as we remain committed to a balanced and dynamic capital allocation strategy to maximize shareholder value, which will continue to thoughtfully include: investment to grow our business organically; execute strategic acquisitions; debt reduction; and return cash to shareholders. We have high confidence in our ability to generate significant shareholder value, based on our historic track record and future growth prospects.

Now I'd like to discuss what we're doing to promote the benefits of plastics. At Berry, we continue to believe the possibilities of plastics are endless. Whether it's used in applications such as health care, medicines, food storage and spoilage protection products, from cell phones to cars, plastics is one of the most versatile material in the planet. We're encouraged by the progress and are partnering with trade organizations to build alliances and improve collaborations across the value chain with key influencers, specifically around: First, prevention, where we're refocused on the enhancement of our recycling infrastructure; second, innovation in developing new sustainable technologies and supporting the use of reprocessed materials; third, education and engagement, where we're actively engaging with government, industry and consumers to drive effective solutions; and lastly, cleanup, where we're developing solutions to address and clean up areas of existing plastics wastes in the environment.

Before I turn the call to Mark, who will review our Berry financial results and fiscal 2019 guidance in detail, I'd like to highlight our expected $670 million of free cash flow in fiscal 2019. We remain committed to growing our cash flow and delivering on these commitments as we had each year. Mark will provide more detail in his remarks and then I will come back to summarize our strategy and open the call up for questions. Mark?

Thank you, Tom, and good morning, everyone. I'd like to refer everyone to Slide 4 now. As Tom referenced, fourth quarter sales were $2,054,000,000, which was up $173 million or 9% over the prior year quarter, primarily due to recently completed acquisitions and organic sales growth of 3%. From an earnings perspective, we achieved quarterly operating EBITDA of $346 million. Higher raw material manufacturing and transportation cost of 9% were partially offset by the recent -- by the additions of recent acquisitions, along with cost-reduction efforts and price increases. During a year of significant inflation, we continue to work diligently within all 3 segments to pass through these increased costs, and we remain committed to offsetting them in a productive manner. Just today, we announced that we are taking additional pricing actions to recover these inflationary costs.

Now turning to Slide 5. Reported sales for the full fiscal year 2018 was an annual record of $7,869,000,000 compared to $7,095,000,000 in 2017. This 11% increase was primarily due to recently completed acquisitions. Operating EBITDA from fiscal 2018 also came in at an annual record of $1,380,000,000. Accounting for the annualized impact of acquired businesses, including cost synergies, our adjusted EBITDA was $1,449,000,000 for fiscal 2018. Our $53 million increase in operating EBITDA was a result of contributions from acquisitions and lower SG&A costs, partially offset by cost inflation in excess of our selling prices. In this year of significant inflation, where costs went up nearly $300 million, we were able to largely offset with $200 million of price increases.

As a reminder, plastic resin represents about half of our costs and we have automatic pass-through arrangements on approximately 75% of our purchased resin, with a timing lag of about 1 month. These pass-through arrangements typically do not cover costs outside of resin, and the majority of our under-recoveries this past year relates to inflation on costs other than resin, such as corrugated boxes, freight and colorants, to name a few. While we experienced nearly $100 million of under-recovered inflation in fiscal 2018, historically, we haven't seen back-to-back years of negative price/cost spread.

Looking at the results of each operating segment starting on Slide 6. Sales for our Engineered Materials division for the quarter was $682 million. The 1% sales dollar decline from the prior year quarter was primarily driven by lower sales volumes, partially offset by an increase in selling prices, along with the contributions from the Laddawn acquisition. The volume headwinds primarily result from material qualifications and development activities in the September 2018 quarter to drive future earnings growth as well as strong volumes late in the September 2017 quarter. Operating EBITDA in our Engineered Materials division was $122 million, which is down 8% from the prior year quarter, primarily as a result of incremental volume last year, costs related to our manufacturing cost-saving initiatives and the timing lag of inflation recovery.

Next on Slide 7. Our Health, Hygiene & Specialties division delivered sales of $724 million in the quarter compared to $596 million in the prior year quarter. The increase of 21% was primarily attributed to the Clopay acquisition and organic sales growth of 3%. The organic sales growth was primarily driven by higher selling prices, partially offset by softer volumes in baby care and an unfavorable currency impact. To the extent weakness in baby care persists in certain regions, we are prepared to reallocate our manufacturing capabilities and resources to other markets such as adult incontinence, healthcare and specialty applications. Operating EBITDA increased 16% in the quarter to $123 million. This $17 million increase on operating EBITDA was primarily a result of the Clopay acquisition and cost-reduction initiatives, partially offset by under-recovery of inflation.

Turning to Slide 8. Sales in our Consumer Packaging division were $648 million in the quarter, which was $49 million higher than the September 2017 quarter. The 8% organic sales growth was a result of higher selling prices of 6% and volume growth of 2%. Operating EBITDA for Consumer Packaging in the quarter was lower at $101 million compared to $111 million in the prior year quarter. The timing lag of recovery in higher raw materials, transportation and manufacturing costs were partially offset by the volume growth. Our results in the quarter also included increased costs from the start-up of new capital expenditures to support our continued growth as well as negative overhead leverage resulting from inventory reductions.

Slide 9 provides a summary of our income statement for our fiscal fourth quarter and fiscal year. Overall, operating income was modestly lower compared to the prior year quarter, due to the items previously discussed that drove the operating EBITDA changes. Interest expense was $64 million compared to the prior year expense of $66 million. This decrease was primarily a result of interest rate reductions we achieved from proactive measures to lower our interest costs from completed refinancings. Additionally, we made principal payments of over $300 million on our term loan debt throughout fiscal 2018 and have made an additional $100 million payment at the start of fiscal 2019.

In wrapping up the income statement, our net income for the quarter was $133 million, a 21% increase compared to $110 million in the prior year quarter. Earnings per diluted share was $0.99, up 22% compared to the prior quarter and adjusted net earnings per diluted share increased 3% to $0.90 in the current quarter.

Next, on Slide 10. The company generated a quarterly record of $448 million of cash flow from operations, a 13% increase compared to the prior year quarter. Net capital expenditures in the quarter were $66 million and totaled $333 million for fiscal 2018. We invested a record level of capital in fiscal 2018 to support the organic growth and new product growth initiatives that we have discussed the past few quarters and are starting to see and look forward to the continued sales and earnings growth from these projects.

Our adjusted free cash flow set both quarterly and annual records at $382 million and $634 million for the September quarter and fiscal 2018, respectively. Our consistently increasing, dependable and substantial free cash flow provides us the opportunity to return value to our shareholders. And with our new $500 million share repurchase program announced during our last earnings call, we repurchased $35 million of shares outstanding during the September 2018 quarter. And as Tom mentioned earlier, if compelling valuations persist, we intend further repurchasing our shares in fiscal Q1.

Our financial guidance and assumptions for fiscal '19 are shown on Slide 11. We have targeted our fiscal 2019 adjusted free cash flow at $670 million, which includes $1,036,000,000 of cash flow from operations, partially offset by capital expenditures of $350 million. Our guidance also assumes constant-currency rates at the end of the fiscal 2018 and a normal inflationary environment on our costs.

Cash interest is estimated to be $270 million, cash taxes at $165 million and working capital and other cash costs at $45 million.

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

Thank you, Mark. As I mentioned earlier, in fiscal 2018, we generated record financial results. We're extremely proud of our history and predictability, having grown our free cash flow and exceeded our targets every single year as a publicly-traded company. With respect to capital allocation and our strategies for 2019, we will continue to do what Berry does well: manufacture products within the stable end markets, grow our business organically, leverage our scale advantage, locate and integrate accretive acquisitions and generate consistent dependable free cash flow.

Our acquisitions pipeline continue to be very robust with global opportunities in each of our 3 segments. 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. We work to identify the best people and best practices at each acquired business and apply those resources and practices to the entire enterprise. This historical disciplined track record is the foundation of what has led Berry to where we are today, which has provided consistent long-term compound annual growth rates of over 20% on revenue, EBITDA and shareholder return and why we believe we have a bright future ahead.

In fiscal 2018, we completed the strategic acquisitions of both Clopay and Laddawn. The Clopay acquisition has strengthened our position within the attractive health and hygiene market and broadened our presence as a global supplier in many of the leading consumer industrial product manufacturers. We will continue to work with our global customers to provide an enhanced product offering that reduces cost and provides improved performance in our global hygiene films offerings. Laddawn has demonstrated strong organic growth through its proven web and mobile sales platform, which targets the faster-growing small and medium-sized customer base. The combined Laddawn and Berry custom film product portfolio will provide a vast range of product offerings to thousands of value customers, further strengthening our core films business.

Further, another leg of capital allocation is our share repurchase plan. Our share repurchase plan gives us the opportunity to return cash to shareholders through opportunistic repurchases and drive long-term shareholder value. With our free cash flow yield of 11%, we feel our stock is an attractive investment and anticipate further executing on the share repurchase plan. We will continue to be dynamic in our use of cash to drive value for our shareholders, and we'll provide updates quarterly on our progress.

Next, through our strategic decisions on capital deployment, we've been able to demonstrate organic volume growth by providing advantaged products in targeted markets. Our record level of capital expenditures in fiscal 2018 and our plan for 2019 is evidence to our commitment and focus on organic growth to drive further market value for Berry.

Let me lay out by segment what we're specifically doing to drive positive organic volume growth. Within Consumer Packaging, our value proposition and recent success around connectivity, sustainability and cost innovation has led to innovative packaging solutions which addresses unmet needs. A few new products being launched include Verdant, which is a unique range of post-consumer recycled products for the beauty and personal care markets. Embark, a new range of child-resistant containers for the growing legalized cannabis market. And lastly, we partnered with Digimarc, created a new technology where we can provide printing for our rigid products that allow consumer interaction through the use of their smartphones as well as printing that will enable the products to be designed with a full package barcode, delivering convenience at checkout. We continue to look for opportunities where we can provide advantaged products in targeted markets, and I'm pleased to report that we're continuing to see stronger pipeline and improved hit rates across the business and most pronounced in our health care and specialty rigid packaging products.

Within our Health, Hygiene & Specialty division, our previously announced $70 million investment in China for state-of-the-art hygiene products is on target to be commercialized by the end of calendar 2019 and supports our leading position in this global market. Additionally, as Mark mentioned, the HH&S division has redeployed assets and developed resources to support the higher growth area of adult incontinence in the Americas and Europe. We are well positioned with our asset base and product solutions related to discretion and comfort to build on a leading market position in the faster-growing incontinent segment. With the ensuing rise of the middle class globally, aging populations and higher GDP growth rates in developing countries, we continue to believe demand will grow in the high value-added hygiene product applications.

Additionally, in 2018 we experienced strong growth in our industrial and health whitening product lines and our pharmaceutical packaging products. Specifically, in whitening product lines, our previously announced $50 million investment in North America with Berry's proprietary Spinlace technology continues construction in our Mooresville, North Carolina location. And lastly, in our healthcare markets we are expanding in both our Offranville, France and Bangalore, India sites, supporting our global pharmaceutical customer base. The investments in ophthalmic products, along with our full line of vials and nasal dispensing products enhance our global footprint in serving our customers in the pharmaceutical packaging segment with our continued commitment to innovation and quality. We remain focused on high-growth markets and applications, where we're partnering with our customers in the commercialization of products, and feel confident in these investments will promote our longer-term growth expectations.

And within Engineered Materials, we're utilizing our new film technology in flexible packaging in our recent investments in value-added multilayer films to support growth in e-commerce, which will provide an opportunity for our customers to have a more cost-competitive packaging solution. Earlier in the year, we secured a multiyear supply agreement with one of our packaging converter partners who specializes in the manufacturing of protective packaging solutions for e-commerce, courier, fulfillment and the distribution markets. In order to support their expected growth, we're investing in excess of $20 million for capacity expansions over the course of the next 6 months in multiple Berry facilities.

Additionally, we're investing in our innovative protection solutions product offerings, which provide enhanced load containment, ultimately reducing the breakage, damage and loss incurred in the transportation of goods.

Lastly, 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. The fundamentals of our Engineered Materials segment remain positive, as reflected by another solid fiscal year.

And 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 at Berry will continue to drive positive results and achieve our goal 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 may have.

(Operator Instructions) First question comes from the line of Mr. George Staphos.

Tom, thanks for the rundown on the new products and the like. I guess piggybacking on from that, my questions to start would be really on additional guidance for '19, if it's possible. Can you talk about what kind of EBITDA growth notionally we should see from the 3 segments, barring acquisitions and obviously holding the raw materials constant, freight constant? Should we expect, for that matter, EBITDA growth across each of the 3 segments? Why, why not? The related guidance question, if you could, just what assumptions are you making for resin pricing, specifically polyethylene, polypropylene and also freight in your assumptions?

George, just a couple comments. We are a continuous improvement culture. Each of the business is ultimately -- are measured against and accountable for driving continuous improvement around margins, around revenue growth, productivity, et cetera. Obviously, we continue to be focused on fully recovering and offsetting the inflation that we incurred in 2018 and 2019. And you'll hear in certain businesses, we've taken the proactive steps to ultimately look toward other opportunities to increase the types of raw material used in product composition, both in terms of resin and other raw materials, to ultimately give us maximum flexibility towards times of inflation. We're not quoting a specific improvement number by business, but relative to the forecast for 2019 on inflation, we're assuming flat inflation based on where we end in 2019 going forward, in terms of polypropylene and polypropylene. We realize this is a very dynamic space. And again, we -- that has been traditional with our budgeting process to just take the ending number on the prior year and carry it forward in the coming year. Mark, any comments?

Yes, George. I would say with respect to your specific questions on guidance, while we don't provide guidance by segment, we certainly do expect all 3 of our segments to grow organically on earnings in fiscal '19. With respect to resin, to Tom's point, we typically project flat on resin. So flat for the year. And with respect to the other costs, I know you mentioned freight specifically, we certainly have some increases as we've lapped the increases that occurred kind of early to mid-2018. We've got that accounted for as well as some incremental inflation on freight and other costs assumed in our guidance.

Next question comes from the line of Mr. Ghansham Panjabi.

This is actually Matt Krueger sitting in for Ghansham. First question, can you expand on your base volume expectations by segment for FY '19, along with some of the key contributors in each of the segments? I think this is something that you mentioned or guided to in the past. It'd be great to get some more detail heading into fiscal '19.

Yes, we expect each of our businesses to generate low single-digit organic sales growth across each of the spaces. I spoke -- we've increased our growth capital investments for the company, directing our investments towards what we believe are faster-growing spaces, where we're targeting specific markets with advantaged products, similar to what we've done inside of our Consumer Packaging business. And similarly, I think another trend is what we've done inside of HHS, where we're migrating more of our capital investment towards higher growth areas of the world, specifically China, to support hygiene as well as some of our specialty products in air filtration, not to mention the faster-growing wipes space with the investment in Mooresville. And we obviously talked about Engineered Materials as well in terms of the investments around converted film. So that will continue to be the trend where we want to be very smart and judicious with our capital spend. We want to make certain that we've got advantages when we were investing. We want to make certain that we've got the appropriate end customer partner to minimize risk. And as always, we're focused on making investments with asset mixes that are as flexible as possible.

That's very helpful. And then just as a follow-up, trying to dig deeper into a couple specific product categories. Can you provide some added detail on the inventory reductions you referenced in the consumer segment? Is this something that we should expect in the FY '19 as well? And then you referenced the potential to reallocate capacity away from baby care into other categories. Has something changed in the baby care market that makes this market less attractive or is there just better structural growth elsewhere?

No. Yes, very good, great question. No, we continue to be a leader in baby care. We're really seeking out greater balance across the portfolio, areas like adults incontinence. Wipes have higher growth rates at this point, but we're very well equipped to manage that space. And clearly, we're committed to this space. We're just getting better allocation across the portfolio and focus just to -- as previously answered, to make certain that our investments are targeting resources towards the higher growth areas of each of the respective portfolios.

And Matt, with respect to your question on working capital, we're certainly working every day to try to reduce the working capital required to operate the business. So proud of the efforts of the consumer team who are continually working to improve our systems and processes to reduce that. So certainly our goal for next year is to continue those efforts. We have a conservative -- we don't have that built into our guidance. We actually have a more conservative build built into our guidance for our working capital and other cash uses. But just like other years, we're going to work harder to do better than that.

Next question is from Mr. Brian Maguire.

Just wanted to follow up on George's question on some of the cost and price assumptions in the guidance. I know from the slides, looks like in fiscal '18, price versus COGS was roughly a $100 million headwind. Just wondering if you could give us a rough sense of how much of that you'd expect to claw back in '19. Is it like half of that amount? And then -- and just kind of related to that, I think you've mentioned that polyethylene, polypropylene prices, you expect to be flat. So just to confirm, you're not expecting any drop that we've seen from the recent fall in oil prices to benefit you, that's -- that would sort of be upside of the guidance?

Right, yes. About -- so about half is a fair, I think, assumption in our guidance for fiscal 2019. About half of that half, if you will, so 25% of the total just relates to the mechanical timing lag of the pass-through of resin cost changes on our contractual arrangements; with the other half, or again 25% of the total, coming from incremental pricing as agreements mature, as we've talked about, recovering that inflation that's occurred since the agreement initiated. And you're right, again, with respect to guidance on resin, flat is our overall assumption. Obviously, here in the -- as the year has started, it appears as though that market may be declining with the recent drop in oil prices. But we're early in the fiscal year. So flat is our assumption for the full year.

Okay. And just could you just remind us what the impact of like $0.01 move in resin means for working capital? I think we've talked about maybe $7 million, $8 million in the past. Is that right?

That is correct. It's $7 million a $0.01. Now that assumes all grades move by $0.01. Obviously to the extent one grade moves differently than the other, you would have to prorate that approximately half and half. It's a little more weighted towards polyethylene, but half and half is a pretty fair assessment.

Okay. And then, Tom, I just wanted to ask on Laddawn, I think the platform there looks quite different than your existing one. Just wondering how transferable you think it could be to the legacy Berry business. Maybe you could just talk a little bit about how their order and fulfillment is a little bit different than what you've done historically. And if all of that is applicable, then why only a $5 million sort of synergy number there? Is that potentially a conservative number, if you can transfer some of the order and fulfillment just to move it down to the rest of your company?

Great question. We're very excited about Laddawn acquisition, and I would look at that purchase for us as being basically a growth investment. They've got a business model in terms of small lot order fulfillment that is winning the marketplace. The business is demonstrating very strong growth, high single-digit, low double-digit growth that we believe is ultimately going to be transferable to other aspects of Berry's portfolio. What Laddawn brought our company and to our team was a technology capability and know-how, a front end that was unique to the marketplace and certainly unique to the Berry. The value we bring is the manufacturing competency and scale know-how that we can supplement that with. And we're being very judicious and cautious with what we add, how we add and how fast we add because the business is working really well. And what we're focused on is, ultimately, how we can pace our introduction of new products to that portfolio, not just to benefit Engineered Materials, but potentially other aspects of the company. We'll have more on that in future calls, but it's clearly addressing that Tier 3, Tier 2 customer, looking for smaller purchases, looking for greater flexibility. And Laddawn model provides that. Very happy with the acquisition.

Next question is from Ms. Debbie Jones.

Just one more question on the bridge to 2019 EBITDA. If I look at Slide 5, you have your 2018 adjusted EBITDA of $1.449 billion. If I take the comments that you just made to Brian, I'm assuming that the bridge, about the $1.5 billion you've implied for next year, is all just COGS -- I'm sorry, the price/cost spread. So should we assume that maybe there's a modest volume improvement offset by SG&A? Or what are the other buckets there?

Yes, there's some -- I think, Debbie, your high-level analysis there is accurate. There's some other items that offset each other, but that's a fair starting -- that's a fair way to think about it.

Okay. And then just second question, you made some comments in the prepared remarks about enhancing the recycling infrastructure and also plastic cleanup. I just wanted to understand what you think your role is in that, are you referring to some industry initiatives or something specific to Berry?

Debbie, this is more of an industry-wide initiative and hopefully, and maybe even the next call, we'll have an opportunity to speak more specifically. But the focus is really on trying to assemble different aspects of the value chain: brand owners, resin chemical companies, converters like ourselves, reclamation houses, waste disposal houses, in a collaborative effort to build alliance and collaboration all across that value chain. And I can't be too specific, but we are already having conversation, discussions around the strategy, the plan and the timing, the execution of how we leverage the resources across that alliance, if you will, to ultimately drive value in the space around those categories of prevention, innovation, education and engagement as well as cleanup. And I'm really pleased because I'd say that it's the first time I've seen the discussions happen across that value chain with the groups I mentioned. So more to come on future calls.

Next question is from Mr. Arun Viswanathan.

Just another question on the guidance. I guess first off, was there anything that changed, I guess relative to 3 months ago? Was it maybe slightly less working capital use or maybe potentially a better traction on your price increases or some higher volume expectations? Just wondering what the sensitivity is around that $670 million number for next year.

Yes, no, I would certainly -- in the near term here, Arun, as we mentioned earlier, there appears to be some modest tailwind to our guidance with recent oil moves, but again, very early in the year. But I would say, outside of that, nothing's really changed in the macro environment that would drive a guidance change, relative to what we were thinking about 3 months ago.

Right, okay. And then just as a follow-up, wanted to understand CP a little bit better. Good volume growth, but slightly below us on EBITDA. So I was just wondering if that was just a short-term resin situation or it was the business integration costs. And do you also increase your cost-reduction efforts across the whole company? Or -- and what was kind of the target for cost reductions for next year?

So relative to CP, it's predominantly driven by raw material inflation, the offset of raw material inflation. And relative to the cost-reduction opportunities, each of the businesses are ultimately accountable to drive cost reductions because we believe a value proposition for Berry is being a low-cost producer. That benefits us, both in terms of the profitability of the business as well as our ability to enhance our organic growth proposition. Key areas of inputs clearly for us are around materials, around energy, around scrap and around freight. And each of the businesses have goals and objectives around that, that are incorporated and built into our 2019 guidance, but we're not quoting numbers by business.

Next question is Mr. Anthony Pettinari.

Mark, in your prepared remarks, I think you talked about taking additional pricing actions to recover costs. And understanding you're probably limited in terms of what you can share, is it possible to give any kind of detail in terms of what form that's taking, whether it's freight surcharges or normalizing price increases or other kind of efforts? And then I think for resin, I think we have a pretty clear picture of the lag times to recover costs. But for non-resin costs, stuff like freight and other categories, is it possible to say how many quarters typically it takes you to recover those?

The -- listen, as we said before, the businesses remain committed and are chartered to find ways to fully offset inflation. As Mark mentioned, we recently, in 2 different press releases, communicated recent price increase announcements that we have in a couple of the businesses right now. Clearly, the timing lag in other raw materials is longer than the indices-based inflation area opportunities we have and deflationary opportunities in resin, so they typically take longer. They could take as much as quarters, many quarters, because you're working within confines of purchase and sales agreement. So as we said before, we're not deviating from those agreements. We're working collaboratively and creatively with our end customers to find ways to offset that inflation. But the other raw material components and freight components typically takes a longer amount of time.

Okay, that's helpful. And then just shifting to e-commerce. I think you talked about a $20 million investment for capacity expansions over the next 6 months. Is it possible to say what products -- product categories that's really focused on? And then the multiyear partnership that you referenced, could you just provide a little bit more color there in terms of what your partner's providing for you and how you're taking that to market?

Yes. The partner, I choose not to mention their name specifically, but assume they're located in the major distribution houses, in the most popular distribution houses around the world, where they're ultimately creating specialty packaging. We're providing the substrate that they ultimately use to compose and build that low-cost protection solution. We've entered into a long-term agreement with them. And the growth related to that partnership has afforded us the opportunity to reinvest in this business and convert a film substrate that will supply directly to them. And again, they're located inside the distribution houses of the large mass-market commodities that are out there.

Next question is from Mr. Scott Gaffner.

Tom, just going back to your comment earlier on, I think you said low single-digit organic growth in 2019. How should we think about that price versus volume with all these new projects coming online?

It's a balance and it's a different mix inside of each business, clearly, in terms of the progress that they've made, in terms of offsetting some of the inflation with price. But I think we're very excited about the investments that we've made across all 3 of the businesses in growth spaces. And again the whole theme around targeting specific markets with advantaged products. And it will be -- it's consistent across all 3 businesses that we've outlined. We're really excited about that. I think it's -- we'd love to say that the mindset around growth happens overnight, but I think we're doing the right things in terms of reinforcing our low-cost position, and then secondly, making the right capital investments with the right targeted customers with letters of intent to reduce risk and make certain that those investments are as flexible as possible for future use.

Okay. So it sounds like you're saying we should expect positive volume growth across all 3 segments in 2019. Is that fair?

Yes. Organic volume growth in all 3 of the business are projected to be low single digits, correct.

Perfect. And then just one last question. When you look back on the cyclicality for the business, I mean clearly you didn't own a lot of the businesses that you own today back in 2009, but can you give us a sense on how you view cyclicality in the business on both an EBITDA and a free cash flow basis? And I ask about both because I would think free cash flow would actually be somewhat countercyclical, given you'd have input costs come down during a recession. But any thoughts you can give us around that would be helpful.

Yes, Scott. No, I think you said it well there at the end. I mean historically, when we've had recessionary-type environments, our input costs dropped significantly. And just like we have the lag on the way up as we did in fiscal 2018, we would have a similar lag in a deflationary environment, which would yield, certainly lower selling prices, much higher profits and cash flows. That's been the historical experience, certainly.

Next question is from Gabe Hajde.

Maybe Mark, the first one, centered around the $300 million of cost inflation that you discussed or mentioned for fiscal 2018, can you talk about sort of what's in that bucket? I'm assuming it's materials and wages and labor and all that stuff, but -- and what you'd do expect in sort of a normalized year.

Sure. Yes, the biggest -- obviously, our biggest spend is plastic resin, as you know. And we mentioned in our prepared remarks, it's about half our costs. Specifically, for fiscal 2018, polypropylene had the most significant inflation on a year-over-year basis. Other categories that we referenced also increased on the non-resin side, but the biggest category was certainly polypropylene resin, which impacted both Consumer Packaging and Health, Hygiene & Specialties more so. They're the largest users of polypropylene resin. But it's -- all of our COGS are in that $300 million number, Gabe.

Okay. And then maybe one, I guess last stab at the guidance. Appreciating that the business is sort of ever evolving with acquisitions. Can you kind of talk about maybe first half, second half split between EBITDA? I mean, I'm -- fiscal '18 shook out maybe 48% in the first half and 52% in the second. I'm looking -- I'm thinking about the way some inflation rolled through the system. You probably have some higher costs here in the December quarter and even in the March quarter that you're lapping, such that it might be more pronounced in fiscal '19?

Yes. Our business is highly seasonal. That means typically, our June quarter is our strongest quarter, followed by September, followed by March, and then our weakest quarter is unfortunately our first quarter that we start the year off. But the December quarter is seasonally our weakest quarter, and I would expect a similar layout in fiscal '19 as we've seen in past years.

Mr. Tyler Langton, sir, please ask your question.

Just on Engineered Materials, I think you said in the -- what you said in the release, I guess volumes were down 3% for the year, which seems to imply maybe a bigger decrease in the fourth quarter. I think, Mark, you mentioned something about material qualifications. I'm just trying to get more detail there in whether rationalizations are still impacting that. And just -- you said that started to pick up as we go through fiscal 2019?

Yes. Inside the Engineered Materials it's a -- we like to say that material science is a key component to what we do there. And there's never a good time to take on large-scale qualifications of ultimate raw materials, both in terms of resins as well as some of the other various components that could be in there to make up the value proposition of what the products deliver. But we chose to do that in quarter 4, qualifying ultimate raw materials with the intent to give us maximum flexibility, both throughout the year as well as during periods of inflation, to make certain that we had maximum flexibility. So the business took on that challenge. We also made certain that as part of our acquisition of AEP, we did qualifications where we determined which formulations were superior versus what we historically had done and versus what they were doing to make certain that we optimize that. And it has an impact on production. It definitely had an impact in the fourth quarter. We're going to have some hangover in our fiscal Q1 as well inside of Engineered Materials, but that is incorporated and included in our guidance for 2019.

Great. And then just on the M&A front, can you just talk about what you're seeing in regards of sort of number of opportunities out there, what the sort of pricing and multiples look like? Just any detail there would be great.

The pipeline continues to be robust. Obviously, you've seen a rise in interest rates of late. Our speculation is -- and that obviously is going to impact valuations. We continue to believe the market can provide ample opportunity for us to continue to do what we've done historically in this fragmented space. And any of you that were at PACK EXPO recently in Chicago probably got a strong sense from just the level of fragmentation inside the industry and the fact that for companies like Berry who truly believe that this is a core competency for our company, we're going to take full advantage of that as we have historically. But I think as we've also mentioned, we're going to have a very balanced capital allocation program with the goal of always maximizing shareholder value.

Mr. Adam Josephson, sir, please ask your questions.

Mark, just a couple on guidance. I know you don't give explicit quarterly guidance, but given that we're halfway through the December quarter, can you just give us a sense of what's transpired thus far? Have you seen a pickup in organic volume trends? I think organic volume was down about 2% in 4Q. Are you expecting organic line to be up this quarter? I know it's a seasonally light quarter, but any commentary on volume trends, price/cost expectations, et cetera for this -- the current quarter?

Yes. No, I think -- thanks, Adam. Relative to guidance, as we mentioned, Q1 is typically our weakest quarter. I would expect the quarters to lay out similar to historically. In terms of specific, we don't give kind of intra-quarter guidance on our calls. Tom did reference though, there is some kind of Q1 year-over-year headwinds relative to these material qualification we're doing in our Engineered Materials business that I -- and that was incorporated into our guidance in terms of how we think about the quarters laying out this year. Otherwise, I would say no other significant deviation.

Okay. And then just back to the price/cost expectation of, call it, up 50 versus down 100. I mean, on the surface, one could say you're being conservative by not assuming any resin price declines from here, but on the other hand, you're assuming $150 million delta in price/cost year-over-year. So I mean how do you think about the conservatism or lack thereof in terms of your price/cost expectations for '19, just taking into account all that, that I just talked about?

Yes, no, we -- historically, we have not seen negative back-to-back years of price/cost. I would highlight by that, fiscal 2018 was obviously not a normal inflationary environment, where we saw some things going up double digits. That being said, back to your quarterly point, Adam, I do think you have to consider the timing of when those increases really ramped up, which was our -- early in fiscal 2018. So we still will be lapping that kind of early in fiscal 2019. Sequentially, we haven't seen that move up over the course of the back half of fiscal 2018. You'll have a lapping effect and continued improvement on the price/cost as the year progresses.

Edlain Rodriguez, please ask your question.

This is Sahas Apte on for Edlain. The baby care weakness that you're seeing in health and hygiene, how long will you wait and make sure to kind of reallocate those assets? Is it a few quarters or like a year?

Well, in this niche, the nice thing is we have the -- they're kind of inter-walled. We have the ability to utilize those assets to produce baby or AI. And we continue to simply -- as we've done in all the businesses, we're just reallocating resources to support some of the higher-growth spaces. As we've said, we continue to be fully supportive and committed to the hygiene space around baby. We're a leader in that space and we continue to invest to support that leadership position. But that's happening real time right now in terms of resource allocation mix, and it's -- we think it's a good balanced way to manage the business and the portfolio of products, but still very much committed to the baby side.

Okay. And then I think within Consumer Packaging, you guys said you should see volume growth for -- based on new wins. And I think today, you said something about the food and beverage taking away some substrates. I was wondering if you guys could just expand on that a little bit in probably more detail.

Yes. Listen, we've had good opportunities. We won't talk about some of the specific substrates, but in general, both inside our Engineered Materials business as well as CP, we continue to develop advantaged products that are providing value proposition for lower costs, greater damage protection, improved clarity for consumers and brand owners to obviously market their products. And we're seeing -- we continue to see very strong success on each of those businesses. So we're bullish on the outlook, obviously. We are -- we continue to be very strong believers of the possibilities that plastics makes available to the marketplace, and we're continuing to promote and reinforce those every day.

Anojja Shah, please ask your question.

I just -- I wanted to go back to e-commerce. It seems to me like you're really ramping up your activities or capabilities in that business between the Laddawn acquisition and the supply agreements. First of all, is that true? And second, how -- it does seem like a pretty crowded market with lots of suppliers here. What does Berry do that's different?

Great question. All that we're doing is investing around what I would suggest is a broader mega trend. And the mega trend of connectivity isn't going away and people want connectivity, whether it's in the program we have with Digimarc, whether it's in having mobile online capability for e-commerce or in solution and distribution fulfilling capability with Laddawn, or whether it's supporting a partner with converted films to manufacture cost-effective protection solutions at the distribution centers. So I think in each of those: Laddawn, value proposition, serving Tier 2, Tier 3 with fulfillment capabilities faster and with more flexibility than other providers out there; Digimarc is both a matter of connectivity with the consumer as well as ease of use during the checkout process; and relative to converted films, lower costs, greater value-add, higher protection solutions. We're happy to compete in competitive spaces as long as we continue to build better mousetraps and have a strong cost position, and we think we're doing that.

Mr. Salvator Tiano, sir.

So my first question is a little bit on the volumes again, and you did mention the positive organic growth you expect across all 3 segments. But as we see between Health, Hygiene & Specialties, it seems the past 2 quarters, we've seen a decline in organic volumes there. And I wanted to know, with all these the investments you're finalizing essentially right now, how much do you think they'll contribute towards shifting that number in fiscal '19 to be positive versus what should be probably another 1 or 2 quarters of lower volumes from the legacy business?

Yes, sure. As Tom mentioned, we expect organic sales growth up from a dollar perspective in all 3 segments. Measuring volumes obviously by segment in terms -- some our products are sold by unit widget, some are sold by weight, some are sold by square surface areas. So we've got products that are growing in all 3 segments, and the mix of how that shakes out between pricing and volumes is still TBD. Generally, we assume kind of flat unit volume with again, some modest price as we look to '19 to recover the inflation that we had through fiscal '18. And as Tom mentioned, we've got, obviously, a lot of good projects going in all segments that provide upside to that expectation.

Perfect. And I was wondering if you could talk a little bit about the healthcare footprint we've seen in the Consumer Packaging business. And I think health and personal care are around 1/3 of the sales there. But if you can focus a little bit on the healthcare footprint, which areas do you operate in and what opportunities do you see to expand through M&A? Will there be any antitrust restrictions due to market share, and would you be willing to make acquisitions should some businesses come to the market soon?

Relative to acquisitions, we continue to apply our historic disciplined approach around the businesses that we acquire, but we're obviously always open to M&A. The healthcare business is an important component of Consumer Packaging, a focus area, if you will. It's not only domestic business that allows us to provide a variety of product, everything from ophthalmics, dosage delivery, control devices, prescription vials, et cetera, but it's also a global business with our capabilities in Offranville as well as Bangalore. We're excited to be making capital investments in both of those international facilities to provide support for domestic North American brand owners. So very excited about the business. We'll look at all aspects in terms of both capital investment, resource deployment as we are in every business, again, focused on targeted markets with advantaged products that have -- that have improved growth profiles. We're going to invest there. We're excited about the target position that's been built inside that business both domestically and internationally, and the hit rate and win rates inside those businesses continues to improve to the degree that we're -- we continue to be willing to make those investments in CapEx to support that growth.

Mr. George Staphos, sir, please ask your question.

Just a quick question for you on AEP and then on cost. For AEP, it sounded like you were still seeing some impact from the integration and customers finding alternative sources of supply. Is that true? Is there a way to quantify that at all, guys? And if not, obviously I'm on an open mic, are you seeing perhaps more competition than you anticipated in that market and that being one of the reason why we're seeing the AEP related volumes still declining? The second question on cost, I think you'd mentioned earlier there were some development costs that you were incurring. I think that was part of what you're getting at with your answer to, I think Tyler's questions. Is there are a way to quantify that? And also, on the inflation guidance for next year, is there a way to put some number on the freight and other costs, Mark, that's built into the guidance?

Listen, first and foremost, AEP is a phenomenal business. We continue to compete in that market every day. It's probably a shortest cycle business that we have, with the majority of that space being served through distribution. So we compete every day for volume win and volume losses. So the competitive dynamic hasn't changed. We're very comfortable with our position in that space. It continues to bring great value to us. More of the same there. We're going to continue to have ebbs and flows of competitiveness and distributor destocking, restocking. That'll continue to be a part of it. Relative to the cost-reduction initiative, we were specific in that. We definitely incurred some demand softness in the space, frankly because we allocated time on equipment to support the qualification. I'd have to again restate, there's never a great time to do that, but if you're going to do qualifications, we want to do the qualifications on production scale equipment to make certain that the value proposition that we're aspiring for is validated on a production scale as opposed to just the lap scale.

Yes, and with respect to the freight and other costs, again we saw this kind of the stepped-up incremental inflation in the first half of '18. Incrementally since then, it's really been relatively flat across most of the categories. So we have that assumption as well as a modest level of additional inflation assumed in our guidance.

Mr. Scott Gaffner, sir, please ask your question.

Sure, just 1 or 2 follow-ups. First, Tom, a lot of focus from us on volume growth, but I think maybe something you could highlight or talk to us, a lot of the new products you're coming up with have significant reductions in the weight of the product, and especially as we focus more on sustainability. So when you look at it, how important is volume growth and maybe what do you think is the long-term organic EBITDA growth in the business rather than the long-term volume growth?

Yes, and you bring up a great point, and it's probably underappreciated inside of our business, but weight reduction is a core competency of what we do. We actually chartered everything for the year, reduced the weight of the products that we ultimately produce now in next-generation products. So we've always talked about it, that the percent, it could be 2%, some products significantly more. So it's probably not the appropriate measurement of our success. And frankly, when you talk about post-consumer, post-industrial products, we are proactively marketing that. We want to make certain, Scott, that our end customers know that there's an opportunity out there, that if they choose to go to a post-consumer recycled material, that we can provide it. And what we want to do is make certain that we are equipping the marketplace with demand, that ultimately it supports reinvestment in that infrastructure to support PCR-based materials. And we think that's ultimately good business. Verdant is a great example. It was demonstrated at the plastics show. And for us, it's a clear demonstration that the end customer does not have to forgo any of the premiumization they might be looking for by using a PCR-based material. And I think the Verdant product line is a great example of how you can get both. You can ultimately have a PCR-based material as well as a premium package that allows the brand owner to market themselves as effectively as they desire.

Okay. And then just on the long-term EBITDA growth, where do you think that is for the total company?

Well, listen, our -- we -- long term, we've-- go ahead, Mark, if you like.

Yes, no, mid-single digits kind of has been the historic organic EBITDA growth of the business. Obviously, we've overachieved that historically. We've complemented that with very strategic acquisitions. But I would say organically, mid-single digits has been a historic track record for Berry, Scott.

Okay. Last one, Tom, you mentioned packaging for legalized cannabis. I mean how do you think about that as an opportunity? I mean there's a lot of investments by some large CPGs or beverage producers in the U.S., in Canada, et cetera. I mean is that -- is the discussion heating up there or what do you see is the opportunity?

Yes. I would say we're in the early innings of legalized cannabis packaging. We're simply taking on a lot of the skill set and know-how that we've developed over the years in terms of child resistance, tamper evidency, dosage control, food preservation, freshness and applying it to a different application. And I would suggest we're in the early innings of that opportunity.

No more questions in the queue. Mr. Stilwell, sir, please continue.

Thanks to everyone for your time. I'd like to wish everybody a very restful and happy Thanksgiving as well. Take care.

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