Berry Global Group Inc (BERY) 2022 Q3 法說會逐字稿

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Berry Global Third Quarter 2022 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Dustin Stilwell. Please go ahead.

Thank you, and good morning, everyone. Welcome to Berry's Third Fiscal Quarter 2022 Earnings Call. Throughout this call, we will refer to the third fiscal quarter of the June 2022 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 measures are available in our earnings release and investor presentation on our website.

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

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

Thank you, Dustin. Welcome, everyone, and thank you for being with us today.

As safety is our top priority and most important value, let me start on Slide 4. Keeping all of our teammates healthy and safe is our highest priority. We're very proud of our industry leadership on safety performance. And as you can see, we delivered an OSHA incident rate below 1 for fiscal 2021. And expect fiscal '22 to deliver another year of improvement with an expected rate of 0.8, which is significantly better than the industry average of 3.7. Our entire global team's emphasis on working safely and servicing our customers in what has been a challenging environment has made us a stronger, better and safer company.

Turning to our key messages for the quarter on Slide 5. First, our business delivered solid quarterly results, including record revenues for any June quarter and record adjusted earnings per share for any quarter in our history. Secondly, throughout the last 2 years, we've seen significant inflation and have taken aggressive pricing action and invested in cost reduction projects across our businesses. Our team has done an exceptional job and continues to make additional progress on both fronts.

Third, our ability to provide a one-stop shop for our customers on a global basis with local supply chain is unique and differentiated. We are investing for long-term growth, with a focus on faster-growing product categories and geographies, along with innovation, sustainability-led opportunities for additional growth and value creation. We've made great strides towards our sustainability goals. And we will continue to be ambitious with our commitments, which are being driven and led by the needs and demands of our extensive global customer base.

And finally, we continue to return cash to shareholders as we repurchased $285 million, representing another 4% of our total shares outstanding in the quarter. This puts our total at nearly 11 million shares or approximately 8% of our total shares outstanding through the first 3 quarters of fiscal 2022, returning almost $640 million of capital to shareholders. As we stated in our last earnings call, we anticipate repurchasing at least $700 million of shares in fiscal 2022, with a plan to use the remaining cash towards debt reduction. Given our top priority of driving shareholder value, we were fortunate to repurchase our shares and take advantage of the attractive return opportunity at prevailing prices.

Turning now to the financial highlights on Slide 6. Our June quarterly performance was in line with our expectations, including an improvement in our price cost relationship, offset by modest softening demand and the stronger U.S. dollar. For the quarter, we delivered June quarter record net sales of $3.7 billion, which is a 6% improvement versus the prior year on a comparable basis, adjusted for foreign exchange and recent divested businesses. On a 2-year basis, organic volumes were up 3% and in line with our normal volume expectation, as we reported strong organic volume growth of 5% a year ago compared to a 2% decline in this quarter.

From an earnings perspective, operating EBIT was up 2% for the prior year quarter on a comparable basis, in line with our expectations, including a favorable price/cost recovery of $41 million when excluding the prior year COVID mix benefit.

As we've demonstrated historically and during this most recent quarter, we remain committed to passing through cost increases and believe we are well-positioned given our scale, along with our ability to service our customers from our facilities in close proximity to their locations, which provides both cost and sustainability advantages. We continue to work collaboratively with our customers to pass through inflation, as our selling prices were over $300 million higher than the prior year quarter and up a substantial $2.3 billion over the last 4 quarters, the highest ever recorded in our company's history. To put it into context, our average selling price inflation since our IPO was 3% contrasted to our recent LTM change of 16%. We nearly offset all of this unprecedented inflation while still expecting to deliver significant free cash flow for our full year. And finally, adjusted EPS increased 10% on a comparable basis versus the prior year, driven by solid earnings and opportunistic share repurchases.

Before I hand over to Mark, I want to cover 2 slides, 7 and 8, which touch on some of our investment growth opportunities as well as our resiliency during the softening recessionary economy. Berry has a top 2 market position in over 75% of our product categories, which collectively generates over $10 billion of annual sales. Our business model is very resilient through any economic cycle and includes the broadest portfolio of packaging solutions, with strong, dependable and stable free cash flows, as you can see on Slide 7.

In addition, we have consistently driven top-tier results in nearly all key financial metrics, generated strong compound annual growth rates for revenue, earnings and free cash flow, and have grown our adjusted earnings per share every year as a publicly traded company. Through past recessions, our volumes were modestly negatively impacted given that demand for our products are primarily nondiscretionary and stable. While both earnings and free cash flow increased as raw material costs historically drop, given that cyclical markets, which use civil materials, typically fall sharply.

And finally, on Slide 8. We continue to invest in each of our businesses to build and maintain our world-class low-cost manufacturing base, with an emphasis on key end markets which offer greater potential for differentiation and growth, such as health care and pharmaceutical. Additionally, we will continue to invest and expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster-growing end markets, along with continuing to invest into emerging market regions, we will further enhance our ability to provide consistent, dependable and sustainable long-term growth. Longer term, we believe our emerging market presence can be 25% or more of our total revenues.

And lastly, innovation and sustainability are increasingly embedded in everything we do. We continue to believe this represents a great opportunity for growth and differentiation. By making these deliberate choices on these higher value growth markets and regions over time, they will represent a larger portion of our sales mix and become an increasingly more relevant driver of both earnings and volume growth.

Now I'll turn the call over to Mark, who will review Berry's financial results. Mark?

Thanks, Tom.

When we compare our results to the prior year June quarter, we have adjusted the prior year to present on a constant currency basis and remove the impact of divested businesses to provide comparable results. Reconciliations to reported results have been provided in the appendix.

I'd like to refer everyone to Slide 9 for our quarterly performance by each of our 4 operating segments. Overall, our businesses continue to perform well and focus on both our near-term priority of recovering inflation while driving long-term sustainable organic growth.

Specifically, for the quarter, our Consumer Packaging International division delivered a 12% increase in revenue over the prior year, primarily from the pass-through of inflation. On a 2-year basis, organic volume growth was 2%. In the quarter, we saw relatively flat demand across our consumer-facing categories, such as food, beverage and health care, while industrial categories experienced some softness. The lockdown in China also had a modest negative impact on our volumes in the quarter.

Operating EBITDA improved 6%, driven by pricing actions to recover inflation, along with cost productivity, partially offset by modestly weaker demand, primarily in our industrial markets.

Next, on Slide 10. Our Consumer Packaging North America division delivered a 9% increase in revenue over the prior year, which included higher selling prices from the pass-through of inflation and flat volumes in the quarter, coming off a very strong 6% organic volume growth delivered in the prior year. On a 2-year basis, organic volume growth was 3%. From a market perspective, we continue to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable drink cups used by quick service restaurants and convenience stores. Supported by our pipeline and nondiscretionary end markets, we expect to deliver organic volume growth in fiscal Q4.

Operating EBITDA increased an impressive 21% on a year-over-year basis as we have continued to progress on recovering inflation along with cost reductions from recent capital investments.

Next, our Health, Hygiene & Specialties division revenue was down modestly, primarily as a result of the moderation of advantaged products related to the COVID-19 pandemic benefit a year ago. As we are lapping the majority of the impact from the pandemic-driven inventory correction, along with continued strength in demand, we are anticipating a return to organic volume growth in fiscal Q4. Operating EBITDA was down 32%, in line with our expectation as a result of the benefit from the pandemic-related mix a year ago and the lag in recovering inflation.

And on Slide 12, our Engineered Materials division delivered a 5% increase in revenue over the prior year, primarily as a result of the higher selling prices from pass-through inflation, partially offset by lower volumes. The volume declined as expected versus the prior year, was primarily related to our focused effort to mix up in certain categories along with softer demand from the distribution market, which we believe included some destocking in anticipation of lower polymer costs. On a 2-year basis, organic volume growth was 4%. Additionally, we expect volumes to sequentially improve as we continue to onboard new business and lap the strong prior year-over-year comparison. Operating EBITDA was up an impressive 22% compared to the prior year from our focus on improving our sales mix to higher-value product categories and recovery of inflation.

Next, as you can see on Slide 13, we are now targeting adjusted earnings per share of $7.40 for fiscal '22, which would be another fiscal year record and our tenth consecutive year of delivering EPS growth. The updated estimate assumes reaffirming our outlook for operating EBITDA of $2.15 billion, as improvements in price cost have offset expected foreign currency headwinds from the strengthening U.S. dollar.

Next, on Slide 14, we are now targeting free cash flow of $750 million for fiscal '22. This includes cash from operations of $1.5 billion less capital expenditures of $750 million. Our updated cash flow expectation includes the strengthening U.S. dollar, continued inflation, and our proactive decision to carry higher inventory levels for our customers to mitigate potential supply chain risks and challenges, which continue to impact our business. We expect these higher inventory levels to be temporary and will therefore increase future cash flows as we return to normalized levels as supply chains improve. Excluding these uses of cash for working capital due to inflation and supply chain challenges, our free cash flow for fiscal '22 is expected to exceed $900 million.

Our cash flow year in and year out has been a dependable key strength and core value of our company. It provides us the opportunity to invest in our businesses, automate and become more efficient while returning capital to shareholders. Our capital allocation strategy remains clear and opportunistic and includes continued investment in organic growth, and cost reduction projects, share repurchases and debt paydown.

Our guidance for the year includes returning $700 million to shareholders via share repurchases and ending the year in our targeted leverage range of 3.0x to 3.9x, as we have previously committed. We believe we are well-positioned for continued value creation and returning capital to our shareholders through both our dependable and consistent free cash generation and strategic divestiture opportunities. This will allow us additional capital for opportunistic share repurchases and further debt repayment.

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

Thank you, Mark.

As you can see on Slide 15, the strategic choices we've made guide how we prioritize our investments in our business, which is why we're investing in several markets and product categories that we expect to drive long-term organic growth, including a few of those which we've highlighted on this slide.

We continue to invest in each of our businesses to build and maintain our world-class, low-cost manufacturing base, with an emphasis on key end markets which offer greater potential for differentiation growth, like health care, personal care and pharmaceuticals. As you can see, these recent strategic investments expected to contribute over $300 million in revenue over the next 2 years and are not only in faster-growing end markets, but are largely focused in regions, such as China and India, with growth rates expected to be in the mid- to high single digits.

We will continue to focus on global mega trends and believe there will be considerable demand for our protection products in regions with rapidly increasing populations. We are very well-positioned to continue to deliver significant value for our customers and shareholders through investments like these presented here, with an unmatched global footprint and design capabilities to support circularity.

And lastly, as pictured in the center of the slide, we have recently invested in our second mechanical recycling facility located in Europe that will enhance our capacity for post-consumer recycled products that are more and more demanded by our customers. Our investments in both innovation and sustainability provide us a competitive advantage and are increasingly embedded in everything we do. Those advantages include our ability to both produce and source recycled resins globally along with our manufacturing capabilities to innovate, design and necessary protection from a more sustainable solution and our scale to produce sustainable packaging solutions desired by our customers. We will continue to invest in global innovation capabilities and centers of excellence to capitalize on what we believe is one of our strongest growth opportunities, that being the overwhelming demand for sustainable packaging solutions.

Moreover, as you can see on Slide 16, we have committed to minimizing product impact by enabling 100% of our fast-moving consumer packaging products to be reusable, recyclable or compostable by 2025. We are continuously innovating and investing to work toward the global goal of a net 0 economy. Additionally, I would like to highlight, Berry has been recognized as one of the 100 best corporate citizens by 3BL Media. This benchmark is widely recognized by assessing public traded -- publicly traded company in the United States on their fundamental, environmental, social and governance transparency and responsibility commitments. This recognition reflects the huge strides we've made to prioritize ESG at every level of our business.

Furthermore, from a collaboration standpoint, we have recently begun our partnership with both Cleanfarms and Poly-Ag Recycling on a closed loop approach to advance Canada's circular economy. Also, we recently announced our collaboration with McCormick, which leverages our expertise and access to provide a new McCormick assorted and neon food color bottle made from 100% post-consumer recycled material. A life cycle assessment compared to their current offering estimates that McCormick will realize an 86.8 metric ton or 59% reduction of CO2 emissions with this new PCR bottle.

At Berry, continuous improvement is at the heart of everything we do. 3 areas of note are important to consider. Material, we continue to make investments that give us access to quality streams of recycled content to help our customers meet their sustainability goals. Labor, we have recently invested in projects that will help our annual target of reducing 2 million labor hours from our operations and have tripled the capacity of our internal automation teams to execute our growing productivity pipeline at a faster pace. Energy, our third largest cost category and nearly 90% of our Scope 1 and 2 emissions. Plastic products in most applications enjoy the lowest greenhouse gas footprint of alternative substrates. We intend to build on this advantage area to meet our annual target of removing 100 million kilowatt hours from operations.

Like the innovations mentioned earlier, our intense focus on sustainability, we will continue to commit resources and thoughtful advances to improve the overall footprint for our products through their life cycles.

While plastics cannable continue to improve recycling rates, our primary raw material plastics has the best environmental footprint versus alternative substrates in almost all applications reviewed in the recent McKinsey & Company research paper published in July 2022 titled, The Climate Impact of Plastics, shown here on Slide 17. This study concluded that in almost all applications reviewed, plastic solutions had a lower total greenhouse gas contribution than alternatives. Greenhouse gas emissions are increasingly important given the need to dramatically reduce anthropogenic carbon emissions to limit global warming to 1.5 degrees Celsius, above pre-industrial levels to avoid the worst impacts of climate change.

The role of plastics packaging enhances use efficiencies and can help decarbonization efforts, particularly in terms of reducing food spoilage and improved energy efficiency. The debate on materials choice should take a balanced and science-based perspective and include the emissions profile as one factor.

In summary, we are pleased with the hard work of our employees, delivering solid quarterly results in the face of persistently higher costs and tough year-over-year comparisons. As we stated earlier and have demonstrated in the quarter, we are confident, and we'll continue to recover inflation and generate cost productivity.

And to close, utilizing our dependable and consistent cash flow complemented with strategic divestiture opportunities, we will continue to focus on driving organic growth, while providing more consistent return of capital to create maximum value for shareholders.

I thank you for your continued interest in Berry. At this time, Mark and I are glad to answer any of your questions.

(Operator Instructions) Our first question will come from the line of Ghansham Panjabi with Baird.

Tom, just given all the acquisitions over the past few years, including AVINTIV and RPC, how do you think the portfolio is positioned to navigate a broader macroeconomic slowdown globally, including a higher degree of consumer elasticity given all the inflationary pressures?

Ghansham, 70% of Berry's portfolio continues to be in nondiscretionary products, whether it's food and beverage, health care, personal care. And we think that positions us very well. And history demonstrates that, that in prior economic downturns or recessionary periods, the company performs exceptionally well. We anticipate no change should that materialize to a greater extent in the coming quarters.

Our next question will come from the line of Kieran De Brun with Mizuho.

I was just wondering if you could dive a little bit into the demand you're seeing by end markets. If you could touch a little bit on the industrial, consumer, and kind of food service side of things and the trends you're seeing into the fourth quarter. And maybe just following up on the prior question, some of the expectations, even if preliminary that you're seeing in '23.

Yes. I'd say that on a 2-year basis that we've noted here, our business continue to perform very well. CPA, HHS, CPI and both Engineered Materials, frankly. We've made great progress on price recovery, offsetting, frankly, more costs in place than any time in our history. And in that regard, we do anticipate Q4 to show some sequential improvement. Clearly, the 70% of our portfolio tied to food, beverage, personal care, specifically both in CPNA and CPI, continue to be very consistent and stable. We noted that the industrial portions of our business, specifically the pieces associated with CPI and in some of the more industrial-focused categories inside Engineered Materials, were somewhat negatively impacted from a demand perspective. But all in all, we think the portfolio is very well-positioned. And as I said in the previous response, historically, has performed very, very well given that these are products that people consume every day.

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

Tom, my question is largely around growth in the investment program, and then along with investment, the investment in working capital. So I want to say, going into the fiscal third quarter, the expectation was for a bit better volume growth than what you ultimately saw. Yet, in your remarks today, you generally said things were as expected. Can you give us a bit more color in terms of why it was as expected even though volumes were off? I'm guessing it was the price/cost battle that you're fighting. Why you are comfortable that fourth quarter will be better despite -- I mean, in fact, that you have easier comps, which is true, what gives you confidence you're going to get growth out of the $300 million of growth that you targeted on the slides? And what the cadence is on that?

And then lastly, if I can, why are you holding working capital strategically for -- to the tune of $150 million going into next year when raw material prices now look like they're coming down? Is that just a reflection your customers see their demand now backing up and we have an inventory issue in the pipeline?

Sure, George. Happy to. I'd say a couple of things. One, the industrial impact inside our businesses probably eroded a little more than we anticipated in the quarter, which was somewhat of a negative offset. As we said, the food-based businesses continue to perform well. And inside our Engineered Materials business, we made a concerted effort in that business to focus on price recovery, as well as taking various opportunities to drive mix change inside that business when the opportunity presented itself. So I think we're striking the right balance between both growth opportunities and the opportunity to fully offset our inflation. As I said, we anticipate sequential improvement from Q3 going into Q4 in terms of our price realization, and we are fully committed to 100% offset that inflation impact that we have.

Relative to the inventory decision that we made in the period, I'll state a pre fact. And that is, in North America, George, the predominant way that we receive our goods is through rail. Today, employment challenges in the railroads have led to a 14% drop in railroad average manifest speed. So for us ultimately to be comfortable in the quarter, knowing that dynamic exists and that we don't have any near-term visibility of when it will be rectified, we're betting on making certain that we can serve our customers. And given that dynamic, coupled with the reality that we're going into a hurricane season, we thought it was a prudent choice to prioritize our customers, first and foremost. We anticipate will return to a normalized $900 million free cash flow profile for the company, and we're confident and comfortable with the decision.

George, it's Mark. I think you also asked about the growth capital. I mean we continue to feel good about those projects. As a reminder, those are customer-backed investments. I mean, while some of them have been slightly delayed due to the supply chain challenges and issues at customers, we continue to feel good about those projects and delivering the committed results that we had expected.

Another supply chain example, George, in that category. Many of those high-performance films in one instance that we're onboarding right now, EVOH is the primary raw material component that has been short supply. While it continues to be on allocation, allocations are beginning to improve. And we're hopeful, with some additional capacity coming online, that will return to a more normalized basis. But as Mark said, all of our CapEx that we have spent is customer-directed. None of it is tied to a Berry ambition or idea without the express partnership and alignment with an end customer.

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

For HH&S, you discussed a lag in recovering inflation. And just based on raw material prices today and specifically polypropylene coming down, can you talk a little bit about the time line for that recovery? And maybe how much of a benefit could be seen? And just broadly, as you exit the fiscal year, how much will you have potentially unrecovered or to recover in '23?

The HH business and the opportunity will come relative to the renegotiation of purchase and sales agreements with those customers. So the lag in recovery is tied to contractual obligations that we are under today. Over the next several months, we'll be in the process of renegotiating those agreements in alignment with their expiration, both related to both volume and price recovery.

Okay. That's helpful. And then just exiting the year, any view on total kind of unrecovered costs that you might be able to get back in '23 or...

Yes. Thanks, Anthony, it's Mark. I mean, obviously, the inflation is a moving target. So we're continuing to seek inflation recovery and also drive our costs down, right? I mean we've got a lot of great capital projects that have been implemented and continue to be implemented to drive down cost, to drive profit improvement. But it's a little bit of a moving target. But I would say all 4 of our segments have made good progress. We expect that price cost relationship to improve again here in Q4. And I would say that relative to a number, again, it's a little bit of a moving target. They're all 4 behind. I mean we still have to recover -- we still have some inflation recovery in all 4 segments, but making good progress.

And I think, an adder to that, Anthony, was in my commentary, we've dramatically expanded the number of resources to support our internal productivity tied to automation. The quarter saw a strong benefit from cost reduction projects. I think the benefit was in excess of $12 million for the quarter, and that continues to be a focus area of concentration for us.

Your next question comes from the line of Angel Castillo with Morgan Stanley.

And just wanted to focus in on Slide 14. Just a couple of pieces there that I think have notable changes from the kind of the way that we were thinking about capital allocation strategy in the past. For starters, I guess, we have the dividend future potential. Would love to hear some comments around how you're perceiving that as kind of -- if it's changed in any way. But more importantly, maybe when we look at kind of acquisitions, it seems like maybe that's kind of gotten pushed out, and share repurchases has moved up a little bit. So as we think about maybe normalizing free cash flow next year, and just kind of going forward, if you could give us a sense for maybe how we're thinking about the level of buybacks versus acquisitions, potential for dividend and maybe quantifying the divestitures, that would be very helpful.

Sure. It's really intentional. The focus in terms of how we're going to disperse our cash flow from operations is prioritized around, first and foremost, organic growth. And given the fact that we have unique opportunities and we've executed pretty aggressively against that repurchase authorization, we'll continue to do that, especially at current levels. The third piece clearly is divestitures. We're a broad and extensive portfolio. I will tell you, it's an active process that we engage in on a regular basis. And we'll hopefully be able to make any type of public commentary should something materialize that puts us in a position to discuss and speak to. But it is a specific intent for us to look at the portfolio, examine opportunities to potentially reprioritize one piece of the business in exchange for another. And again, we'll update you as soon as we can, should something materialize in that regard. But it was intentional.

The acquisitions piece, again, in dividend side, again, from a shareholder value creation perspective, the opportunity to repurchase our own shares right now, we think, is an exceptional value. And we think investing in the organic growth of our business is similarly a huge priority. And if we can leverage divestitures to help facilitate that, we'll do it.

Your next question comes from the line of Kyle White with Deutsche Bank.

I wanted to go actually back to George's questions on the working capital. I guess, should we expect you to hold this level of working capital for the foreseeable future until the supply chain and the rail environment improves? Or do we expect that working capital based on what you see going forward into next year could potentially come down next year?

Yes. I think -- Kyle, it's Mark. It's totally dependent on the supply chains. As Tom referenced, it's taking longer for material to arrive to our sites. We think it's prudent to make sure we're providing the appropriate service to our customers. And so if that means we need to carry a little bit higher inventory to take care of our customers, we think that's the right thing to do long term for our business. And as things normalize, hopefully sooner rather than later, we'll certainly readjust those inventory levels. But at this point, I think it -- I would be guessing, quite honestly, to try to predict when that's going to happen.

And if I could just follow on. Is this mostly the North America supply chain that we should be monitoring or is it more on a global basis? I know you called out the North American rail, so just curious there.

Yes. I mean I would say it's a global dynamic, but largely to North America factor.

Your next question will come from the line of Adam Samuelson with Goldman Sachs.

Yes. I guess I'm trying to just make sure I'm squaring the fourth quarter commentary right. It looks like it implies a $588 million of EBITDA, if you were right on the number for the 215 for the year. And in that scenario, so you're up about 60 -- a little up to $60 million year-over-year. You're up low single-digits. Volume, that's kind of low double-digit, kind of EBITDA contribution. I think that's largely offset by FX. I guess I'm just trying to make sure it's the right thinking, then that price cost would be kind of that big bridge item to get you up to that to hit that guidance number because it implies a pretty step -- meaningful step-up sequentially on earnings when in the last few years, there's not usually that big of a step-up in the fiscal fourth quarter. And kind of how do we think about that price cost tailwind as we carry into the early parts of fiscal '23?

Thanks, Adam, it's Mark. Yes. No. You've got the math right. It will be -- our expectation is to drive EBITDA on a comparable basis, up approximately 15% on a year-over-year basis. And that's largely driven by the factors you just discussed, which is continued improvement in price/cost. We continue, again, to take pricing actions to offset inflation. And then there has been some modest moderation in our primary raw material that will benefit the quarter as well.

Your next question will come from the line of Jeffrey Zekauskas with JPMorgan.

In terms of demand for plastic products, recycled material or lower carbon emission material is really growing at a much faster rate than traditional plastics. Because of your access to lower carbon plastics, is that something that can increase your growth rate over a longer period of time, if you have more access? Or do you see it more as a trade-off between the recycled part growing faster and that business being cannibalized from the other side, the standard carbon emission plastics?

Yes. Great question. I'm going to answer it 2 ways. One, from a traditional resin perspective, the industry continues to grow. As an example, there's an additional 2 billion pounds of polypropylene coming online and 6 billion pounds of polyethylene coming online. Berry's ability to design for circularity and innovate from a design perspective will continue to enable virgin-based materials, who as you heard, relative to the McKinsey study, in most instances have an equal or better carbon footprint. And you're going to see carbon becoming an increasingly important component around the sustainability discussion for the world to get to net 0 by 2050.

In terms of recycled content, both in terms of mechanically recycled, bio-based, advanced recycled materials, Berry is not sitting back idly. We announced and showcased in the earnings release an expansion of our post-consumer recycle capability that will be commissioning in fiscal '23, to complement what we already have to support incremental organic growth based on the value -- that total portfolio, between both access to virgin materials, that can be responsibly designed and managed, in addition to how we can incorporate both mechanical recycling, advanced recycling and bio-based materials into that portfolio with the global customer base that we serve, all supported by plants that are in close proximity to those end users.

And that should not be minimized given that transportation is a significant component from a carbon perspective. And Berry's footprint is uniquely positioned to ultimately be in closer proximity to our end users to reduce that transportation cost.

Your next question comes from the line of Mike Roxland with Truist Securities.

Just wanted to get your thoughts on -- given some of the issues that have experienced in rigid packaging substrates, if you look at cans; and the magnesium, aluminum issue, you look at glass and the issues with European natural gas, have you seen or experienced any increase in demand from existing customers and new customers that may want to look for a patching substrate with maybe a little bit more stability? And can you also talk about some initiatives that the company may be pursuing to try to exploit some of the issues at these other -- with these other packaging substrates?

Each and every day, we have to, A, understand the requirements for our end use space to make the best recommendation on material choices that meet those needs. Plastics continues to be a unique opportunity for those brands to meet both their physical and physical requirements of the application, cost competitively. And that continues to be the case. We showcased really for the business on a 2-year basis, and we think that is appropriate given the pandemic nuances, our CP North America business is up 3%. Our CPI business is up 2%. Engineered Materials, up 4%. So the demand for the substrate, and I think showcased by the incremental capacity being brought to the market, provides a good level of confidence that this substrate will continue to grow, both in existing markets, as well as developing markets.

And Berry's aptitude to design responsible packaging for circularity and incorporate alternative materials that ultimately can increase recycled content is a great combination. And as you saw that third-party investigative piece relative to carbon footprint of plastics versus other materials lends itself very well when you look at the data to support plastics as a choice relative to your carbon goals.

Your next question will come from the line of Arun Viswanathan with RBC Capital Markets.

I guess, I just wanted to get back to the volume question. So you have a slide in there that show some of the organic investments that you're making that should drive a couple of hundred million dollars of growth, I guess, over the next little while. I guess, could you kind of describe how that plays out on a volume basis, maybe by segment and timing? What should we expect? Are you still thinking about low single-digit volume growth from here?

We continue to believe all our businesses will be low single-digit growers. We showcased $100 million-plus investment in dispensing solutions for both Europe and United States as a sustainable alternative. We've showcased the investments that we've made in food service on our all polypropylene cup and lid, where currently, U.S.-based capacity is all spoken for, so much so that it's justifying an incremental CapEx spend to expand that capacity.

Pharmaceutical, with a new site in India, to support both a growing segment, as well as a geography. Recycled materials in Europe with Plasgran 2 being introduced, and the introduction of a new white substrate to support Europe, which is a new developing market for us. So yes, that's the specific purpose of those capital investments aligned with customers in growth categories that in many instances are incorporating both the feature benefits of the traditional material with the benefit of recycled content or advanced recycling.

Okay. And then if I could follow up on price as well. So with resin costs moderating, how should we think about -- and you guys have enacted a lot of price increases as the whole industry over the last couple of periods. So with resin prices moderating, how do you expect to kind of deal with the non-resin inflation? Is there potentially some surcharges that you can implement? Or would you continue to implement price increases to offset that? And how much do you expect to hold on to as far as price now that potentially some of the input costs are moderating?

Yes. I would tell you the majority of our resin obviously is on escalator/de-escalator, but there's a whole host of other materials that frankly are going in the other direction still. We see unprecedented inflation in the area of packaging materials, pallets and we talked about energy and labor and everything from your machinery parts. So our ability to get that on the table relative to the pricing discussion is certainly warranted. And we've used a variety of different vehicles to get that done. And it continues to be an area of commitment that will be -- we have a very strong resolve on and around. And we were pleased with the progress in quarter 3. We said we'll make strong sequential improvement in quarter 4 and well into '23 we anticipate just based on the variety of inputs that we procure.

Yes. And I would just add, I mean, obviously, a falling cost environment for our primary raw material does help in the ability to get other price, right? So whether or not it's on an escalator or de-escalator, certainly, it helps to the extent you've got -- it can assist by not going down as much as the primary raw material drop. So it's definitely an enabler for sure.

And you noted that the working capital increase is onetime potentially in nature. But can you just expand on that? Because many companies now have been dealing with supply chain issues. It sounds like you guys are making a conscious decision to help out your customers by carrying greater inventory levels. Wouldn't that be a structural necessity? Wouldn't it take greater supply chain investments to not have that? Or do you see that as just kind of transitory here?

We see that as, in my view as somewhat transitory. We believe that there will be the necessary changes made, both to access to labor, as well as innovation that will drive greater efficiencies. And again, we did make the conscious choice in this period to support our customers with additional inventories. And we wholly expected at some point in the near term here that things will return to some normalized level.

Yes. And obviously, even if it didn't improve, it still wouldn't repeat itself next year, right? So it would not be a headwind that you dealt with next year or the next year even if the environment didn't improve. I mean from that perspective, it's one time. I suppose if you made a case that it continue to get worse and worse and worse, then potentially it could repeat itself, but that seems like a -- feels like an unlikely scenario.

Your next question comes from the line of Josh Spector with UBS.

I guess you guys continue to highlight growth in emerging markets, and clearly, a lot of your organic investments are going there. Is there a way to think about your profitability in emerging markets versus the rest of the world? Is it significantly higher or lower? Do you need more scale in those regions? Any thoughts around that would be appreciated.

Yes. I would say, in general, it's similar. We -- our investments tend to focus around global partners. And so the margin profile tends to be very similar. I mean, relative to scale, I think we continue to develop that scale. And the reality is most of those markets are very fragmented. So while we may not have scale relative to our other regions, on a competitive basis, I would say we do have that scale. And certainly, our global footprint helps provide that scale as well, from a sourcing product capability perspective as well.

And we have the benefit also that expansions. I use Bangalore, India as an example. We had an existing facility there, an existing management team that we felt was capable to ultimately help manage through an expansion. Another example of -- our breadth and our scale and using existing teams and capabilities that know how we operate, and can take advantage of the entire Berry resource mix to execute.

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

It's actually Phil Ng. Tom, you've highlighted a fair amount of polyethylene, polypropylene capacity coming on in the not-so-distant future. And certainly, we're seeing some signs that resin prices could fade. So curious, how are you thinking about how that kind of trends, call it, the next 6 to 12 months? And I think historically, just given your scale, when capacity comes on, you've been able to kind of leverage that from a procurement standpoint. So can you kind of help us think that through?

And then a question for Mark. I think implicit in your 4Q guide, you're assuming some fade in inflation. Can you expand on that a little bit? What are some of the big assumptions, whether it's resin or some of the other input?

Start with, we're excited that the industry continues to grow to support these capacity expansions. And again, whenever this amount of volume comes on the market, we'll compete openly, obviously, to try to secure the best pricing that we can based on our size and scale. But I think the most important component of it is, it's supporting an existing growing industry. And we're thrilled that it's coming online here in North America, where Berry has close to 60% of its business located. So I'll let you speculate on what the benefit to us may be. We wouldn't comment on what we believe it could be on this call particularly. But nonetheless, it's really about growth. It's about its proximity to our largest region. And we couldn't be happier.

Phil, with respect to your question about assumptions in the guide on cost, for polymer, which is the bulk of our cost, we've assumed July pricing. And as I mentioned earlier, there was some moderation here in recent months that will benefit the quarter. To the extent, polymer changes in August and September, that will actually have like very little impact on our fiscal year results given we close out here in September, and the timing lag of the costs getting through the P&L due to inventory. But as Tom mentioned, the other costs, we're continuing to see an inflationary environment, not at the same pace that we have seen in the last 4 quarters. But nonetheless, we still see those costs and inflationary status. And obviously, some of those outside the U.S. are actually accelerating, like energy in Europe. And all of those inflation assumptions are embedded in our guidance.

And just on that note on Europe inflation, especially energy, pretty dynamic. How are you managing passing that through? Look, you did a pretty solid job there. And as you kind of negotiate new contracts going forward, will that be an important element? I know historically, resin has been the biggest piece, but energy, very, very dynamic, especially in Europe these days.

Yes. I think on the energy side, we're fortunate in that while we certainly do consume electricity that generate our products, we actually use less energy than competitive materials. But yes, as Tom mentioned, we're continually working to improve our operations by reducing the amount of energy that we consume to make our products. And certainly, we're out in the market to recover those inflationary costs with our customers. And as you can see in our results, have had -- had good success in doing so. And we'll continue to do that. And obviously, procuring energy, our sourcing department works diligently to get the best pricing that we can in each market that we operate.

It's just too significant a component throughout the European market. That is on the table. It's not an oddity to bring that to the forefront to get relief and recovery.

Your next question comes from the line of Gabrial Hajde with Wells Fargo Securities.

Tom, in one of your responses to a question about productivity, I think you referenced $12 million net this quarter. And I know that there's been a lot of discussion about labor availability and reliability, et cetera, talked about. I'm curious kind of within your 4 walls, what you're beginning to see. And then it's been opaque, I guess, to see the results given a lot of the disruption over the past 18, 24 months. But based on kind of -- I'll come at it 2 ways, the $150 million of spend that you have embedded in your CapEx and then again, kind of annualizing what you got here in this quarter would suggest maybe $30 million to $50 million annually that you kind of expect to get out of productivity. A, can you confirm that? And then B, is that something that maybe we can start to see in the numbers again next year?

I think that range is a reasonable expectation. The team has done a really nice job. And so think about the -- more from inability to get any labor. And now it's really focused on getting the right labor to make certain that you can maximize productivity. We're doing 2 things. We are increasing our emphasis on both our frontline leadership and complementing our talent with further means to automate the business. And one of the unique aspects of our global business is the means and ways by which we share best practices. And that continues to be a cadence, that we're using very similar to what we use on safety. And if you look at the business' safety performance, which is clearly an upper quartile performer inside and outside our industry, we think similar benefits are possible relative to that ongoing drive to increase worker productivity.

It's a journey, because there's definitely been a dynamic change in terms of that labor pool and driving maximum productivity in it is critical. And we are really excited about the progress noted in the quarter and what we anticipate that will bring to us in '23 and beyond. We think it's a -- it can be a differentiator.

And then -- I know it's challenging kind of live mic here. But you referenced some contract renegotiations here in the back half of the year for HH&S. When I look at kind of, again, the profitability cadence over the past 5 years, I know you guys have done a lot of work underneath the surface to transition to more, I want to say, adult incontinence products, et cetera. Do you envision that would be mix benefit for you kind of on a go-forward basis? Or are you looking to maybe get better terms out of shorter contract lags? Or anything like that, that you can give us?

All of the above. The company made a concerted effort to increase its presence around premium fem care, premium baby, adult incontinence. And that was very, very stable for us in the quarter. And it really helped to offset the strong comps that we had in mask and wipes and drapes and gowns. So absolutely. Working through the pass-through mechanisms, our mix of material, our access to capital to invest alongside our customers to support their growth are all aspects of negotiation that we enter into to maintain the leadership position we have in that growing industry segment.

Your next question comes from the line of Mike Leithead with Barclays.

Just real quick. For the recent divestitures, could you help us with the associated EBITDA associated with that? And Tom, I just wanted to follow up on some of your divestiture comments to an earlier question. I guess, would you be looking at further, call them singles or doubles around the edges? Or would you also be looking at maybe some bigger-sized divestments as well?

We review the entire portfolio with the Board every quarter. We just completed a Board meeting. It was a part of those discussions. Suffice to say, we're a very large company, with a global footprint, scale. And we've got a lot of optionality. We're going to make certain that it's in the best interest of creating value and being able to be executed with minimal disruption to our customers. So I won't be able to really tip one side or the other. Just I think we've got a pretty robust portfolio to draw from and to consider should the circumstance make sense.

Yes. And Mike, this is Mark. On your first part of your question, the businesses that we've divested thus far in fiscal '22 annually contributed around $20 million of EBITDA.

Your next question will come from the line of Mark Wilde with Bank of Montreal.

I've got just a couple of quick cleanups. One, can you give us some sense of what the retail destocking that we're hearing about from a lot of the mass merchandisers, what effect from that you might be seeing in your business? And then secondly, early in the year, you were talking about $100 million drag from this mix switch in HH&S as we move away from some of the premium COVID products. Where are we at in that process right now?

2 areas, I think, that you're seeing more pronounced inventory destocking would be, one, in our distribution business tied to Engineered Materials. It's very typical that in that business, distributors will draw down their inventories in anticipation of falling raw material prices. So that business is traditionally lumpy in that regard. And there's traditionally ebbs and flows of demand because of that factor. And again, 60-plus percent of our Engineered Materials business is served to that channel.

In our HH&S business, the primary area in terms of destocking would be around the hard surface disinfectant wipe category. That coming off of the pandemic, we saw and the industry saw a lot of excess inventory that continues to be drawn down. Those are the 2 primary categories that have been impacted by the inventory destocking.

Yes. And on the last part of your question, Mark, I would say that's largely behind us at this point. I wouldn't expect a lot of impact in Q4 forward. I think that mix benefit is pretty much removed from our LTM results at this point.

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

Hope you're well. Just one more on capital allocation, if I may. So obviously, you're buying back a significant amount of stock this year. You're expecting $700 million or more. You're obviously still not paying a dividend yet. Do you -- and you're buying back stock because of the discount at which your stock is trading. Do you think that discount is likely to be lower if you were to initiate a reasonable sized dividend that's steady and reliable compared to buybacks that obviously come and go, and consequently, investors just can't necessarily count on?

Yes. Adam, it's Mark. I mean, we regularly take feedback from both our current shareholders, as well as prospective shareholders. And we think this capital allocation strategy that we've outlined is consistent with the feedback we got and is aligned with management's view on how to maximize shareholder value.

Our final question is a follow-up from the line of Jeffrey Zekauskas with JPMorgan.

In your recycle -- recycling efforts, which polymers do you focus on? Is it polyethylene or polypropylene or PET? And what are the primary applications for your recycled material now?

It's both polyethylene, as well as polypropylene. On the mechanically recycled material, it's predominantly in more industrial-based applications. On the advanced recycling basis, it's more consumer goods given its ability to be readily used in food contact.

Where do you get advanced recycled materials from or what polymers are those?

They're prominently polypropylene.

I will now turn the conference back over to management for any closing remarks.

Thank you. That concludes this morning's call. Thanks, everybody, for your interest and time this morning. Look forward to talking to you next quarter. Thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.