Berry Global Group Inc (BERY) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Berry Global earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

Thank you, and good morning, everyone. Welcome to Berry's Second Fiscal Quarter 2021 Earnings Call. Throughout this call, we will refer to the second fiscal quarter as the March 2021 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'll be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website.

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

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.

First, let me start with our #1 core value on Slide 3, and that is safety. We believe safety doesn't happen by accident, and everything we do at Berry starts with safety in mind. As you can see on the slide, we have an ongoing commitment to identifying, managing and eliminating risk. We're proud of our industry leadership in safety by keeping our team members safe as evidenced by our OSHA incident rate of 1 at the end of 2020, significantly better than the industry average of just below 4.

Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This work has resulted in our very strong start to the first half of our fiscal year, and the numbers speak for themselves.

For us, environmental, social and governance are not just words on a page but are leading principles in everything we do. These principles fuel our commitment to carrying not only for the communities where we have operations, but to ensuring that we are providing better opportunities and bringing innovation to provide multiple [lines] to natural resources.

In alignment with this, we recently became the first North American headquartered plastics packaging converter to have a 1.5-degree Celsius target validated by the Science-Based Target Initiative. This is possible because we have reduced our market-based greenhouse gas emissions by 19% since our base period in 2016, which means we are on our target to achieve our Impact 2025 goal of 25% reduction in emissions intensity.

Plastics in spaces where we participate provides an advantaged carbon footprint, and our teams are working continuously to reduce the material used to help further our value chain partners to achieve their Scope 3 greenhouse gas reduction targets. More than 85% of the resin we produce or procure for our fast-moving consumer goods packaging products are made from recycled or renewable materials or recyclable at the end of their use, which is well on our way to our goal of 100% by 2025. Just recently, we announced another partnership, this one with Borealis, providing us access to now over 600 million pounds annually of postconsumer recycled content.

Moving on to Slide 4 with a summary of our quarterly highlights from our second fiscal quarter. Results for revenue, EBITDA and earnings per share all came in stronger than we anticipated, including solid demand across each division. Strong momentum the team has driven over the past several years delivered record results for any quarter in the company's history for these respective metrics.

The diversity of our portfolio across various end markets and regions continue to provide the consistency and dependability we've demonstrated for decades. Our top strategic priorities remain the same, consistently growing organic volumes and improving our balance sheet. In the first half of fiscal '21, we're off to an exceptional start in achieving these goals. Organic volume growth came in at 5% for the quarter and 6% for the first half with all 4 segments again delivering strong volumes. Stay-at-home food, health and wellness, along with the personal protective products continued to see solid growth in the quarter. Away-from-home in certain other markets, while still facing some softness, are seeing improvements.

Additionally, our strong results on earnings and stable free cash flow allowed us to reduce our leverage, ending the period at 4x net debt to adjusted EBITDA. We are well on our way to meeting our objective of getting leverage below 4x. After we achieve this target, we anticipate operating our company while maintaining our leverage in a range of 3 to 3.9x on a go-forward basis. We believe the continued execution of growing organic volumes and strength in our balance sheet will deliver significant shareholder value.

And lastly, as most of you are aware from the beginning of our fiscal year through [January], we saw significant cost increases in our primary raw material, (inaudible). Additionally, we've experienced inflation in other raw materials and other costs, such as corrugate and freight. With a strong volume growth momentum in the businesses, along with our efforts to improve the timing lag of pass-through of inflation in our customer contracts, we've seen good progress towards this objective and continue to actively pass these costs through.

Our updated guidance reflects this progress relative to our expectations on inflation recovery. It includes a modest incremental impact from inflation over the next few quarters, which is offset with an increase in mix benefit primarily from our HH&S segment along with a positive impact from currency. As a result, we're increasing our organic volume growth assumption from 4% to now 5% and increasing our fiscal year operating EBITDA guidance to $2.25 billion, which is a $50 million improvement from the midpoint of our previous range.

We began fiscal 2021 with confidence in our ability to grow organically as we've demonstrated over the past year, and I believe we are well positioned to continue to see long-term, predictable and sustainable growth with customer-linked capital investments that target continued expansion into both faster-growing segments and emerging markets.

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

Thank you, Tom. I would like to refer you to Slide 5 now. For the second fiscal quarter, reported sales were up over 13% to a record $3.4 billion. The quarter revenue included organic volume growth of 5%, including all 4 segments showing positive organic volume growth.

As Tom noted, demand for our products remained strong in certain markets, which had previously experienced pandemic headwinds have continued to improve. The quarter also included higher-selling prices from the pass-through of cost inflation that increased revenue by 6% along with a 3% increase related to foreign currency translation. These increases were partially offset by the sale of the U.S. flexible packaging converting business that closed at the end of November.

From an earnings perspective, our operating EBITDA increased by 9% to a quarterly record of $590 million driven by the 5% volume growth, product mix and realized cost synergies. Adjusted earnings per share increased by 34% to $1.59 in the quarter, which included benefits just referenced related to EBITDA along with interest expense savings from debt reduction of over $1 billion in the last 4 quarters.

These strong financial results are the byproduct of our entire global team's focus on organic growth opportunities and driving cost productivity while managing the increased demand from our customers and the human resource challenges related to the pandemic. The results are yet another example, as you can see on Slide 6, of our proven performance over many different economic cycles.

As referenced on prior calls, we have consistently driven top-tier results in key financial metrics, including 20% or more compounded annual growth rates for both free cash flow and adjusted earnings per share.

Now looking at the quarterly performance of each of our 4 operating segments on Slide 7. For the quarter, our Consumer Packaging-International division delivered a 9% improvement in revenue, including a 7% increase related to foreign currency and a 4% increase in organic volumes. Regionally, we had 2% volume growth in developed markets, such as Western Europe, with stronger growth in emerging markets, such as China and India. From a market perspective, our product serving at-home food continued to generate strong performance, while our foodservice business will continue to improve as countries reopen.

Industrial and automotive markets, which were negatively impacted at the start of the pandemic, continued to improve and generated strong year-over-year growth. The CPI team produced an impressive 12% improvement in EBITDA, primarily driven by the strong volume, foreign currency translation and cost productivity. We are encouraged by the positive volume results and are optimistic given the pipeline build and momentum in the business.

Net sales in our Consumer Packaging-North America division were up 15% to $731 million, primarily as a result of higher selling prices of 9% from the pass-through of inflation and a 5% increase in organic volumes.

The organic volume growth in the quarter was primarily attributed to continued strength in our core consumer businesses from products such as closures, bottles and containers. This quarter marks the 12th consecutive quarter of positive volume growth for the Consumer Packaging-North America division primarily driven by their long-term strategy of focusing on advantaged products in targeted markets with strong customer linkage. We are very pleased with this achievement and are also encouraged by their continued strong momentum and pipeline. EBITDA was $133 million, the same as the prior year quarter, as strong volumes and cost synergies were offset by the timing lag of pass-through of inflation.

Our Health, Hygiene, & Specialties division delivered sales of $781 million. The 21% increase included higher selling prices of 13% from the pass-through of inflation and organic volume growth of 8%, including growth in all 4 regions globally. The organic volume growth in the quarter was primarily attributed to organic growth investments along with continued demand for health-care apparel, premium hygiene and specialty products, such as disinfecting wipes, fabric care, water and air filtration, as well as a recovery in the building and construction market.

EBITDA increased by $44 million or 39% primarily driven by the organic volume growth, favorable product mix and cost productivity. We continue to see a benefit during the quarter of approximately $25 million in EBITDA from favorable product mix associated with pivoting our assets to produce products related to COVID-19 protection.

Sales for our Engineered Materials division were 15% higher on a comparable basis at $798 million. The increase was primarily attributed to higher selling prices of 9% from the pass-through of inflation along with organic volume growth of 3%. Volume growth was primarily driven by our consumer-facing products and some of our industrial businesses along with a modest recovery of certain markets that were negatively impacted by the pandemic, such as our can-liner business that serves away-from-home waste disposal.

EBITDA was $114 million in the quarter, which was $7 million below the prior year on a comparable basis. This decrease was primarily a result of a lag in passing through cost inflation and the deep freeze in the southern part of the United States that impacted some of our facilities in this division.

Next, on Slide 8. Free cash flow for the last 4 quarters ended March 21 totaled $951 million. Our free cash flow continues to be utilized to reduce our outstanding debt, and we have paid down over $1.3 billion over the past 6 quarters, which has lowered our annual interest expense and reduced our debt leverage to now 4x. We remain committed to maintaining a strong balance sheet, and we believe our consistently increasing and dependable cash flow will provide us the opportunity to further improve our strong balance sheet as we have demonstrated historically.

We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile. During the quarter, we issued additional sets of investment-grade-rated first priority senior secured notes, $800 million with a fixed rate of 0.95%, and an additional $775 million with a fixed rate of 1.57%.

We also refinanced our term loans, lowering their spread by 25 basis points. We used the proceeds of the issuance and refinancing to replace existing variable rate term loans, which will reduce our interest expense by $15 million annually. The combination of debt pay down, earnings growth, interest rate reductions and refinancing activity has improved our interest coverage ratio over the last 1.5 years from 4.7x to now 6.5x.

Next, our updated fiscal 2021 operating EBITDA and free cash flow guidance as shown on Slide 9. Given our continued strength through the first half of the year and stable demand outlook across our business, we're increasing our organic volume growth assumption for fiscal '21 to now 5%, including low single-digit growth in the back half of this fiscal year, building on last year's strong performance, all supported by our robust and growing pipeline, increased level of capital expenditures and the positive trends and momentum we are seeing in each of our businesses.

Given the continued strength in our pipeline, we are raising our capital expenditure spending expectation by $50 million to support incremental growth projects. Additionally, we are increasing our operating EBITDA by $50 million from the midpoint of our previous guidance provided in February to $2.25 billion. We've included a negative impact from inflation and the associated timing lag in passing through inflationary costs.

We expect the majority of the impact from the recent unprecedented increases in resin prices in the United States to impact our results in the June 2021 quarter. So we expect this lag will be largely offset in the June quarter from continued favorable product mix.

The guidance assumes that both of these factors dissipate in the September quarter. And as a result, we expect operating EBITDA in the back half of the year to be split relatively evenly between the June and September quarters and will be similar with the second half prior year results when adjusted for our recent divestitures and the COVID-19-related mix benefits.

We are proud of the continued strong execution by our team as the unprecedented resident inflation we have experienced has been more than offset by volume growth and productivity. Our fiscal 2021 free cash flow guidance remains in the range of $875 million to $975 million. The range of free cash flow includes $1.575 billion to $1.675 billion of cash from operations, partially offset by capital expenditures of $700 million. We also continue to anticipate further strengthening our balance sheet and expect to be in our targeted range by the end of fiscal 2021. This concludes my financial review.

And I'll turn it back to Tom.

Thank you, Mark. Before we close our prepared remarks today, I want to touch on what we've been focused on and what's driving our strong results. 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 growth markets and regions.

Overall, the diversity of our end markets and product offerings as well as the essential nature and demand consistency of our products have been core to the underlying performance of the business. I'm very confident in our team's ability to meet our near- and long-term expectation and commitments to provide sustainable, profitable growth. We have multiple drivers of organic volume growth shown on Slide 11 and 12. Our focus on both faster growth end markets and emerging markets, along with sustainability led packaging.

As we highlighted on our last earnings call regarding our Global Inhalation Healthcare Solutions, going forward, we'll regularly showcase targeted products or markets we are focused on. We expect emerging markets to grow faster than advanced economies with increasing populations and the need for our protection products. And we will focus on mega trends previously discussed. This has allowed us to increase revenue in emerging markets from $100 million in 2013 to now over $1.5 billion.

Furthermore, as you can see on Slide 12, we are continuing our support of circularity through our ability to manufacture recyclable films and incorporate sustainable materials. We recently announced a $70 million investment to support our growth opportunities, which will enhance our manufacturing capabilities for more use of recycled content and PHA resins supporting bio-resin use. Berry, along with many of our customers, have dedicated sustainability goals, many of which specify the increased use of recycled or recyclable materials. This investment will further enhance Berry's portfolio to fully recyclable, biodegradable or compostable film to support its customer needs. Berry is committed to remaining at the forefront of the innovation necessary to meet customer sustainability goals through these investments in the latest equipment, technologies, advantaged film development and design for circularity.

As a global leader, we are driven to innovate, as you can see on Slide 13. We've highlighted just a few of the amazing products we've designed to manufacture with sustainability in mind. On the top right, you can see our tethered closure offerings. Our CPI Group unveiled a range of closure designs that meet European Union legislation requirements. These closures remain attached to the container throughout its use for ease of recycling.

On the top left of the slide, we manufacture the J-Cloth Plus wipe, the first and only contact clearance externally certified biodegradable and compostable wipe. This wipe is produced with 100% biodegradable fibers and can be disposed of at any green recycling bin after use. We remain steadfast in our commitment to lead and collaborate to drive innovation and acceptance of products targeted towards improving recyclability, reuse and reduction of virgin plastics, all with the goal to promote a more circular economy.

In summary, on Slide 14, building on our strong first quarter, we delivered outstanding results across all of our operating segments. We again have delivered on our strategic goals to drive organic growth and improving our balance sheet, all while setting financial records for any quarterly period for EBITDA, revenue and earnings per share.

For the fiscal year-to-date, adjusted earnings per share has impressively increased 55% compared to the prior year-to-date, while operating EBITDA and revenue were both up 14% and 12%, respectively. And finally, with consistent dependable end markets, a leading cost position, along with sustainable capacity to invest in long-term steady growth, we are confident in our ability to consistently grow low single digits through our customer-linked capital investments that target continued expansion into both faster-growing end markets and regions. I thank you for your continued interest in Berry.

And at this time, Mark and I will be glad to answer any questions you may have.

(Operator Instructions) And your first question comes from Ghansham Panjabi with Baird.

Congrats on the progress. So at the onset of COVID, you pointed towards a sort of a 65/35 split of the portfolio advantage versus disadvantage specific to COVID. Where are we in the recovery curve specific to the 35% relative to the pre-COVID baseline? And are you starting to see any signs of the 65% moderating in context of many CPG companies pointing towards slowing demand? And I guess I'm referring to what you're specifically seeing for that 65% in 3Q as well?

Thanks, Ghansham. Yes, we -- in our guidance, we're basically assuming that the benefits of COVID basically over as of the June quarter, and I think if you look at this quarter, you can see the benefits of the diversity of our portfolio. All 4 businesses delivering positive growth, strong pipelines enabling that growth coupled with the capital investments that we've been making around the megatrends that we believe will sustain us well beyond the end of the pandemic, that being health and wellness, food safety, e-commerce and sustainability trends. So all the continued investment we've been making, the pipelines all tie around those strategic initiatives. And I would say, in spite of what's going to be a difficult comp in the back half of the fiscal '21 for some of our businesses that had benefits relative to COVID, we still anticipate low single-digit growth, driven by the overall diversification of the portfolio that we have with strong expectations around Engineered Materials and CPI. So feel real good about the outlook. We feel we've invested accordingly to build this business around low single-digit growth over the long haul and feel very good about the outlook going forward.

Great. And for my follow-up question on resin and your embedded outlook for the December -- or I guess, for your 4Q, can you just take us through what you're assuming from a resin trend line perspective? Are you assuming that resin plateaus and then you catch up on price cost by the fourth quarter? Or are you actually assuming that resin moderates from current levels? And if so, can you baseline that against which sort of month we should think about maybe February levels or March or whatever else you're thinking at this point?

Difficult to predict it on a by-month basis, but we certainly believe we'll begin to see moderation. We're still going to have a headwind for the full year from a lag perspective. But I'd remind you, this was probably one of the most significant impact to the resin facilities in the Gulf Coast that we've seen in 35-plus years. The ability and the diversity of the portfolio to ultimately prevail given the strong growth that we had and the good work that our commercial organizations have done in terms of improving lag and pass-through mechanisms are strong advantages for the company going forward. But we do expect moderation. And the -- I would say that, it's a speculation here, but we -- the resin companies will probably need through May, June time frame before we start seeing more normality going into the back half of the calendar year.

In terms of our guidance, Ghansham, this is Mark. We haven't assumed that relative to our guidance. While Tom said that's probably our best estimate at this point based on the information we have today. We've assumed resin being flat at current pricing for the balance of the year with respect to our guidance.

Your next question comes from Anthony Pettinari with Citi.

Regarding the increases you're seeing in non-resin costs, I'm wondering if you could talk about any pricing actions taken in the quarter to recover those. And to the extent that you're able -- if it's possible to give a sense of how much progress you've made in shortening the lags for non-resin-based raws and other costs, maybe how long it historically took to pass those through and how much you've been able to shave off that time?

Yes, I'd say it's ongoing, Anthony. So we continue to work with customers to pass through inflationary costs of all kinds, including certainly, our primary raw material resin and shortening that lag. Difficult to quantify, per se, but it's an ongoing effort that our commercial teams are working with customers to shorten the timing lag on pass-through resin as well as put in other index clauses, whether or not it's corrugate or freight. It's going to vary depending on the product and how significant of a cost component that is for that respective product. But I would characterize it as an ongoing effort. As we stated in our prepared comments, team's done a great job of continuing to work with customers, make sure they have product and pass on inflation as appropriate.

Yes. I think Mark highlighting the most important part, we've really made certain that we prioritized service and supply above all things else. And in areas that certain components of where we've seen inflation weren't tied to (inaudible) there, we began very early in showcasing those incremental costs and looking to have offsets. So the team really has done a very good job. I'm pleased with the sense of urgency that we've shown in terms of passing that through.

Okay. That's helpful. And just following up on that, I mean, you indicated the timing lag is baked into the guidance. Is there an amount of cost that you won't get back in fiscal '21 that you would expect to recover in fiscal '22 or the beginning of fiscal '22 that you could quantify?

Yes. Again, it's ongoing, right? This is a dynamic process. There's certainly, in the year, we're going to have a significant amount of I'll call it under-recovered inflation both on resin and other raw materials. We have variety. We're very diversified from a customer perspective. So it's -- as I said, an ongoing initiative, and there will certainly be a ongoing effort to recover that inflation. But I apologize for being redundant. Again, our top priority is making sure customers are getting product. And we're taking all the necessary actions, including incremental cost, to get product to customers on time.

Your next question comes from Mark Wilde with Bank of Montreal.

Congratulations on a good quarter. Tom, I wondered, when we think about the volume growth this year, the 5%, how would you kind of parse that out between the portion you think is kind of COVID benefit related and then just kind of other organic growth?

It's important to start with we began this journey around -- investing around large megatrends early in 2018. We had a targeted capital investment and looking for customer linkage along the way. That has proven beneficial in each of our businesses. And as we stated at the beginning of the pandemic, each of the business has different nuances relative to portions of the portfolio that may be positively or negatively impacted in aggregate for the company as a whole. It was neutral to slightly positive for the company with the HH&S portion of the business on the health-care side being most advantaged.

So that's why we feel so good about the longer-term prospects for us to continue to deliver that low single-digit growth because this is a journey that we began all the way back in '18. We showcased that we would begin the growth in 2020, which we did early, and then ultimately, the pandemic hit. So it ultimately just benefited some of those strategic investment plans that we made then and we've continued to make throughout the pandemic. I think that's helping set Berry aside long term because we've been able to continue to maintain that capital investment tied to specific customers to increase our position geographically as well as around these bigger -- these growth trends.

Yes. It's been quite a remarkable turnaround, Tom. If there were 2 or 3 key things that you would point to as kind of drivers to the better organic growth, what would they be?

Targeted focus around specific organic growth where we have advantages and tie that growth and that investment to specific customers, increase your geographic presence in geographies that ultimately are delivering higher growth rates, which we've done a very good job increasing that exposure to over $1.5 billion. And ultimately, we were able to capitalize on a transformative acquisition that gave us truly global value-delivery capability that is fully integrated and delivering exceptional promise for us to serve large global brands around the world with local value delivery.

Your next question comes from Joshua Spector with UBS.

This is Lucas Beaumont on for Josh. I just wanted to touch on your free cash flow bridge, if we could. Could you please walk us through your updated assumptions for working capital, interest and the other line items between EBITDA and free cash flow.

Also just -- I was a little bit surprised that there wasn't more of a headwind from the high raws on working capital for the outlook. So if you could maybe just talk about the factors impacting your expectations there versus 3 months ago as well, that would be great.

Sure, yes. This is Mark. Relative to free cash, as we, I think, had in the release, our EBITDA outlook for the year is $2.25 billion; our CapEx, $700 million. Our interest number is going to be in the $310 million to $320 million range depending on how the back half shakes out from a rate perspective. And then as you pointed out, we've got a use of working capital of about $100 million in the outlook and then taxes. Outlook there remains the same at about 25%. And those get you down to that $875 million to $975 million of cash.

And with respect to the second part of your question, team's done a great job on working capital. Quite honestly, part of it is just strong demand has driven our inventory down. We continue to find new ways to service customers with lower inventory levels. So while none of us wanted to see the unfortunate weather events in the southern part of the United States, the reality is post that event, we're going to be a better company with respect to working capital management service to our customers. So we haven't -- as a result of that, we haven't seen that negative impact because inventory levels are at lower levels.

Great. I just wanted to touch on bio-plastics a little, if we can. Our recent conversations with bio-plastics producers have indicated that converters really only need minimal changes at the packaging level to use their products. So I was just wondering, could you help explain to us is that right? And I guess, what part of your operations would need to change if changes are needed, and what kind of an investment do you see is needed there to be able to apply those products?

We've been fortunate to close new applications and bio-based materials. We're trying to educate our end customers on literally the range of possibilities, whether it's mechanically recycled, whether it's bio-based, whether it's molecular recycled materials. Each material, whether it's virgin or otherwise, they all have different melt viscosities and such requiring various degrees of tweaking. But to a large extent, there's not a significant amount of change required to run those materials. And it's really all about presenting the feature benefits to our end customers so they can make an informed decision for their end customer. Some investments that we may choose to make in the future allows us to use a wider spectrum of materials to give us an opportunity to have a broader selection of materials at different cost price points to create optimum blend and mix it so. But all in all, yes, it's correct that it doesn't require a significant amount of modification.

Your next question comes from Neel Kumar with Morgan Stanley.

In Consumer Packaging-International, could you just break down the 4% volume improvement by end market. How did the trends look in the industrial business versus the grocery and more consumer-oriented markets? And can you just also give a sense of how that looked geographically?

I'd say the following on CPI, I saw similar growth positives in terms of food, household, health care being the primary drivers in CPI. Emerging market growth is very strong for us as well that they're further along in the recovery. No doubt about it, much of Europe remains in the throes of the pandemic. And we've continued to see the strong in-house and in-home consumption coupled with improving trends on the industrial side. So it's an improving position. That team has done really a really solid job and continued to innovate, continued to close new business, dispensing systems. Trigger pumps, airless pumps and the likes have all been strong areas of opportunity for us, coupled with the success that we've had around our sustainability leadership. That continues to be an area that, with the investments that we've made for mechanically recycled material as well as like a recycle access that we have, We've made really strong progress in introducing specifically the advanced recycling material to our food-based customers. We have over 27%, 2-7% of our overall food-based customers working on a specific project or already having committed to advanced recycling material as it continues to become more readily available. So we're really pleased with that progress inside that space. But as we fully expect that we continue to see improvements, the opening, you'll see further industrial strength. But the trends that we've seen in at-home consumption, we believe are going to be sustainable for us. Very pleased with how that team's operated in a difficult environment. And again, the linkage to our global key accounts that, that business has enabled is -- will provide growth opportunities for years to come.

Great. That's helpful. And then in terms of just volumes, can you just give us a sense of how quarter-to-date trends are looking across the segments And then you talked about longer-term volume expectations of low single-digit growth. In any case, in [essence] in particular, I was just wondering if you could just touch on your degree of confidence that volume growth can still be positive in 2022 despite lacking a couple of years of very strong growth and just potentially shifting to a more normalized environment?

We've invested in each of our businesses to deliver low single-digit growth, and we remain steadfastly committed in our ability to deliver that growth for the franchise. As you'll recall in our HH business, we made a targeted pivot to increase our position around hard-surface disinfecting wipes. We pivoted more premium hygiene, premium fem care and adult incontinence to give more balance to that portfolio, coupled with better geographic presence in terms of developing regions of the world, and we delivered on all of those. We're not going to -- we really can't comment on a current intra-quarter type performance. But suffice to say, we took that into consideration when we gave our guidance increasing the full year outlook to 5%.

Your next question comes from Arun Viswanathan with RBC Capital.

Just curious, you've brought leverage down to a pretty favorable level here, and then it sounds like you're continuing to focus on that and maybe get into the 3 to 3.9 range over the next year or so, maybe you can just kind of reiterate your priorities for cash use at this point. Would you consider -- is the Board considering a dividend. And then maybe you could also comment on potential for share buybacks.

Yes. The primary strategic objectives for the business continue to be around investing in and generating crop organic growth, continuing the improvement of our balance sheet. As we said, we intend to stay within that targeted leverage range between 3 and 3.9x while operating the company. And we'll continue to use this cash flow that we're able to consistently generate on further debt reduction. We will consider accretive bolt-on acquisitions that allow us to stay inside that range as well as returning cash to shareholders in the form of share repurchases and dividends. So we're in a very strong position, really driven by that cash flow generation that is -- has been -- really become a cornerstone for the company.

And where are you finding the most organic opportunities? I know you've made some investments in HH&S and in China as well. You've discussed dispensing systems. But I guess, going forward, where are you finding the most opportunities by segment, maybe if you could help us out.

Well, I'd say really across the business, health and wellness continues to be a key category for us in each of our businesses and globally. The ability to ultimately support the growing e-commerce trends with noted investments we recently made inside our Engineered Materials business, food safety barrier properties that we can ultimately support inside of our food category continue to be areas of opportunity, both domestically and internationally. And sustainability. We clearly believe sustainability is a growth platform for us, and the level of investment that we've made both in terms of mechanical recycling as well as the access that we've enabled for the molecular recycled materials is something we're really excited about and is soon becoming a really significant growth driver, we believe, for the company's organic growth goals.

Your next question comes from Kyle White with Deutsche Bank.

I apologize if I missed this, but what was the impact from the lag in the pass-through of resin during the quarter? And what does your guidance assume from this impact for the June quarter as well?

Thanks, Kyle. Yes, we do continue to have a negative lag that we've experienced year-to-date and expect that for the full year just due to the increases in resin prices. Our average remains about the same. We have about a net 1-month lag across the business. Each customer is different. That's the general average for our business, about net 1-month lag on pass-through.

Yes. Are you putting a finer point in terms of the dollar amount impacts that you had in the quarter and then what you're expecting for fiscal 3Q on this?

No. I mean all those assumptions are embedded in our guidance, but we're not specifically calling out how much of that relates to the timing line on resin.

Yes. Fair enough. I wanted to go back to the bio-based resin question. Are you truly agnostic to alternative resins in terms of being able to convert them, or are there some limitations by grade? And do you have any competitive advantage when it comes to using alternative resins beyond your scale relative to some of the other packaging converters? Or is it just a matter of being able to qualify that raw material?

Look, Berry has -- we've made strategic investments to make certain that we're well positioned to have our own internal capability on post-consumer materials coupled with the access that we have to the molecular recycled materials is unique to Berry. I think, clearly, we have made it a point to set ourselves apart with our end customers to give them both access to educate them on design with these materials in mind, coupled with the tradeoffs that they can consider again, so they can make an informed decision. We believe one of our primary roles is to be demand creators. And with the fact that we've now secured 27% of our food customers in Europe, adopting some advanced recycled or molecular recycled solutions is really good progress given the infancy of that technology. So we'll let the markets play out as they will. I have a lot of confidence in our global sourcing organization, our material science know-how. I believe it's unique. And we believe it will be shown out, again, in support of our long-term low single-digit growth commitments that we've made in the future.

Your next question comes from Adam Josephson with KeyBanc.

Tom and Mark, congrats on a really good quarter again. Mark, forgive me if I missed this, but in terms of your second-half volume expectation, can you give us a sense of what you're expecting out of the 4 segments? I'm asking particularly about HH&S, just given how exceptionally difficult the comparisons are. Obviously, over the last 4 quarters, the growth has been tremendous.

Yes, no worries, Adam. So we didn't give it by segment, but I would say, again, overall, we're expecting positive volumes, certainly. And as we said a year ago, when we reported earnings, we had some businesses that I think Ghansham mentioned it earlier in the call, but we had some businesses that were disadvantaged related to the pandemic when it started and some were neutral to advantaged. And as we start lapping those comps, those things are going to reverse. So specifically, our Engineered Materials business had some headwinds early on in the pandemic. So we would expect them to be more favorable than the average over the back half. Same thing with CPI, with China and Europe being some of our businesses there being really negatively impacted as they shut down almost a year ago now today. And the opposite is true with HH&S specifically having a strong period during the pandemic. So in total, those things are going to net out just like they netted out a year ago the opposite. It's just going to -- we're going to have some reversals. But we don't give specific numbers by segment. But in general, that's the way we see it playing out over the rest of this year.

I think, Adam, if you also consider during this time, the pace and consistency of the investments that we've continued to make in these businesses to support these long-term growth objectives have been very, very clear.

No, I appreciate that, Tom. And just back to the slide on the sustainable solutions in terms of PCR, again, compostable or bio-based. Tom, can you just give us a sense of what percentage of your portfolio those represent and what your goal is? I just -- I ask just given the supply chain constraints and the price constraints really of PCR and then just some of the disadvantages of compostable and bio-based versus just virgin resin. So just wondering how far you see the company going in those directions just given whatever constraints there are, et cetera.

Yes. That's -- I think, Adam, you brought up some interesting points. There's a lot of solutions out there that our end customers can choose from and around. Our goal and our objective is to educate them on the range of possibilities, both in terms of performance as well as feature benefits that can meet their needs. That's why we've been very holistic in our view, clearly making large investments, both in the advanced recycling as well as the mechanically recycled materials. But it's about 5% of our overall portfolio right now. And we think that advanced recycling, the molecular recycling is ultimately a virgin alternative. And that's why we're so excited about and believe it has such hope to help address the plastic waste goals and objective of the industry and of our end users. the ability to take those materials that were less easy to recycle, break them down to their original composition, re-polymerize them and have virgin quality-like material is why we've made such a huge foray into those materials. We believe on a large-scale basis, it is one of those solutions to address this worldwide problem. And there's not a resin company we do business with that in some form or the other is not making an investment or R&D around this technology know-how. We're really excited about it. And that's -- it provides that alternative that doesn't require a significant tradeoff, if you will. And that's why we've made the proactive steps to give ourselves the access to qualify the percentage of end customers that we have in Europe and educating the U.S. and rest of world on that know-how as well with some broadly known commercialization successes that we've noted in previous calls.

Your next question comes from Gabe Hajde with Wells Fargo Securities.

Tom, Mark, I was curious thinking about, I guess, looking at 2022, and I appreciate that we're not done with 2021 yet, but just to make sure, I guess, directionally, and if you can make any qualitative comments, you have an $80 million headwind kind of called out in your guide from inflation and other. And I think you've talked about directionally a $20 million to $25 million mix benefit, primarily in HH&S kind of per quarter. So really kind of offsetting one another, if I were to roll forward to 2022. Is there anything else that you would point us to, whether it's under- or over-absorbed fixed overhead? I appreciate we don't make our own assumption about volumes. But just anything out there that's kind of onetime in nature that would make this year look different than kind of going forward?

So I think, Gabe, it's Mark. That was well said. I think we're obviously continuing to focus on driving organic volume growth and earnings growth across all our businesses. There's a number of things that we're working on driving that. But in terms of just really large numbers, I think those are the 2 largest numbers, recovery on inflation and then how much of this mix benefit dissipates, and how long will it take if it ever dissipates.

Okay. And then I guess in the spirit of sustainability, the reduce, reuse, recycle, you didn't really used to have kind of larger-format packaging, and I'm thinking about the bigger containers that you acquired as part of our PC. Have you guys kind of explored increased usage of these larger-format reusable containers to the extent there's either a closed-loop nature to your manufacturing process and/or dialogue with customers to implement more, I guess some of these larger-format packages?

Yes. It's a good question, Gabrial. We've announced previously some successes in some closed-loop programs, specifically with Georgia-Pacific. We're taking the best practices from those initiatives and applying them to a broader part of our business. And it's growing in interest, for sure. And the ability to ultimately that it helps provide an identifiable recognizable source of those materials. Even in instances where they may be reprocessed re-palletized is a real advantage for us. So it is a growing component of the overall sustainability strategy for our end users.

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

This is (inaudible) sitting on behalf of George Staphos. Congrats on the quarter. I guess returning to these segments, what is the biggest source of volume and EBITDA increase in guidance from segment level?

I would say broadly, it's been a recovery of the -- when we were flagged at the industrial-related businesses. So the things that had headwinds at the start of the pandemic, the recovery in those businesses has been stronger than we anticipated as the year started.

Got it. That's helpful. And then I guess just turning to HHS, what's your utilization there? And then for what period of time would you be able to grow without having to spend more capital under that business?

We've got a -- as you can imagine, we have a lot of different products and assets, and so utilization broadly is going to vary depending on the region and the asset. I would say we're generally pretty full in that business, in HH&S, and we're adding capacity every quarter. Incremental machines are going in. We've got several new meltblown lines going in across the world now. We've got some other film assets that are also being added as well as nonwoven, non-meltblown, I mentioned those earlier, being added across the world each quarter.

And we're out of (inaudible) we're in a growing substrate with growing demand dynamics, and we're supporting that as a leader, not only domestically but around the world. So we're pleased that, throughout the pandemic, again, we're able to continue to maintain that level of investment to support our larger customers through these customer-linked solutions. And that's why we feel very good strategically about our ability to deliver over the long term that low single-digit growth consistently and profitably.

Your next question comes from Arthur Almeida with Goldman Sachs.

I was hoping you could talk to us a little bit about how you achieved a positive price cost spread this quarter. I imagine outside of the faster pass-throughs on pricing and the mix component that you mentioned during your prepared remarks, you likely had some benefits from maybe lower-cost inventories flowing through the P&L. But looking ahead, do you expect that to continue? It sounded like, Mark, in your prepared remarks, you would expect the favorable product mix to offset the majority of the impacts from higher resin costs? And what would that look like from a price cost perspective for the balance of the year?

Yes -- no, your comments are spot on. We do have a negative lag and so a negative price cost in 2 of our businesses, EM and CPNA year-over-year. CPI was relatively neutral as the inflation has not quite been as significant outside the U.S. as well as we benefited from some year-over-year cost synergies there. And really, the favorability has been driven in our HH&S business. We have pretty efficient pass-throughs there, and then the mix as you pointed out and we had in our prepared comments, continues to benefit that segment.

And as we roll the year forward, we continue to see that lag in pass-through of inflation. And as we mentioned, we've got that mix benefit for the June quarter. And then both those things kind of flip in the September quarter. We would expect that inflation recovery to improve in the September quarter as pass-throughs start to kick in on our contracts, and our assumption relative to our guidance is that those mix benefits start to back off in the September quarter. Obviously, we don't have a lot of great transparency to that as we sit here today, but that's a conservative outlook relative to our guidance.

Right. And as you said, that would assume resin prices stayed flat. So if they come down like a few forecasters are predicting, that would just be an added tailwind to earnings. And then I guess a final question is, if you could add a little bit more color into what's driving the $25 million mix benefit that's incorporated in this guide but wasn't included in the previous guide. Is that purely HH&S? Is there a structural change there between now and when we last spoke in February?

Yes, just stronger health care, personal protection equipment products. Those lines that make those assets were making lower selling price items like furniture backing and other more industrial applications that generate a lower profitability. And our assumption prior had assumed that those mix benefits go away at the end of the March quarter. Obviously, as we sit here today, we've got better transparency than the current quarter. And so we view that mix benefit continuing in the current quarter.

We'll continue to revisit that, as I said earlier. Don't know how long that will last and how it will -- if at all, it will go away in the future.

Your next question comes from Phil Ng with Jefferies.

Congrats on a strong quarter. Cost aside on the non-virgin alternatives, is it technology where it needs to be -- to scale up? And from a performance standpoint, Tom, what are some of the limitations, and if we kind of look out the next, call it, 3 years, that 5% of your portfolio where you're using non-resin product, where do you see that going? And how does that kind of impact your profitability as well?

There's not significant tradeoffs in the molecular recycled material. And there -- most of the resin companies are in a scale-up version right now, looking to prove out the technology. We're partnering with them ultimately to, obviously, supply feedback as well as educate our end customers about it. But I would expect to see a much larger percentage of our portfolio made up of this substrate. As you said, it's probably in that next 2- to 3-year type time frame before that happens. But the prospects for large-scale use to be a cornerstone of our supply chain is very high in my view at this stage. I have no reason to believe otherwise. And we're going to continue to push the demand and the education, which again, we believe is one of our primary roles.

And Tom, you don't see that having a negative impact on your margins, maybe even actually a positive? Is that what we should think about it?

Well, that's part of the -- any kind of emerging technology as the demand increases, the level of cost competitiveness will continue to improve. So that's why we're so -- we're trying to get out in front of this early. It's why we've secured a significant portion of the material that is -- that will become available between now and 2025 so that we can get introduced to the market as quickly as possible. And we've had, as you see -- as you saw, just really good success with our food customers in Europe to this point. So we'll continue to focus on that as an area of concentration.

That's super exciting. And just one on the EM segment. I don't know if you guys called this out. How much of a hit was the winter storms? And with that headwind reversing, do you see EBITDA actually growing in fiscal 3Q and the full year on a year-over-year basis?

Yes, there's probably maybe less than a dozen plants, I guess, that were impacted by the polar vortex. But nonetheless, it had some impact on those plants and equipment. We're fortunate with the diversification of facilities that we have we can move that business from one site to the next. But they're back up and running, delivering the goods as we expect them to. We do anticipate, again, continued consistent growth inside our Engineered Materials business, as Mark outlined earlier. As you see improvement in the economy, it had a -- it was one of the most negatively impacted given its industrial mix, that will have some positive trends in the coming quarters.

Your next question comes from Salvator Tiano with Seaport Global.

The first one, actually, I wanted to understand a little bit on pricing, especially since, as you mentioned, HH&S was actually delivered post the spreads during the quarter, which was very exceptional. To what do you -- degree do you think some of this pricing may be coming, I guess, from strong demand and you can potentially hold to it and actually see some margin expansion in HH&S or potentially in Engineered Materials and elsewhere versus what is purely pass-through of higher costs.

I mean, the team continues to do a good job again trying to optimize the assets that we have and sell our products where they provide the most value to the market. Again, the pandemic, obviously, has put increased focus on safety, people with insight, certainly in the health-care industry with both health-care workers as well as patients and visitors, and we -- how long that trend towards nonwoven-based product versus reusable, I think it's still TBD. But historically, people have not reverted back. Once they make that transition to the safer product, they generally stay in it. But obviously, we're in an unusual time with the pandemic, and we recognize that.

Yes. Okay. Makes sense. The other thing I wanted to get an update is just on the HH&S, if you can provide a breakdown of revenues by the key end markets. How does it look now when we look at diapers, wipes, masks and gowns, verse how it looked pre-COVID? And for the key markets, especially diapers, what are you seeing in terms of demand now? And what's the outlook?

Yes, I don't have the exact percentages in front of me, Salvator, but certainly, the business has pivoted. Tom called it out, I think, a couple years ago that we continued to invest in the faster-growing areas for nonwovens, adult incontinence, health care, as we've mentioned. Hygiene is still a very important category to us, baby care. We continue to try to compete in the most value-added products in that space, the premium-care product category. We continue to bring innovation to our customers in that category across the world. And so we're going to -- that's going to continue to be an important category for us going forward.

I think the -- it's a much different business than it was. When we first took it on, the team's made, I think, really great forays into the growth component niches, specifically premium hygiene, premium fem care, adult incontinence and then giving ourselves that same access in the fastest-growing region of the world, that being China, and we are now complementing that with a further health-care investment to support health care in that geography as well. So not to mention the good work the teams have done with hard surface disinfectant wipes, supporting our leadership position in North America, and entering now Europe with this innovative technology, and it's really a new emerging market for us that we're excited about. All of these, again, are supported with customer linkage. So we feel really good that the pivot of the portfolio is working as we desired. As Mark said, the pandemic has, I think, given us good exposure to the benefit the disposable drapes and gowns. And with the change in terms of elective surgeries coming post-pandemic, that'll be good news for HH&S. But strategically, that business is well positioned to deliver those single-digit growth.

Your next question is a follow-up question from George Staphos with Bank of America.

Joining late, just very quickly, I know we're late in the call. Tom, have you talked at all about dispensing what the growth rate was in the quarter or what the annualized revenue is at the present time within the business? And then more broadly, if we think about how Berry looks post-reopening, post-COVID, obviously, you've gotten some very strong trends within HH&S to your credit and to your investment strategy over the last 4 to 6 quarters. Is there any segment in your business right now where you'd expect volume trends to be negative once we're past COVID and we're back into the reopening? Why or why not?

Closures dispensing solutions continues to be a targeted area for growth. Globally, it's close to a $2 billion business for us across the entire franchise. We continue to innovate in that category and continue to believe that we're going to be in the advantageous position given our global footprint and our ability to serve our customers locally. And George, as you noted, we have made targeted investments. We've been making those consistently over the last several years all around the megatrends that we think will deliver consistent, predictable low single-digit growth over the long term of all of our businesses. They're all wired for growth in that regard, whether it's EM, CPI, CPNA or HHS, and really proud of the team, how they've executed, how they've maintained their focus, how they've been able to ultimately deploy these capital investments and execute innovation, new product closes during a difficult time when you didn't have the traditional means to close those types of businesses. So we feel really bullish about the outlook to deliver growth, delever the company, to use sustainability as a growth platform for our company and to take advantage of this global footprint that's been abled by the most recent largest strategic acquisition that we've done in our history to really provide that local value delivery capability to the major brands around the world.

Tom, did you mention how quickly dispensing grew in the quarter?

Mid-single digits.

Listen, we appreciate very much everyone's interest in our results for the quarter. Look forward to our next call. Thanks, everybody.

Thank you again for joining us today. This concludes today's conference call. You may now disconnect.