Berry Global Group Inc (BERY) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Berry Global Group Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Dustin Stilwell, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Berry's Fourth Fiscal Quarter 2022 Earnings Call. Throughout this call, we will refer to the fourth fiscal quarter as the September 2022 quarter.

Before we begin our call, I would like to mention that on our website, we have provided an investor 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.

Please note that in our commentary today and within our presentation, when we compare our results to the prior year quarter or full year, we have adjusted to present on a constant currency basis and removed the impact of divested businesses to provide the appropriate comparable results. Reconciliations to reported results have been provided in our earnings release and the appendix of our presentation.

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

Turning to our key takeaways for the quarter and fiscal year on Slide 4. First, our business delivered solid full year fiscal results, including record results for both revenue and earnings per share growing 10% and 7%, respectively, coming off another record year in fiscal 2021.

Secondly, throughout the last 2 years, we've seen significant cost inflation and have taken proactive pricing actions and invested in cost-reduction projects across our businesses. Our team has done an exceptional job and continue to make progress on both fronts.

Third, during the year, we generated a substantial $876 million of free cash flow and returned $709 million to shareholders via share repurchases or approximately 90% of our total shares outstanding.

We continue to invest for long-term growth while making great strides towards our sustainability goals, and we'll continue to be ambitious with our commitments which are leading to consistent opportunities to expand our relationships with our global customer base.

Additionally, as you saw in our press release issued this morning, Berry has decided to initiate a quarterly cash dividend, which is a significant milestone for the company, while also increasing our capacity under our stock repurchase program to over $1 billion.

And finally, on today's call, we will review our fiscal year 2023 goals and commitments, which include a continued focus on organic growth, inflation recovery and reducing our costs, along with the opportunity to deliver strong returns on cash to shareholders through further share repurchases, taking advantages of our significantly undervalued share price.

Turning now to the financial highlights on Slide 5. Our September quarterly performance was modestly below our expectations on revenue and EBITDA, which was primarily impacted by continued inflationary pressures and pockets of supply chain challenges, which resulted in softer customer demand, along with the strengthening of the U.S. dollar.

The company again demonstrated its ability to generate substantial cash, delivering record free cash flow in the quarter.

From an earnings perspective, EBITDA was up over 9% and adjusted EPS increased an impressive 18% from the prior year quarter, including an improvement in price/cost spread of $58 million. As we've demonstrated historically and during the most recent quarter, we remain committed to passing through inflation and believe we are well positioned given our scale, along with our ability to service our customers from our facilities in close proximity locations, which provides both cost and sustainability advantages.

For the full year, we delivered revenues of $14.5 billion, a 10% increase and fiscal year record. And we met our adjusted earnings per share target of $7.40. And finally, we exceeded our most recent annual free cash flow guidance by $125 million, driven by strong working capital management. Also, we were able to delever for the third consecutive year, ending the fiscal year at 3.7 net debt to EBITDA, which is our lowest leverage ratio as a publicly traded company.

Additionally, as you saw in this morning's announcement, our Board of Directors has authorized an additional $700 million for share repurchases in addition to our current program which has approximately $340 million remaining, putting the new total authorization over $1 billion. We believe our shares are significantly undervalued, and this increased authorization reflects our confidence in the outlook of our business, our long-term strategy and the strength of our operating model and cash flows.

Before I hand over to Mark, I want to cover a couple of slides, specifically Slide 6, details our original fiscal '22 guidance to where we ended the year. Fiscal '22 provided some unique hurdles from an operations and demand perspective, not to mention forecasting challenges throughout the year. We are very fortunate to have such a dependable and diversified portfolio which only saw modest headwinds on demand and enabled us to meet or exceed our guidance for cash flow and earnings per share.

On Slide 6, we have provided a comparison of our original guidance to actual fiscal '22 results. As you can see, the majority of the headwind was a result of foreign currency due to the strengthening of the U.S. dollar, along with softer customer demand, which despite our very stable and diversified portfolio, we weren't entirely immune to.

In our consumer businesses, which represents 70% of our portfolio, demand remained steady. Our scale, global end markets and product diversity provides a rather insulated demand profile for Berry. Both distribution and industrial markets did see some modest headwinds throughout the year in areas such as automotive and building and construction. We anticipate these to recover as overall global markets improve.

And lastly, I'm proud of the agility of our teams working with customers, as costs were consistently increasing throughout the fiscal year as a result of inflation. To put it into perspective, costs increased over $1.6 billion during the fiscal year and we were able to offset these inflationary pressures. While we did end the year improved in price/cost spread, we have more inflation to recover and expect additional improvement in cost reduction benefits in fiscal '23.

On Slide 7, in both the near and long term, we remain focused on driving consistent, dependable and sustainable organic growth. 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 in emerging market regions, we will further enhance our ability to provide consistent, dependable and sustainable long-term growth. We've done a great job since our IPO in 2012 growing our emerging markets from less than 2% to now 15%. Longer term, we believe our emerging market presence can be more than 25% of our total revenues.

And lastly, innovation and sustainability are increasingly embedded in everything we do, and we continue to believe this represents a great opportunity for growth and differentiation that I'll discuss in our later prepared remarks.

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

Thank you, Tom. I would like to refer everyone to Slide 8 for our quarterly and fiscal year performance by each of our 4 operating segments. Our businesses continue to perform well and focus on inflation recovery and generating cost productivity while driving long-term sustainable organic growth.

Our Consumer Packaging International division increased revenue by 8% over the prior year quarter and 11% for the year, primarily from the pass-through of inflation and improved product mix. In the quarter, we saw relatively flat demand across our consumer-facing categories, such as food and beverage; while demand in more discretionary markets, such as automotive and surface coatings, experienced some softness; along with the lockdown in China having a modest negative impact on our volumes. On a 2-year basis, organic volume growth was 2%, driven by capital investments in growth categories, such as closures, dispensing systems and health care.

EBITDA improved 10% in the quarter over the prior year, driven by product mix improvements, inflation recovery and cost productivity.

Next, on Slide 9, our Consumer Packaging North America division delivered growth in the quarter and a 14% increase in revenue over the prior fiscal year, which included pass-through of inflation and flat volumes coming off a strong 4% organic volume growth delivered in the prior fiscal year. We were able to offset softer customer demand with organic volume growth from recent capital investments. On a 2-year basis, organic volume growth was 3% as 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.

EBITDA increased by an impressive 27% and 13% over the prior year quarter and fiscal year, respectively, as we made continued progress on inflation recovery, improving our product mix and generating cost productivity.

On Slide 9, our Health, Hygiene & Specialties division had a modest reduction in revenue for the quarter from the pass-through of lower polymer prices on flat volumes. For the year, revenue increased 3% over the prior fiscal year, primarily from the pass-through of inflation, partially offset by the moderation of advantaged products related to COVID. On a 2-year basis, organic volume growth was 2% with continued market growth in nonwovens.

EBITDA was down around 25% for the quarter and fiscal year, as expected, due to the benefit from the pandemic-related mix a year ago and a lag in recovering inflation on costs other than polymer. We continue to pass through these cost increases to our customers and expect earnings will improve sequentially and will be back to positive price/cost spread on a year-over-year basis in the third quarter.

And on Slide 9, revenue in our Engineered Materials division was down 7% for the quarter due to lower volumes and finished 10% higher for the fiscal year, primarily from the pass-through inflation. The volume decline, as anticipated, 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.

EBITDA was up an impressive 28% over the prior year quarter and 13% over the prior year from our focused effort on improving sales mix to higher-value product categories, along with cost inflation recovery.

Next, our fiscal '23 guidance and assumptions are shown on Slide 12. We are expecting to generate between $7.30 to $7.80 of adjusted earnings per share, which at the midpoint, would be another fiscal year record and our 10th consecutive year of delivering EPS growth, which I am proud to report that we have done every single year as a public company. For comparison purposes, fiscal '22, adjusted for divestitures and recent currency rates, was $7 per share.

In our '23 midpoint, we would deliver another strong year, year-over-year growth of 8%. Given the timing lag of inflation recovery, seasonality and timing of cost reduction actions, we expect earnings to be stronger in the second half of fiscal '23, similar to '22. Our comparable EBITDA at the midpoint is expected to grow approximately 5%, which includes continued inflation recovery along with continued cost reduction benefits. Additionally, we expect free cash flow to be in the range of $800 million to $900 million with cash from operations of $1.4 billion to $1.5 billion less capital expenditures of $600 million.

Our cash flow outlook includes headwinds from foreign currency and higher interest rates than fiscal '22 and some incremental nonrecurring costs from cost-reduction initiatives. 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 to grow and become more efficient while returning capital to shareholders. As you can see on Slide 13, our capital allocation strategy remains consistent and return-based and includes continued investment in organic growth and cost-reduction projects, share repurchases, debt repayment and the new quarterly cash dividend.

In fiscal '23, we expect to return $700 million or more to shareholders via share repurchases and dividends, including an approximate 2% dividend yield, while further reducing our shares outstanding by nearly 10% at current valuation levels.

We believe we are well positioned for continued value creation through both our dependable and consistent free cash generation and strategic portfolio management opportunities which provide us additional capital for opportunistic share repurchases and further debt repayment.

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

Thank you, Mark. Our fiscal '22 results are yet another example of our proven operating performance over many different and sometimes challenging economic cycles. As you can see on Slide 14, we have consistently driven top-tier results in nearly all key financial metrics, including strong compounded annual growth rate for revenue, earnings and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company. This year, we grew adjusted EPS by 7%, and we expect fiscal 2023 to grow by approximately 8%. Our business model has proven resilient, including a broad portfolio of plastics packaging solutions with strong, dependable and stable cash flows to allow us the flexibility to drive strong returns for our shareholders.

From our current viewpoint, global market demand for our industrial markets will create a choppy demand environment. We will continue our focus on inflation recovery while also driving strong cost/benefit through efficiencies and asset optimization throughout our global footprint to offset any demand challenges.

Next on Slide 15. Since the RPC acquisition in mid-2019, over the past 3 years, we have reduced our net debt by nearly $3 billion, including over $1 billion this past quarter. Furthermore, in fiscal 2022, we returned an additional $709 million to shareholders via share repurchases, totaling over $3.5 billion of value returned to our shareholders, while growing our adjusted earnings per share more than 70% since the RPC acquisition. Fiscal '22 marks the third consecutive year we've reduced our leverage, ending the year at 3.7 net debt to EBITDA.

Next, I want to quickly highlight the news we announced earlier today. We are proud to initiate this new quarterly dividend and authorized supplemental buyback program. This announcement is clear evidence of the work that the Berry teams across the globe have completed to position the company to succeed. Today, Berry is stronger than it ever has been, and this dividend initiation underscores our commitment to enhancing long-term value for all stakeholders.

Another element to our value creation has been the strategic investment choices we've made and how we prioritize our investment in our business. We are investing in several markets and product categories that we expect to drive long-term organic growth and complements our ongoing efforts of building and increasing our resilient portfolio of products, including a few of those which we've highlighted here on Slide 16.

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, like health care, personal care and pharmaceutical. As you can see, we expect these strategic investments to contribute over $300 million in revenue over the next few years. We believe we are well positioned to continue to deliver significant value for our customers and shareholders through these investments, like those presented, with an unmatched global footprint and design capabilities to support circularity.

Our second dedicated mechanical recycling facility located in Europe and featured in center of the slide will be operational in Q1. As a top 5 polymer recycler in Europe, this new facility will enhance our capacity for post-consumer recycled products that are demanded more and more by our customers globally. This site is the world's first closed-loop system to mechanically process domestically recovered household waste polypropylene back into food-grade packaging, with the ability to handle 200,000 tons of material annually.

Our investments in both innovation and sustainability provide us a competitive advantage and are increasingly embedded in everything we do. Innovating circular and sustainable solutions remain a key aspect of our long-term decarbonization and global growth strategy. We see increasing demand for these products, which include attractive design and sustainability advantages, that we believe will support longer-term, higher-growth opportunities.

Our advantages include the ability to both produce and source recycled resin globally, along with our manufacturing footprint and capabilities to innovate and design the necessary product protection from a more sustainable packaging solution 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 17, we continue to make great progress on our sustainability targets and 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 towards the global goal of a net 0 economy.

Next, we are proud to highlight that Berry has received the 2022 Energy Project of the Year from the Association of Energy Engineers for our milestone goal to eliminate 100 million kilowatt-hours of electricity from global operations. The emissions saved from this remarkable reduction in energy use are equal to CO2 emissions required to power over 16,000 homes for 1 year.

Further, from a collaboration standpoint, we partnered with Ingreendients to launch a bottle of its haircare product line made from 100% post-consumer resin.

We also recently announced our launch of a new Mars jar for the well-known products, such as M&Ms, SKITTLES and STARBURST, which will be lighter in weight and include 15% post-consumer resin.

And lastly, announced recently at Pack Expo, Berry received the prestigious Sustainability Technology Excellence Award for our tethered closure with a tamper-evident band. This innovative packaging solution cuts down on waste by securing the closure to the bottle and improving recyclability.

In summary, our strategic priorities remain unchanged. Our entire global team's emphasis on working safely and servicing our customers remains our #1 priority and has made us a stronger, better and safer company. We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth while recapturing inflation. At the same time, we remain focused on executing our long-term strategy of driving shareholder value, expanding our competitive advantages and delivering on our financial priorities to position Berry for long-term success.

I'm very pleased with the hard work of our employees, delivering solid results in the face of persistently higher costs and a dynamic global economy.

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

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

Tom, just on your comments on driving cost/benefit through automation and asset optimization, can you just give us a better sense of -- just expand on those comments. Is it targeted towards any specific segment across your portfolio?

And then just a follow-up question for Mark in terms of the variances on price/cost for fiscal year '23 versus '22. Anything you could share there?

Ghansham, automation is a priority across the entire portfolio. Throughout the company, we've got over 125 dedicated technicians supporting automation projects as well as our internally proprietary fabrication capability. We're partnering as well with third parties to help us similarly execute those programs at a faster pace. We're making capital investments to support lower-cost assets.

For example, electric machines in Europe to ultimately reduce our energy costs and increase throughput, yield as a result. So it's all part of that, up to and including what we've been doing around global asset optimization. That meaning moving more and more business to more higher-productivity assets that we have throughout the chain to lower our conversion costs, reduce energy dependence while at the same time being able to successfully serve our customers.

Ghansham, with respect to price/cost, as you probably noted, we have about $100 million of growth embedded in our EBITDA guide for '23 on a constant currency and adjusted for divestitures assumed for the year. That growth is coming from price/cost, a little more weighted towards the cost side. As Tom mentioned, we've got a lot of capital-driven cost reductions that are coming through. And then we've got some price recovery from inflation that we haven't yet recovered from customers making up the rest of that $100 million.

Okay. And then just last quarter, you talked about perhaps carrying higher inventory levels just based on issues with rail, freight movement and so on and so forth. Have things normalized? I'm just trying to understand how you outperformed from a working capital standpoint.

Things have clearly normalized. We're keeping an eye on the rail negotiations that are underway right now. We've got a backstop should anything materialize in that regard as well, pivoting from rail to more traditional means, over-the-road hauling. But nonetheless, not a concern, it's certainly normalized for us, and we were happy to make it through the hurricane season relatively unfazed.

And I would say, Ghansham, with respect to your question on working capital, volumes, as we mentioned, came in slightly lower than we expected. And then obviously not the way we want to get there, but certainly, that helped working capital as the year closed out. And I'd say our team has done a nice job of adjusting both purchases on materials as well as our finished good quantities as the year closed out, in spite of these challenges we've had on the supply chain.

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

Tom or Mark, just following up on Ghansham's question. The free cash flow guidance for '23, does that assume that the -- I think the $150 million inventory headwind that you referenced earlier reverses? Or do you get that back next year?

And then just in terms of the guidance for '23. Are there any underlying volume assumptions for the company? And then directionally, as we think about the 4 segments, any segments where you would expect volumes might be stronger or weaker in '23?

I'll start with the overall. No doubt about it, we -- when you think about 2022, it's a very dynamic and challenging year. And I'm frankly quite proud of the team, on a 2-year basis, delivering 2% volume growth given that '21 was a very, very strong year for us.

We see that similar dynamic and economic backdrop as we enter our fiscal '23 as well. There's continued to be inflationary pressures. There's pockets of supply chain challenges that are out there. And frankly, our end customers are pointing to a near-term outlook that is a little softer customer demand.

Nonetheless, we believe that the capital investments that we're making better position us versus the market and position us well for the long term for low single-digit growth. And clearly, as it relates to demand in that outlook, any deviation we see in terms of demand across the fiscal year, we'll address with cost and productivity initiatives.

Yes. On working capital, Anthony, we typically assume 0 impact. Obviously, the year is just getting started here. So we'll see as the year progresses. As we start the year, polymer's a tailwind in the U.S., which is our largest-cost category. But obviously, with the situation with energy in Europe, we have a long road here ahead of us for the year. So we'll see how the year plays out, but we've assumed 0 in total for working capital in '23, which is consistent with how we've done it in the past.

Okay. That's helpful. And then just the return of capital announcements are really welcome. In terms of the dividend and your approach there, can you talk about the approach to the dividend and maybe possible dividend growth in the future? Are you targeting a certain payout or certain yield? Or is there sort of a benchmark or peer set that you're looking at? Just any thoughts there.

Well, first and foremost, we're thrilled to make this historic announcement today, the first dividend in our 10 years as a publicly traded company. Really driven by the confidence that we have in our operating model and the resiliency of the portfolio and its ability to consistently deliver strong operating income and cash flow from operations.

And that's given us the confidence, coupled with feedback from our investors, which there's been a percentage of our [customers] that had been interested in the initiation of a dividend. It similarly gives us access to a new shareholder base as well that ultimately may look at that as a precursor for investment that we've otherwise not been able to take advantage for.

And given that we believe our stock is tremendously undervalued right now, that, coupled with the share repurchase authorization, we think is a great combination for both existing and new shareholders for our company.

Yes. With respect to, I guess, the quantity, Anthony. Certainly, we have more than adequate cash flow to support this dividend and obviously a much larger dividend. We thought it was the right starting point, given it's in line with kind of the broader market, S&P. And with respect to future announcements on increases, I'd say stay tuned on that. Nothing yet to communicate in that regard.

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

This is actually Cashen Keeler on for George this morning. So just building upon some of the prior questions, can you just comment on what your growth trajectory is during the first quarter? And I guess relative to 2023, the company had some challenges in hitting its growth outlook in 2022. So what should ultimately give us confidence or comfort in 2023 that this pattern won't repeat?

Appreciate the question. As I stated earlier, our continued investment that we've made in CapEx, alongside our customers, we believe puts us in a better position relative to the market. And given that it's customer-linked gives us great confidence going forward.

That said, we're not immune to the dynamic economic backdrop that you've heard from a lot of folks. And considering that Berry is coming off of a record 2021, and on a 2-year stack basis to be plus 2%, given that environment, I think the model is proving itself out. Not to mention the resiliency of a portfolio that's 70% tied to very steady, resilient businesses that people buy regardless of the economic environment that they're facing. And this business has performed incredibly well in those environments.

That, coupled with our ongoing investment in our low-cost manufacturing base and footprint and ongoing investments around sustainability, can ultimately offset any type of weakness that the market may provide in terms of demand. But as we said, we clearly have a near-term outlook with around softer customer demand based on our end customers with a stronger back half. But we clearly will pull the levers necessary to deliver on the results.

Yes. And again, longer term, we continue to view the business as a low single digit growth business. We continue to pivot to markets that are higher growth, like health and wellness, personal care. And certainly investments around sustainability, we think, are going to -- is going to be a future growth driver for our company. No change in that regard.

Okay. Great. And just early trends here in the first quarter?

[Quarter], similar to...

How we exited '22. The market continues to be challenging. And the team is performing very well, as we said in our prepared comments. The commitment to offset fully all inflation that we're exposed to continues to be front and center as we start our fiscal '23.

Okay. And just one quick follow-up. Just relative to that $300 million of revenue from those growth investments over 2023 and 2024, how can we think about the cadence of that kind of layering in here?

Yes, I don't have the exact granular detail in front of me. I don't think there's a big hockey stick as I think about those projects that are outlined on those pages. Some of those are coming online as we speak. So I don't think, if you just modeled it ratably over the next 8 quarters, I don't think that would be significantly different.

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

Any update on any potential divestitures? Certainly, the credit markets have gotten a little tougher. Has that made it a little more challenging to execute?

And on the flip side, did the move that you've kind of announced today in terms of returning cash back to shareholders limit your ability to kind of pursue bolt-ons, call it, in 2023?

It doesn't impact the -- our ability to pursue bolt-ons. We're going to operate the company within our targeted range, between 3 and 3.9x. Relative to prospective divestments, and -- we have nothing to report for this call. It continues to be an area of opportunity for us. And as you said, Phil, as the markets ultimately provide those opportunities, we believe that we'll have assets that ultimately can contribute to that strategy and ultimately be deployed in other areas of the company.

Got you. And then, Mark, if I heard you correctly, for your 2023 guidance, you're assuming $100 million price/cost tailwind. Can you kind of unpack how much of that is cost as it relates to potentially deflation versus some of the good stuff you guys are doing on the self-help side, taking costs out?

And then on the pricing side, in a potentially falling resin environment, do you have the ability to get more price, especially on the nonresin piece? Which dinged you up a little bit this year, but have made pretty good progress to kind of wrap up last year.

Yes, sure. Thanks, Phil. I mean, I guess the good news and the bad news is we've done an excellent job of tightening up our lag on resin pass-through. As you -- as I'm sure you saw in the last fiscal year, resin was very volatile, up and down and kind of record movements. And yet, you saw our earnings -- have very little impact on earnings. So team's done a great job of mitigating the impact of resin on our earnings. That's also, again, kind of the bad news, in that as resin drops, we pass that through very efficiently.

To your point though, it certainly provides a good backdrop relative to passing through cost increases outside of resin, and we're certainly active in doing that. And as we said, about -- I'm going to call it, about 1/4 of the improvement we're expecting in earnings next year, to come from improved price/cost with our customers; with the remaining coming from cost reduction efforts the company is initiating, which would include moving -- getting more efficient on material usage, which could involve changing suppliers, for example.

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

It's Chris Perrella on for Josh. I just wanted to follow up on the Engineered Materials. How much of the volume decline in the quarter was due to deselecting? And when do you see the portfolio -- the product portfolio set at this point?

We'd anticipate in the back half of our fiscal year, we'll begin to see sequential improvement on the demand front. This has been a conscious effort inside this predominantly distribution-served business to continue to refine our business mix, alongside of some of the capital investments that we've made, specifically around areas like multilayer converted films and transportation films.

Now in distribution, clearly, there has been impact throughout the year, just from general destocking efforts that are underway periodically, just based on distributors trying to anticipate lower input costs. But I'd say the back half of the year, we'll be in a more normalized rate. Couldn't be prouder of the work that this team has done in offsetting its inflation while at the same time refining and improving its business and its product line mix. So really happy about the group.

So just to clarify that. So the product line mix, is that set at this point, and then you're just waiting for the market to grow? Or do you still have more bottom-slicing to do in the unit?

There'll be still some work to do in the front half of the fiscal year.

All right. And then a quick one on CapEx. It's a bit lower than what it's been the last couple of years. How does that lower CapEx break out between growth and sustaining versus what you initially expected?

Sure. About half of our CapEx, maybe a little more than half, is what I would refer to as maintenance or sustaining. As you mentioned, we've done a great job of increasing the output of our existing assets, so we've got plenty of capacity to grow within the system. So we're going to continue to invest in growth, as Tom said, behind our customer commitments. But we've got room to grow. We're focused on filling the assets and the production capabilities that we have.

But it's about half and half, reiterating what I said earlier, about half maintenance and the remaining half split between cost reduction and growth. And many of those projects contain both elements, right? Many of our capital projects are adding capacity and also reducing cost on our base business.

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

On the destocking impacts, are we fully cycled through the impact in HH&S from COVID-advantaged products?

And then you called out some destocking impacts in Engineered Materials, but are you seeing any other impacts from destocking in the consumer segment as well?

I know that's been pointed to a lot in a lot of the earlier calls and communications. We look at it, nothing has been to the point that we would say is dramatically unusual. However, in HHS, their destocking was specifically tied to the COVID-benefited areas. Again, that business had more benefit in that tied to COVID. In Engineered Materials, that's a regular aspect of that business given its distribution nature and people trying to time benefits in terms of inflation and deflation. Does that help?

That does. Then I guess on the mix impact in HH&S, is that fully cycled through though?

Mark? Yes. I'd say it is, yes.

I think we're effectively cycled through that on a year-over-year basis.

Got you. And then just on the follow-up. In Consumer Packaging North America, can you provide a bit more details on the volumes there? Called out softer customer demand. What exactly was that related to? And are inflationary pressures having any impact on your food service demand there?

Listen, I would compare both CPNA as well as CPI. I mean, overall, in the food and beverage, basic personal care businesses, they continue to demonstrate their resilience certainly versus other discretionary spaces. Those teams have really done a nice job in terms of execution, both on price given the stable demand in the United States, and even in Europe, given where there's been some softer customer demand. Nonetheless, both those businesses are arguably 2 of the most stable pieces of our portfolio, making up 70% of what we do. And our overall demand in those businesses looks very much like the large CPG global customers that we serve.

From a foodservice perspective, the advantaged nature of our portfolio specifically around all-polypropylene, recyclable, clear drink cups, continues to be a winner for us, both in terms of consumer acceptance as well as the sustainability advantage. And we continue to be pleased with the progress inside that space.

My comment is on having capacity, I would exclude that product line from my comments. We're essentially sold out in our foodservice product line, and we've got more demand than supply at the moment. We're adding supply. That's a chunk of our CapEx that we committed to here in the last 18 months, and we're continuing to add supply to meet the customer demand in that area.

Our next question comes from the line of Adam Samuelson with Goldman Sachs.

Yes. Maybe, Mark, just following up on the comments you made on capacity and understanding kind of the point on the drink cups in North America and CPNA, can you just frame what volumes could grow over a 1-, 2-year period, 2- or 3-year period, inside the organization with the capacity you have, without really needing more investment?

Just trying to think in the context of fiscal '22 where volumes were down slightly versus your initial expectations of up. It doesn't look like there's much volume growth really embedded in the fiscal '23 plan. And you've kind of, again, taken the CapEx a little bit lower than we might have thought previously, which all would suggest there's some scope to grow into the current network without putting a lot more capital to work.

Sure. Yes. Obviously, mix is important. We have asset flexibility on many of our assets. Some have less flexibility. So foodservice, we mentioned, on that particular asset platform, we're sold out. We have other asset platforms that have capacity, and we're out actively selling in those markets. To the extent we don't see demand improvement, we're certainly prepared to take actions on the cost side. And we're doing that and we'll take more if necessary, but I'd say we have adequate capacity to meet our low single-digit growth objective certainly here in the midterm.

But again, a lot of it will be determined by the mix of where the demand comes from. So hard to give an absolute number on that. Still depends on where the volume growth comes from.

Okay. And then if I just think about the fiscal '23 outlook. And again, it seems like at a total company level, there's very kind of modest, if any, kind of volume growth embedded in the plan. Can you maybe just maybe provide any color on expectations by the different segments for volume or regions where it makes sense? Just help us think about how you're framing kind of the different parts of the portfolio from a growth perspective.

Not a significant change to what we've communicated before. The 70% of our portfolio tied to areas like food, beverage, spirits, personal care, are continuing to remain very resilient. We've spoken in the past relative to our industrial-based businesses that have been more negatively impacted by the economic downturn and softness that you've seen in parts of the world. And we don't see a significant change in that regard at this point.

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

I just wanted to unpack a little bit more of the 2023. As you think about a second half that's a little bit more back-end loaded, can you just talk about, other than destocking perhaps abating in some pockets, what are the aspects of the business that you would anticipate to kind of accelerate as we move to the second half? And/or improvements that you would kind of anticipate, is it specifically on the price/cost side? Or is there some end markets where you would expect better results?

I think in general, as we -- we anticipate improved dynamic backdrop versus what we're coming into the year for, you're going to see all boats rise as a result of that. Clearly, we've got a more stable raw material environment right now. And clearly, if we see any type of improvement in terms of FX and currency, that's a net benefit for the company as well. And even though, given that we've done a very good job in passing on inflation throughout the year, I would definitely describe the materials and input cycle, of that being better and certainly more stable in '23 than we started '22.

That's helpful. And then as you think about your capital structure or capital allocation, clearly, you and the Board are working hard to kind of fine tune. And as you think about leverage in particular, can you just talk about why is 3 to 3.9x kind of the right range? And as we think about potential for kind of further delevering from the 3.7, I think a lot of the peer group is maybe below 3.5. So why not delever further kind of near term, just given the macroeconomic environment? Just how are you thinking about that capital structure from your strategy perspective?

Well, first, we're thrilled that the company is now at the lowest leverage level in its history as a publicly traded company. We demonstrated our ability, based on our cash flow, since the RPC acquisition, to dramatically delever the company quickly. We can continue to do that.

That said, given the current environment and the fact that our valuation is incredibly low and that the stock is undervalued, we wanted to take the opportunity to: First, buy back that stock as quickly as we can, taking advantage ultimately of that opportunity; two, recognize that there's another component of our shareholder base that desires a dividend and can expose us to a new pool of investors. And at this time, those are the 2 absolute right investments to make, coupled with the continued investments that we're making in organic growth.

Should we choose to do so as we see the valuations improve, we can clearly, and as we demonstrated, delever the company quickly.

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

Just wondering if you can comment about the cadence of volume growth during the quarter. It seems like a number of your peers have pointed to a particularly weak September as the consumers sort of retrenched during that month. And I just wanted to follow up, Tom, on your comments also, is that your customers pointing to some softer demand. What type of -- can you comment as to the line of sight they have? Is that -- are they talking about October, or are you talking about November, December? Just trying to figure out where demand has -- where is your demand trajectory is headed.

I know what you've referred to. It was very interesting. In what is our fiscal fourth quarter, the calendar third quarter, there was a real change or perturbation in demand that last week in August and in September. It was quite pronounced. And you've heard that referenced by a number of other companies inside the space. And the reference point in terms of the ongoing dynamic backdrop that we're facing, customers, our end customers specifically, are just being really cautious in terms of what they're carrying in inventory, how they're actually measuring and metering consumer demand. So there's not going to be a lot of fluff in the supply chain in terms of excess inventories given the rationale around that softer customer demand outlook for what is our fiscal first quarter, calendar fourth quarter.

Got it. And then just one quick question. This quarter and last quarter, you mentioned mix changes with Engineered Materials trying to "mix-up" certain categories. Can you provide us a little bit more color on what you're trying to do in EM aside from reworking distribution?

Inside our Engineered Materials business, material science is the core competency of what we do, the ability ultimately to secure more multilayer film structures to take advantage of that material science capability. Thinning materials, making them more sustainable while not compromising physical properties is, again, a core competency that applies to that business, and an area that we continue to seek to grow and to pivot toward. And it's consistent with the capital investment that we're making. And it applies, frankly, not only inside the food categories, but also applies to the transportation films as well.

Our next question comes from the line of Gabe Hajde with Wells Fargo.

A little bit late in the call. I did want to dig in a little bit on HH&S and there's been a lot of, I don't want to say noise, in the numbers in terms of obviously pandemic-induced benefits. But also, you guys have intentionally pivoted the portfolio a little bit away from diaper into adult incontinence and femcare. I'm just curious how far along you are in that, and if that's sort of in the rear-view mirror at this point.

And then thinking about diapers as what I'll call a semi-discretionary or somewhat convenience item, any input from your customers in terms of expectations for -- I know we're not going to talk really about price strategy, but volumes kind of going into the next fiscal year.

And then profitability was a touch short from what we were looking at. And could it have just been us mismodeling things. You called out recovering some price/cost in fiscal '23. Is that contractual in nature? Or is there anything in there that's just, I guess, out of pattern that you would call out for us?

Thanks, Gabe. Ongoing efforts to pivot more of our portfolio to adult incontinence, premium hygiene, premium baby, continues to be well underway. And we'll continue on that path as we look to secure more and more share in that space.

For our fiscal Q4, the baby care business was actually positive and our hygiene products were stable, which frankly offset what was the difficult comps that we faced in masks and wipes and drapes and gowns from a year ago that were benefited from the pandemic, along with some of the inventory drawdowns that we spoke of at the end of the pandemic.

We would say this though. From a performance perspective on earnings, it was actually in line with our expectation. And it's more of a function of mix and lag in price recovery tied to the contractual terms with our end customers, specifically on non-resin cost, were the primary drivers. And we anticipate sequential improvement from an earnings perspective in fiscal Q1, and we expect to get back to a price/cost-positive position in our fiscal third quarter, which is the June quarter 2023.

All right. And not to pin you down too much. You guys obviously ramped up the share repurchase activity this year kind of in March. Given the seasonal swings, will we kind of expect a similar cadence, given the initiation of the dividend and things like that? Or would you guys kind of be more, I'll say, programmatic about it over the course of the year?

Yes. Thanks, Gabe. Our guidance has the share repurchase fairly ratable over the year. It's slightly front-loaded, to your point, given the current share valuation is hopefully very temporary. But I would say pretty ratable to slightly front-loaded is the way we've laid out the share repurchases for fiscal '23.

Our next question comes from the line of Arun Viswanathan with RBC Capital Markets.

I guess, first off, when you look at the FY '23 guidance, you're pointing to about $2.1 billion of EBITDA, $800 million to $900 million of free cash flow. Just wanted to see what would push you to the upper end of that range. Is it maybe price/mix or price/cost or volume growth above the 2%? Or maybe you can just elaborate on your guidance as well.

Yes, sure, Arun. I would say, certainly, deflation wouldn't hurt relative to getting to the higher end of the range. '22 obviously was a year of inflation, and we did a great job in spite of that.

Our markets, as we'd talked about, are much more stable, given food and beverage, personal care, hygiene being our largest end market. So the reality is demand volatility, as you know, doesn't have a large impact on our earnings. The larger impact is price/cost spread. And to the extent we can get some tailwinds from other markets decreasing, which puts downward pressure on our commodity prices, that would be a tailwind for us.

And same thing on cash, right? To the extent we have some deflation, that would help. As I mentioned earlier, the working capital being a 0 target, that would create a tailwind on working capital as well.

And obviously, FX. Who knows? We assumed end of October. As we sit here today, we've got a slight tailwind there, but obviously that could reverse tomorrow. But FX is another factor to consider.

And also, this is kind of keep an eye on energy, for sure. The footprint of plastics converters is considerably lower than other substrates from an energy consumption perspective, so that will create an opportunity as you see continued pressure in certain geographies around energy inflation, where the economic feasibility of the pivot to plastics will be a value proposition that I speculate end users will begin to consider.

And when you think about the leverage, you noted that you're at 3.7 now, so the lowest fiscal year-end. Where do you see that kind of evolving over the next year, couple of years? Would you want to move that down into the lower 3s? I think in the past, you've commented 3 to 3.9. So how should we think about that?

It's all around shareholder value creation. We want to deploy and maintain a leverage level that's ultimately consistent with maximizing shareholder value. As we said right now, we think the share price is a very compelling value and that the company is very undervalued. And as a result, we're taking the actions that we are, coupled with attracting, both addressing existing shareholders' interests in dividends, as well as looking to attract new shareholders that may not have been attracted to the company by initiating this dividend.

We're very -- we're happy that we have the type of resiliency and stability of this portfolio that generates the kind of cash that it does to allow us to do this. So we're very pleased with this evolution in our company in paying its first dividend and re-upping the share repurchase authorization. We're pleased where we're at.

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

Just had a quick follow-up on the mechanical recycling side. It seems like there's a lot of demand from customers for a mechanical recycling, there's even potential for electrical recycling. How do you think about those investments forming part of your portfolio? And what kind of percentage of CapEx you might focus on those going forward?

I'd say this. There's not going to be one solution that solves all the problems. That said, we're the fifth-largest mechanical recycle, if you will, in Europe. We're excited about our new Leamington Spa site that ostensibly is fully committed by our end customers. And this will be the first of its kind, ultimately allowing us to have Food Safety Association-approved material coming off that line, which is an FDA-like equivalent.

So we're excited. And this could certainly be models for us going forward to drive more circularity, to address some of our carbon goals and objectives, all while not impacting both customer as well as our end customer expectations in terms of quality.

And we're very bullish on it. And I'm proud. This team has continued to quietly lead in this space. And we believe this continues to be a growth opportunity for our company globally. And our teams have been doing a great job. I couldn't be prouder of the team ultimately implementing our Leamington Spa investment as part of our CPI group. And the alignment we have with end customers is really encouraging in that regard.

It's one of those -- when you think about true value propositions that we can bring, this is a true value proposition that we can bring that's unique to our company.

Great. And then maybe just a really quick follow-up. When you mentioned bolt-on acquisitions, now that you're kind of in that 3 to 3.9x range, is there any area where you'd be focused on adding capabilities? Or any regions where you would want to be more focused on when we think about kind of your potential to do M&A on a go-forward basis?

I'd answer it generally. We've been very clear that the areas of interest are in faster-growing markets or geographies that ultimately can support our organic growth objectives. The company has done a great job in terms of both -- increasing its exposure to emerging markets, but also increasing exposure to faster-growing markets.

And we didn't have a chance to speak of it today, but the expansion that we have in Bangalore, India to support health care and pharmaceutical is on track. It will become fully commissioned this fiscal year for our company, and we're very excited about it.

So those types of investments, aligned with customers in faster-growing markets and geographies, are always of interest. Health care, pharmaceutical, dispensing solutions are some core areas that we've been very prominent in our investment priorities.

Our next question comes from the line of Adam Josephson with KeyBanc Capital Markets.

Mark, I think you mentioned you're thinking EBITDA will be a similar split first half versus second half as it was in fiscal '22, call it 48-52. Just want to confirm that. And it just -- it sounds like if volume, you're thinking, will get better throughout the year, and I would think currency would be a bigger drag in the first half, that perhaps it would be more heavily weighted to the fiscal second half, unless price/cost will be a bigger benefit in the first half. So can you just help me with those, how you're thinking about those components, Mark?

Yes. No, I think, Adam, the way you laid it out was accurate. I would say to the extent -- to your point, to the extent demand does not improve, we're fully prepared, and we'll take the appropriate cost actions to achieve the earnings outlook for the company.

With respect to FX, we haven't made any assumption changes there. We just assumed flat over the course of the year. So to your point, in the front half, it will have a bigger headwind than the back half as the dollar strengthened over the course of fiscal '22.

I appreciate that, Mark. And just one other one. It seems like you'll pay out the vast majority of your cash flow in the form of buybacks and dividends next year. And then you've got, I think, $800 million of notes coming up in February of '24. To the extent that you're planning on refinancing those, can you give us just some sense of -- I think you're paying 1% on those. At current rates, what you might refinance those at? I'm just wondering how much higher your interest rate is likely to be on those notes.

Sure. Yes. I mean, in '22, obviously, we were real pleased that we were able to return $700 million of capital as well as delever the company. So we'll see how '23 plays out, but we've certainly proven that we can do both.

With respect to capital markets and refinancing our debt, I think today's rates, you can go check me on this, but I think it would be in the 6% to 7%. Depending on the tenor of the note, but I think looking at something in the 7- to 8-year would be somewhere in that 6% to 7% coupon area.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

In the cash flow statement, there was a $200 million benefit from the settlement of derivatives. What is that? And what would be the number for next year, if there is one?

Sure. Yes. Thanks for the question. As we've talked about, we have a number of levers available to the company. We look at the cost/benefit of each of those levers and can we redeploy capital. Our derivative portfolio is one of those levers, similar to other working capital levers we have, such as discounted terms with customers and suppliers.

And so just depending on market conditions, those opportunities have different considerations that you evaluate. And last year, thanks to growing interest rates, that presented an opportunity that was more attractive than some of our other opportunities.

So hard for me to predict what the markets will do in '23, but again, the company has many levers to deliver consistent cash flow and mitigate the impact of different items, such as inflation, on its cash flows.

So my base case assumption would be 0, to answer your question. But we'll see how the year plays out.

For the year, your price/cost -- you had a price/cost benefit of $95 million on EBITDA. In the scheme of things, is that a number that you aim to try to get to a positive number each year? Or is it the case that, in the ebb and flow of your business, that under normal circumstances, the positive numbers are followed by negative numbers, and it levels out to about 0.

Mark may have a view on this, but price versus cost is positive in a normal inflationary environment, frankly. Probably greater than $100 million over the last 10 years.

Yes. I would say, in 80% of the years, that relationship is positive thanks to our efforts to continue to focus on cost-reduction efforts, improving our material usage, internal productivity improvements. The net of price and cost are, again, in 80% of the years, a positive relationship. The toughest years are the ones actually like last year, where you have just significant inflation. Those usually create the most pressure. And usually, we have the most tailwind in deflationary environments.

Any other callers, operator?

No further questions.

Well, I thank everybody today for joining us for our fiscal fourth quarter call. We look forward to talking to you to report out on the first quarter. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.