Berry Global Group Inc (BERY) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Berry Global Earnings Call. (Operator Instructions) I'd like to turn it over to Mr. Dustin Stilwell. You may begin the conference, sir.

Thank you and good morning, everyone. Welcome to Berry's First Fiscal Quarter 2021 Earnings Call. Throughout this call, we will refer to the first fiscal quarter as the December 2020 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's and Mark's comments today, we will have a question-and-answer session. (Operator Instructions)

As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website.

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

And now I will 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 fully understand that what we do here at Berry is a valuable part of the supply chain, making and supplying products that are protecting each other, our friends, our families and our neighbors and communities around the globe. Our #1 priority is the health and safety of our team members. We believe safety doesn't happen by accident, and everything we do at Berry starts with safety. Our employees' commitment to show up and perform their work in a safe and professional manner makes me incredibly proud.

But it doesn't end when they walk out of the plant or their office. The safety and health outside of work is just as important. They have demonstrated respect for their colleagues and their communities in this aspect as well. As you can see on this slide, we have an ongoing commitment to identifying, managing and eliminating risk and are very proud of our safety record, with an OSHA industry rate significantly better than the industry average.

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 strong start to the fiscal year and the numbers speak for themselves. First quarter results for revenue, organic volumes, EBITDA and earnings per share all came in significantly better than we anticipated, with strong demand across every division.

Strong momentum we've created over the past several years delivered again record first quarter results on the top line, bottom line and free cash flow. Once again, we are proving our resilience across various economic cycles. The diversity of our portfolio across various end markets and regions continues to provide the consistency and dependability we've demonstrated for decades.

On Slide 4, we said coming into the year that the key focus for the company was to grow organic volumes and improve our balance sheet. We're off to an exceptional start to deliver on those promises.

Organic volume growth came in at an outstanding quarterly record of 7%, with all 4 segments delivering volume growth. Stay-at-home food, health and wellness, along with personal protective products continued to see solid growth in the quarter. Industrial, automotive, distribution and building and construction end markets, while still facing some softness related to COVID-19, improved moderately, resulting in smaller headwinds to our respective segment volumes.

Additionally, our strong results on earnings and cash flow allowed us to reduce our leverage by [0.2], ending the period at 4.1x net debt to adjusted EBITDA. We are well on our way to meeting our objective of getting our leverage below 4x. After we have achieved this target, we anticipate operating our company while maintaining our leverage in a range of 3 to 3.9x on a go-forward basis.

To be very clear, we believe our top 2 drivers now in delivering significant shareholder value is consistently growing our business organically and strengthening our balance sheet. And lastly, as most of you are aware, we've seen significant cost increases in our primary raw material, that being resin, along with some modest inflation of other raw materials and other costs over the past several months, including anticipated February increases.

With the strong volume growth momentum in the business, along with our efforts to improve the timing lag of the pass-through of inflation in our customer contracts, we are active and fully intend on passing these transitory increases through. Our updated guidance includes an incremental timing lag of $50 million over the next 3 quarters related to this incremental inflation.

Despite this timing headwind and with the exceptional start to the year, we are raising our fiscal year operating EBITDA guidance range by $25 million and increasing our organic volume growth assumption from the original 2% to now 4% for the full year. We began fiscal 2021 with enthusiasm and 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. Before we move ahead into the highlights for the quarter, please note that the December 2020 quarter contained additional shipping days for our U.S.-based businesses compared to our prior year period. When we discuss volumes, we have made the necessary adjustment to exclude these additional days and have provided normalized data for proper comparison.

I would like to refer you to Slide 5 now. For the first fiscal quarter, reported sales were up over 11% to a record $3.1 billion. The quarter revenue included reported organic volume growth of 11%, of which 4% is attributed to the additional shipping days, resulting in comparable organic volume growth in the quarter of 7%. As Tom noted, demand for our products remained consistent in certain markets, which previously experienced COVID-19-related headwinds have recovered sooner than we expected.

The quarter included a modest foreign currency impact that increased sales by 2%, which was partially offset by lower -- slightly lower selling prices and the sale of the U.S. flexible packaging converting business that closed at the end of November. From an earnings perspective, the December quarter operating EBITDA increased by 20% to a December quarterly record of $539 million, primarily driven by strong volumes and realized cost synergies.

Adjusted earnings per share increased by 100% to $1.12 in the quarter, which included benefits just referenced relating to EBITDA, along with interest expense savings from debt reduction of over $1 billion in fiscal 2020. Free cash flow for the last 4 quarters ended was over $1 billion. These strong financial results are the byproduct of our entire global team's focus on organic growth and driving cost productivity while managing the increased demand from our customers and the human resource challenges related to COVID-19.

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 by each of our 4 operating segments on Slide 7. For the quarter, our Consumer Packaging-International division delivered sales of just under $1 billion and EBITDA of $170 million. In the quarter, comparable organic volumes were up 4%, driven by strength in consumer markets such as food and hygiene as well as a partial recovery of certain industrial markets that had previously been facing pandemic-related headwinds.

Regionally, we had 2% volume growth in developed markets such as Western Europe, with robust growth in emerging markets such as China and India. The CPI team produced an impressive 21% increase in EBITDA, primarily driven by strong volume, cost synergy realization and cost productivity.

Next, sales in our Consumer Packaging-North America division were up 12% to $686 million, primarily as a result of the 8% increase in comparable organic volumes. The organic volume growth in the quarter was ahead of our expectation provided on our last earnings call as we saw continued strength in our 4 businesses from products such as closures, bottles and containers. Our facilities extended operating schedules to meet the additional demands from our customers in November and December, where we commonly see downtime within Berry and in our customers.

EBITDA was $121 million compared to $107 million in the prior year quarter. This 13% increase was primarily driven by the strong volumes in the quarter and cost productivity, including some acquisition synergies. Our Health, Hygiene, & Specialties division delivered sales of $740 million. The 21% increase included comparable organic volume growth of 15%, with growth in all 4 regions globally. We estimate segment volumes were up high single digits, primarily related to organic growth investments, with the balance benefiting from the additional COVID-19 demand for health care, hygiene and other PPE-related products.

EBITDA increased by $45 million or 45%, primarily driven by the organic volume growth, favorable product mix and cost productivity. As expected and consistent with the September quarter, the December quarter continued to benefit approximately $25 million in EBITDA from favorable product mix associated with pivoting our assets to products related to COVID-19 protection.

And lastly, sales for our Engineered Materials division were 9% higher at $722 million. The increase was primarily attributed to volumes from the additional days of just over 5% and comparable organic volume growth of 2%. 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 flat versus the prior year quarter as organic volume growth was offset by a modest timing lag in recovering cost inflation.

Next on Slide 8. Free cash flow from the last 4 quarters ended December 20 totaled $1,030,000,000. Our free cash flow continues to be utilized to reduce our outstanding debt, and we have paid down over $1.2 billion over the last 5 quarters, which has lowered our annual interest expense and reduced our debt leverage from 4.8x to now 4.1x. We remain committed to maintaining a strong balance sheet and our consistently increasing and dependable cash flow provides 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. We recently issued 2 sets of investment-grade rated first priority senior secured notes with fixed interest rates of 1.57% and 0.95%. We used the proceeds to replace existing variable rate term loans, which will reduce our annual interest expense by over $10 million and also extended our weighted average debt maturity profile. The investment-grade debt market represents a new market opportunity for our company, and we intend to continue our efforts to further strengthen our balance sheet.

Next, our updated fiscal '21 operating EBITDA and free cash flow guidance is shown on Slide 9. Given the stronger beginnings in the fiscal year and improved demand outlook across our business, we are increasing the range of operating EBITDA by $25 million to a new range of $2.175 billion to $2.225 billion. We are increasing our organic volume growth assumption by 2% and now anticipate volume growth of 4% for the full fiscal year, which is 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. We have included a modest incremental negative from inflation and the associated timing lag in passing these higher costs over the next few quarters.

Expected free cash flow will remain in the range of $875 million to $975 million. The range of free cash flow includes $1.525 billion to $1.625 billion of cash flow from operations, partially offset by capital expenditures of $650 million. Excluding incremental growth capital, our fiscal '21 free cash flow is expected to exceed $1 billion. We also continue to anticipate further strengthening our balance sheet and expect our leverage ratio to be 3.8 to 3.9x at the end of fiscal '21.

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

Thank you, Mark. 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. We made these investments for a specific purpose: to be competitive regardless of any economic cycle. Those investments set the stage for what you're seeing now. 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-term and long-term expectations and commitments to provide sustainable, profitable growth. Across our company, our teams are performing at a very high level, with an exceptional sense of urgency to demonstrate consistent organic volume growth by providing advantaged products in targeted markets as evidenced in our recent quarterly results.

As we've stated on Slide 10, the key drivers for organic growth and why we feel confident in our continued trajectory are: our focus on both faster-growth end markets and emerging markets, along with sustainability-led packaging. We expect emerging markets to grow considerably faster than advanced economies, with increasing populations and the need for protection products. And we've increased the revenue in faster-growing regions from $100 million in 2013 to now over $1.5 billion. We will continue to pivot our portfolio and center investments on faster-growing end markets and global mega trends in regions with stronger growth patterns.

Over the past several years, we've made internal business realignments in order to further accelerate organic growth across our global footprint. The transition of our tapes business to HHS and the legacy RPC films business into our Engineered Materials segment are proceeding well and providing great commercial opportunities we would not have had otherwise. Additionally, these changes allowed us to create a global rigid health care packaging and device business, and our total health care portfolio has grown from $500 million in 2015 to now over $1 billion in revenue.

Furthermore, as you can see on Slide 11, we are a leader in health care primary packaging and device markets, including our global inhalation product portfolio. With over 330 million asthma sufferers and 250 million COPD sufferers globally, we are highly focused on ways to improve the lives of those with these conditions. Long-term growth for the inhalation market over the next 5 to 10 years is expected to be high single digits, where we have a primary focus on growth in our Asia Pacific region.

On the sustainability front, which we have long considered to be core to Berry's operating philosophy, the industry has taken tremendous steps forward in the journey to eliminate plastic waste while continuously innovating to meet desired performance requirements of consumers. We continue to invest in both new products as well as qualifying existing products against recognized sustainability standards in the market so customers and end users can make informed decisions.

On Slide 12, we've highlighted just a few of the new amazing products we have designed and manufactured with sustainability in mind. On the top right, you can see our Biovantage Bioresin Bakery Film. This film is made from renewable feedstock with lower carbon footprint than conventional-based polyethylene. This line of film is made from up to 89% bio-sourced polyethylene, which enables our customers to protect their products in a material made from the earth.

And one other terrific example includes the innovation and sustainability capabilities created by our global team of experts. As you can see on the bottom left of the slide, we continue to be a leader in dispensing solutions where we've created lighter-weight, sustainable dispensing trigger pump sprayer that includes a modern design, improved ergonomics made from 100% plastic components, allowing it to be easily recycled.

Berry remains steadfast in its 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. Further demonstration of our efforts and commitments to promote a more circular economy, we've taken a leadership role in developing markets for recycled content made from waste and helping our customers achieve the growing needs of their consumers.

Slide 13 highlights Berry's capability using in-house mechanical recycling process, where we have installed capacity of over 300 million pounds per year after our latest expansion. This new expansion is targeted for personal care and household care applications. Similarly, over the last several months, Berry has partnered with our suppliers to procure another 300 million pounds annually of advanced recycling resin by 2025 in Europe and United States. We've been partnered with leading brands to bring products made from recycled content material to the shelf in late '21 or early '22. To enable this, Berry has 14 sites globally that are ISCC PLUS certified to ensure we bring transparency and accountability to the recycled content process. Our teams globally are working to grow our supply and expertise to introduce recycled content in our products to provide the same functional benefits while solving the plastic waste problem.

In summary, on Slide 14, building upon our solid start in 2020, we delivered outstanding results across all of our operating segments. We, again, including the first fiscal quarter, have delivered on our strategic goals of driving organic growth and improving our balance sheet, all while setting financial records for any December quarterly period of EBITDA, free cash flow, revenue or earnings per share.

And finally, I want to remind you that we believe the Berry investment case had never been stronger, with consistent and dependable end markets, a leading cost position, along with substantial capacity to invest in long-term, steady growth allows us to be well positioned to continue this momentum through our customer-linked capital investments that target continued expansion in 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.

(Operator Instructions)

First question is coming from the line of Anthony Pettinari from Citi.

Tom, you referenced increased efforts to tighten raw material pass-throughs, and I was wondering if that was a comment on resin as well as nonresin costs. And can you give any color on how you've been able to maybe shorten lags or improve pass-throughs relative to previous years or previous periods when you've seen this really sharp cost inflation?

Well, listen, it's a fair question. We've really attempted to and we're working with end users on not only resin but nonresin, freight and other items as well. And during this period, I noted in my prepared comments, we are active right now in passing this inflation through. And we feel confident that while there'll be a lag, we'll see full recovery.

I can't comment on it generically, but certainly, on a case-by-case basis, we're making improvements both in reducing the lag and covering some other nontraditional items, where we can build indices that can regulate up movements in costs and down as well. So it's a work in process, but we feel good and feel confident in our ability to recover here, what we're seeing through February.

Got it, got it. And then you obviously saw really remarkable growth in Consumer-North America and HH&S. Just wondering if that's continued into January and February. And can you remind us how much visibility you typically have into customer demand in those businesses? Is there anything you can say about customer order patterns or customer inventories?

I can't really give you any inter-quarter guidance, but suffice to say, the expectation and the rate that we made on the organic volume from 2% to 4% was really driven by the current robustness of our pipeline, which, on average, is about 20% better than what we've seen in previous years right now, the close rate of the existing applications that teams were working on and the sell-through and ongoing demand from our end users. But we do have clear line of sight, I would say, decent visibility to demand. It's a relatively short-cycle business and feel comfortable with our new outlook at 4% organic volume growth.

Next question is from Ghansham Panjabi from Baird.

I'm just trying to reconcile the 4% volume growth -- organic volume growth increase from your 4Q versus your fiscal 1Q, which was up 7%. And if you can kind of -- as you think back to the December quarter, a lot happened in terms of expanded lockdowns in Europe. A lot of your peers that reported have talked about increasing sequential volumes during the calendar year 4Q just based on the expanded lockdown and consumers staying at home, et cetera. So how much of that boost do you think you benefited from specific to your 1Q in terms of volumes? Maybe the evolution of the quarter would be helpful in terms of volumes.

Yes, Ghansham. So December is always a little bit of a tough quarter. I think I had a comment in my prepared remarks about holidays and what customers do over holidays certainly impacts what we do over holidays, obviously. So December quarter, always tough. But given the robust nature, as we discussed, of the start to the year, the outlook from our customers and our businesses, we're comfortable certainly going from 2% to 4%.

We expect all businesses to grow low to mid-single digits in fiscal '21, with some upside to that in our HHS business. HHS will likely be mid- to high single digits as we're going to lap some of the comps in the back half of the year related to the benefit in PPE. Now obviously, some of that will depend on how long the pandemic lasts. We've got it lasting, specifically for that business, is where the biggest impact is, and we've got that lasting through the March quarter. To the extent it continues beyond that, that would be upside relative to our outlook.

Ghansham, I think the other 2 pieces I'd mention is just as we talked about some of the industrial markets that we serve clearly have improved. They're not at a post-pandemic level right now, but the continued progression in those businesses as well, coupled with what has been really strong execution from the teams in terms of deployment of capital, investments that we've made, targeted specific customers and the sell-through that we're seeing and some of those opportunities gave us a lot of confidence in the back half of the year.

As a reminder, all the capital investments that we make as a company are tied and linked to specific customers. They're customer-linked. As a result, we have a lot of confidence in terms of the predictability of that demand, giving us confidence in the raise.

That's very helpful. And then the $50 million of additional raw material inflation you're now embedding in guidance, how does that phase in over the next 3 quarters? And just for us to calibrate against, are you assuming just the February price increases that are out there, which are pretty substantial for resin? Or are you assuming incremental cost inflation beyond that specific to resin?

What we've got incorporated in guidance is the February increases, nothing beyond February.

(Operator Instructions) Next question is from George Staphos from Bank of America.

Congratulations on the progress so far, guys. I want to come back to the question on value creation, Tom. And you had mentioned in your remarks, and we would agree as we've talked about in our research, that good organic growth and deleveraging helped create value. One of the other things that also, from our research over the years, helps create value is elimination of volatility. And one of the ways that, that's accomplished, is by, on the one hand, improving your margins, and on the other hand, improving the predictability of the return to the shareholder.

So one, what do you think is likely to be seen, from a mix standpoint and a margin improvement standpoint, from some of the new product areas that you're pursuing, either within HH&S or maybe even within sustainability? And on the other hand, how should we think about improving value return to shareholders over time, obviously, not this quarter, but as the leverage gets to where you'd like it to be? Should we expect something of a dividend, which again, together with higher margins, would also take out volatility, lower your cost of capital and ultimately your valuation? What are your thoughts on that? And then I have a follow-up.

Let me answer the first one that comes to mind, I think, relative to growth and new business. I think if you take into consideration the capital investments that we've made to support organic growth, the profitability of that business, the margins of that business had been at or above the company average. We would expect that to continue to be the case going forward.

It's the primary driver of why we've targeted faster-growing markets where we have advantages in faster-growing regions of the world. And that continues. That pipeline of opportunities continues to be robust. And the unique thing about Berry, George, is that we didn't stop. We continued that pace of capital investment to support our growth throughout the pandemic based on the dependability and predictability of the business that we serve. So we feel very comfortable that will be the ongoing strategy going forward.

Relative to the leverage of the company, I'm thrilled with the progress that the team has made. And we intend to operate our company, with leverage between 3 and 3.9x. We generate substantial cash flows of around $1 billion. We're going to allocate 100% of that debt until we're in the range. And when we're in the range, we anticipate a balanced approach, which will include cash return to shareholders, bolt-on acquisitions and further debt reduction while staying within the targeted range.

Understood. And appreciate you reaffirming the value return. I wanted to just piggyback off the first question then. To the extent that you continue to push on sustainability and you're getting new products from sustainability, one, are those products typically higher margin, higher mix relative to the overall portfolio? And if you pooled all your customers right now and said, "here is the Berry suite of sustainable products," what would you say? And how much of their portfolio would you be able to sort of satisfy or fulfill? How much of their metrics would you be able to hit right now? And what would you say your percentage of overall business would be typified as sustainable by your customers?

Clearly, what we walked you through during our prepared remarks was the fact that between advanced recycling materials and mechanical recycled materials, that's about 600 million pounds of material. And it's just -- it's the tip of the iceberg, George, if you will. It's clearly not enough to fulfill and satisfy all the requirements of all of our end users. But I don't know of anybody in our space that has the breadth of offerings that Berry does to begin that process.

I'll also note, relative to advanced recycling materials, I'm really pleased to report the kind of work that our teams have done. The first 2 years of capacity that we're receiving from advanced recycling is sold out. It's sold out. So we're doing a good job in terms of being able to demonstrate the value, getting people comfortable with the technology. So certainly, as the demand for those products grow, we'll be in a very good position.

What we find is that all of our end users have strong -- publicly communicated sustainability objectives. And so they're keen to partner with us to help understand how we can help them meet those needs. I would say still the #1 opportunity across the chain remains around weight reduction. And companies that have the design prowess and know-how to reduce the weight of substrates while not impacting physical properties, using both design and material science know-how, are going to benefit.

And we certainly, at Berry, are in that position, given that it's been a core capability for us for some time. And you've also seen that over the last year or so, we've made a lot of advances both in terms of commercializing fully recyclable, flexible pouches made of polyethylene, bio-based materials supporting our tubes business, real examples of circular solutions, with the likes of Georgia-Pacific and others. And I feel really good about the progress that our team is making.

Again, this is a large component of what we do. We anticipate that this will be a business that we monetize and has similar profitability to what we enjoy for the remainder of the portfolio. And frankly, it's a value attribute that we think is going to be unique to Berry because not everyone is going to have visibility to help solve some of those end customer problems. So we're pleased. And again, I'm excited about this investment. But more importantly, we're excited about the progress we'll make here.

Next question is from Neel Kumar from Morgan Stanley.

You recently announced another capital investment into the wipes and mask space, which I think should come in early 2023. What are you seeing in terms of customer conversations that gives you confidence for additional investments in this space with a fairly long time horizon?

Yes. It's interesting. All our investments, certainly, on the HHS side, typically have long lead times associated with them. And note, the investment in additional wipes capacity in North America is strategic to us. We're a leader in North America. We were very fortunate, given that we maintained our regimen of targeted investment in that space so that we were able to take advantage and help serve the nation's needs for hard surface disinfectant wipes.

What we're seeing is that there continues to be growing demand for that substrate. And frankly, as we see increased openings of the country, we think there'll be exponential demand because you'll see the wipes being used in more settings that were not typical as well as wipes being provided in packaging offerings that make it easier to carry on the go, if you will.

The -- every investment that Berry makes is, again, customer-linked. So you should assume that if we're making an investment in a business, that there's ultimately customer alignment relative to that capacity and that demand outlook. So we're bullish. We're a leader in that space. We're going to continue to lead and we're very confident that the demand will continue to support the capital investment and the return that we're assuming.

Great. That's very helpful. And then in terms of your EBITDA guidance, can you just talk about what assumptions you have embedded for price/cost and how you expect that to evolve through the year?

Yes. So we had a -- in the first quarter, Neel, we had a modest benefit on price/cost, primarily driven by the mix benefit we got in HHS as well as cost synergies that we're still lapping from the RPC acquisition. With the incremental inflation we've seen from the last call, we actually have that now coming in as a headwind for the full year, which will predominantly be experienced in Q2 and Q3. There's obviously a lag in getting that passed through. But Q2, Q3 is where I would expect most of the negative price/cost to persist.

Next question is from Mike Leithead from Barclays.

I guess, first, I want to circle back to something similar to Neel's first question. On HH&S, I think last quarter, you highlighted some mix headwinds you'd expect as we work through fiscal '21. Can you just update us? Obviously, HHS demand has remained quite strong. Has the mix component or the timing of that changed at all in your thinking?

Yes. When we started the year, we had only assumed the mix benefits would be in the December quarter. And now we've extended that to the -- to include the March quarter, and we'll continue to monitor that and update the market as the quarters move forward. But at this point, we only assume that benefit continues until the March quarter.

Got it, that's helpful. And then maybe a question for Tom around sustainability. Obviously, there's been a lot of focus and investment lately in greener resin, whether that's bio-sourced plastic, recycled plastic. When you kind of sort through all of these headlines, when you talk to your customer, what, at the end of the day, do you think is driving their decision process there? Why did they choose Berry versus some of your competitors' offerings? And have you noticed any changes in their willingness to pay premiums for recycled or greener resin?

Listen, it's partly a learning exercise right now by a lot of the global brands out there. There's an array of ways that they can meet their sustainability objectives. There is a sincere interest to make an informed scientific-based decision. And they realize there's a number of ways to accomplish that. And what we chose to do at Berry is have access to a wider range of solutions.

And then as the market ultimately determines what the ideal substrate will be going forward or one that makes most sense, we ultimately can leverage our global supply chain and scale to get behind those particular types of innovation. I don't think you're going to see the plastic waste problem solved by one solution. I think it's going to be a variety of solutions, and we feel really comfortable with where we're at right now. The 300 million pounds of mechanical recycling material that we have, that we own, again, we learn more about the industry, we learn more about the collection processes, the sorting processes. It makes us a more valuable supplier.

Similarly, with the advanced recycling materials, taking the proactive stance that we did to secure and commit to that kind of capacity is simply going to grow the knowledge of our end users to get them comfortable around this substrate, so that as it scales, we'll ultimately be able to take advantage of that opportunity and transition them into those materials where it makes sense.

There is an understanding that as products are ultimately new and initial, there can be higher costs associated with those. And again, the evaluation is what's going to be the change that disrupts my end customer the least, addresses their concerns and allows our company to continue to generate the growth and profitability that they've always become accustomed to. And that's a lot of discussion. I feel that, really, during the pandemic, we've made an amazing amount of progress, further penetrating our key accounts globally. We have a pretty strong passion in finding ways to help them meet their growth objectives. And we continue to bring that to bear relative to sustainability.

We will take advantage of our global scale, our material science know-how and the intimacy we have with those end users to ultimately put ourselves in a growth position. And that's why it truly is a growth opportunity for Berry. It's not -- this is something not only that we're talking about but we're investing in, and we're seeing the actual results play out. And it's encouraging. I think you're only going to see the pace of this improvement, this evolution around sustainability and circularity. It's only going to grow. And I think it's going to grow in a collaborative way.

Next one is from Kyle White from Deutsche Bank.

Hope everyone is doing well. I think you mentioned on your health care portfolio is over $1 billion in sales now and you referenced the asthma opportunity. Just kind of wondering here, on the $1 billion in sales, how much of this has to go through kind of increased regulatory approvals or be produced in kind of clean rooms? And maybe what the returns here are relative to the broader portfolio?

It's a mixed bag in terms of the type of manufacturing environment. But clearly, to support health care, we'll be investing in those types of capabilities, with the appropriate lead times taken into consideration so that there's no disruption. So it's going to be as you go, depending on what we close and where we close it.

We clearly believe on the asthma front meter dose inhalers that Asia presents a really significant opportunity for us. We're encouraged by that because we already have a leading position in that space. There's mid- to high single-digit demand for it, and the margins in those businesses are at or above the company average.

Okay. And then focusing in on 1 of your other organic growth drivers in terms of the emerging markets. Just kind of wondering how you think about emerging markets in terms of your overall capital allocation process when analyzing investments relative to investing in developed markets? Do you look for similar return profiles? Or are you mostly following your large multinational customers when looking to invest in these kind of emerging market regions?

We have similar return profiles regardless of where we operate. So that's one. Two, anything we do from an investment is going to be linked to a customer, so it's going to be supported and aligned around that partnership, which increases the likelihood of success. We've clearly made significant investments in China over the last several years, which have paid huge dividends for us. We've announced a recent new nonmoving capability at the Nanhai site in China that will serve China, Southeast Asia for the health care space -- dedicated for the health or health care space and we're excited about it.

We are going to align ourselves, again, around market segments that are growing faster and geographies that are growing faster and do it all in a customer-linked way. Our position with global brands around the world and the type of investment, dry powder that we have to invest alongside our customers is part of the driver for this confidence that we have in this and the predictability of our growth because it's with leaders and brands that can pull that demand through. And the trust and confidence that we build by already having existing positions as they expand their business to similarly match those growth geographies creates a lot of confidence in execution, in commitment, in quality. And that's continued to be built as we continue to vertically penetrate these accounts so that, strategically, we're aligned with our customer.

Next one is from Josh Spector from UBS.

Just in your prepared remarks, you mentioned some of the segment realignments resulted in growth that you wouldn't have otherwise achieved. I was wondering if you could give us some examples of what that is and why the segment alignment was required to achieve that.

It really helped us create somewhat of a pure play. When we moved the tapes business into HHS, we also have a component of our HHS business that's tied up construction through the housewrap business. Having tapes that ultimately can be applied to housewrap substrates created somewhat of a pure play, right? It's a logical combination. We're serving similar markets and it made good sense. And that has been an area that we've seen success that we wouldn't have had with those businesses being separate.

Inside the Engineered Materials business, we brought the PPI business to be part of the Engineered Materials. And again, you have 2 groups of people speaking the same language, running similar equipment. And it's provided, in that business, not only commercial opportunities to globalize some of our North American business, similarly in agricultural products, but also in terms of best practice sharing and productivity improvements based on the manufacturing processes being like-for-like. And this, frankly, has been something that we've seen with our CPI and CP-North America business as well. So it was a no-brainer for us to make the move because we're already seeing the benefit that we were enjoying between our International consumer packaging business and North America.

That's helpful. And just in terms of the assumptions in your free cash flow guidance now, I mean, obviously, the first quarter being better helped offset some of the resin price issues. But just wondering if you could provide some context in terms of how you're thinking about working capital, cash interest, some of the other line items between EBITDA and free cash flow.

Yes. Not a lot of changes with respect to the individual line items. Interest, we've obviously benefited from some refinancings in the market, but that's been offset by FX, so there's been some incremental increase in interest from FX that have offset some of those savings. I would say all the other lines are generally in line. So a slight increase with respect to working capital, just to account for the inflation that we talked about in our primary raw material resin, mostly in the U.S. with polypropylene followed by polyethylene. So that's probably the biggest change is really higher working capital needs from inflation. We've offset part of that with our restructuring and onetime costs related to the acquisition. We're actually coming in lower than we had expected, which is helping offset some of that inflation.

Next one is from -- yes, we do have a next question from Arun Viswanathan from RBC Capital Markets.

Congrats on the strong performance. And I guess, yes, so first off, on resin, could you just remind us? I think in the past, you've mentioned a statement that resin really hasn't affected your P&L by more than a couple of million on the EBITDA line in any one particular quarter. There's obviously been quite a bit of resin inflation here in the back half of '20. And it looks like it potentially could be sustained through the first half of '21.

So do you still feel that statement is accurate? And is it mainly a function of the pass-through? Or is it a function of the robust volume growth that you're seeing now, which makes it a little bit easier to pass through these increases?

Yes. Certainly, the volume is helping, as well the overall earnings. But with respect to resin, we have very efficient pass-throughs. You can look at our results historically. As resin goes up and down dramatically, you just don't see the volatility in our earnings. So -- and we've continued to do a good job, as Tom mentioned earlier, of working with our customers to shorten that timing lag. But overall, I would call it pretty modest. But to your point, these increases are coming rapidly and in large increments. So to the extent there is a lag, it's just larger due to the magnitude of these changes.

So we felt it prudent to reflect a little larger balance as a timing lag. Again, it's just timing. It gets passed through. It's just timing. When it goes down, by the way, it works the other way. What goes up will come down. So we'll see how, ultimately, the resin environment plays out. But we're, just as we have in the past, efficiently working with customers to pass that through.

Okay. And then I guess, on the growth side, it does appear that there's maybe some structural growth that has materialized post COVID. If I go back to 2019, there was definitely some challenges on the volume side, and maybe we could refer to sustainability in the war on plastics. But on the one end, it seems like many of that -- some of those dynamics have subsided. Or is it that you've just made some great progress in increasing the sustainability profile of your products?

Well, maybe you can just offer your thoughts on that. Is it the case that there isn't really as much focus on the negative aspects of plastics? Or is it that, generally, there's been increased sustainability attributes with your products?

I think the pandemic has proven that plastics is an indispensable part of our lives. I believe that the discussions with our end users have been more balanced, more data-driven and they're looking for the best holistic decision that they can make to address their sustainability objectives. That, coupled with the fact that we have been making very targeted investments and, frankly, committing to and delivering on when certain businesses would actually pivot to growth.

If you recall, we made a specific commitment in our Engineered Materials business on when it would recover to growth and it did, and the pandemic hit right after that. We made a commitment when our HHS business would pivot to growth before the pandemic. And it did, a full quarter early. And then the pandemic hit there. So yes, we think we've made smart targeted investments. We prioritized our capital investment. Sustainability is the value proposition for our company, and it's not gone away. It's not going to go away.

We're going to have to address the #1 issue that we have for our substrate, which is plastic waste. Plastic is not the problem. Plastic waste is the issue. And what we've got to do is continue to find ways to reuse, recycle products and optimize our design, to ultimately improve the likelihood and ability for those to be recycled. And ultimately, infrastructure will be required, but it will get done and built based on demand that we expect from our end users.

Great. And just real quickly, if I could follow up on that. So maybe this is also related to your new capital allocation strategy. So is it the case that you now have a little bit more organic growth runway, and that's why you feel that you could operate in a below-4x leverage area, maybe even approach 3x over time and pivot towards capital return and maybe the focus on M&A reduces? Is that part of the strategy that maybe a reduced focus on M&A and maybe a little bit more focus on organic growth and capital returns?

It's just balanced. We -- the company, over the last 32 years, did 47 acquisitions. Acquisitions have created a major amount of shareholder value for the company. We simply provide an additional leg to our stool, which is organic growth. And we're very comfortable that we're going to be able to consistently, dependably and predictably provide that organic growth that we've committed to.

The cash flow of the company at around $1 billion gives us an amazing amount of flexibility, whether that's returning cash to shareholders in the form of a dividend or share repurchase, or ultimately doing bolt-on acquisitions or further reducing our debt. So we have an amazing amount of flexibility right now, driven by the robustness of this business and the cash generation that it has.

That's supported with a proven track record on delivering for shareholders, whether it's the commitments we make on growth, acquisitions or otherwise. We're going to do what's best that makes best returns for our shareholders. And we're excited about the position we're in and where we're entering. Berry doesn't really have to do "anything", right? We're a strong company. We're a leader. We've got a global footprint. And I think we're in the right markets, growing around the world with the right partnerships. So we'll be prudent. We'll be very conservative as we've always been in the past. But we intend to operate between that leverage range of 3 to 3.9x going forward.

Next question is from Phil Ng from Jefferies.

Tom, congrats. Historically, I've always thought of CP-North America being more flattish, maybe a little growth. So it's pretty impressive you've seen this nice acceleration in certainly the last few quarters. Can you highlight what's driving the strength and any of these wins you've had? And just given the growth opportunities that you see in front of yourself, over the medium term, how are you thinking about it? And do you need to deploy a little more growth capital going forward?

We've -- we're really pleased with our CP-North America business as we are with how all our businesses performed in the quarter. But nonetheless, CP-North America, really going on almost 2 years now, has been able to deliver that low single-digit growth. We've made targeted investments, similar as we've talked about, with advantaged products with end customers, and the team has executed very, very well.

The pipeline is more than adequate to support that low single-digit growth, and we're comfortable whether that's in bottles, bottles, containers, closures, we feel really good about that business and that franchise.

Great. And then within the 4% growth you guys are guiding for the full year, really strong. How are you thinking about the trends between your more defensive categories versus some stuff that might be more cyclical in nature that got hit by the pandemic? Are you assuming those categories kind of bounce back to pre-COVID levels? I'm just trying to get a sense of what you're baking in and maybe some opportunity for upside if it does come back stronger.

We're assuming modest improvement in the more COVID-related businesses that had to face the headwinds, not returning back to our normal levels in the back half of the year.

Okay. And then on the stable side?

Yes. We really -- we continue to be bullish in the categories of health care, of at-home consumption, continues to be strong for that -- those businesses. So continued steady performance in those categories.

Next question is from Mark Wilde from Bank of Montreal.

Just a couple for you. One, can you parse the 2021 CapEx just by rough categories, kind of growth versus maintenance and then growth by segment?

Yes, about half of our capital is what I would define as maintenance. The balance is growth and cost reduction. Some of those projects went -- many of the projects in that category check both boxes, so they have an element of growth as well as cost reduction as we go to larger tooling, for example, to replace smaller cavitation. I would say, in the current environment, we're probably a little more weighted towards growth capital, given the momentum we're seeing in the business. So that second 50% pie, I would say, is slightly overweighted to growth at the moment. I'd say in most years, it's pretty balanced between growth and cost reductions of 25%, call it, each in those categories.

In terms of segments, we're investing in all 4 businesses are getting capital. We've got -- we have a process here that we go through to approve capital, both within the business as well as corporately, depending on the size and scope of the project. And I would say in the current moment, as you would expect, areas that have been really strong volumes, where we've tied on capacity or getting some incremental capacity. So HHS is an example. Tom mentioned the investment we've got going in China in health care, the wipes investment that we're making in the U.S. So in the very near term, I'd say, HH&S is probably, on a pro rata basis, getting slightly more capital, given the demand and the tight capacities in some of those markets.

I think you'll see, Mark, in the coming quarters, the investments we've made in our Engineered Materials business as well, increasing our position both in terms of some of the premium snacking categories as well as e-commerce will bear good results for us.

Okay. And then, Mark, just secondly, on the balance sheet going forward. Would you expect kind of to normalize toward the upper end of that 3% to 3.9% (sic) [3 to 3.9x] range and then go above that on acquisitions? Or do you intend, even with acquisitions, try to operate within that 3% to 3.9 range?

Yes, on the scale of the company, Mark, I mean, I think that's, back to an earlier question, I can't remember who asked it, which analysts, but I'd say another difference is just the scale of the company, right? I mean, acquisitions for us now, to the extent we do anything going forward, will be relatively small compared to the overall size of the company, just given the market and the fragmentation.

So we would intend to continue to operate in that 3.0 to 3.9x leverage range, including any bolt-on acquisitions that the company may do. But as Tom said, it's not a must-do. We're very focused on creating value, be organic growth. And certainly, we'll be looking to other methods to return value to shareholders, including return of capital.

And Mark, I was remiss in not pointing this out, but in terms of the capital investment, certainly, closures, dispensing solutions has been a cornerstone of where we focus a lot of our growth CapEx as well, serving in a variety of markets.

Okay. And just finally, would you expect that we could see some more targeted divestitures in the last 9 months of the year?

Not something, obviously, we can comment on. Obviously, we've got a big portfolio, a lot of businesses. It's something we review on a regular basis. Should something come up that will -- we'll get something out there. Nothing I can report now, though. But it's part of a portfolio management process, and you've seen us take some action in various businesses over the last 12 months or so.

Yes. I really wasn't asking you to get too specific. I was just trying to figure out whether this was still an active part of the strategy to perhaps accelerate the deleveraging.

We continue to look at the portfolio for opportunities that might be -- have more value elsewhere, yes.

Next question is from Gabe Hajde from Wells Fargo.

Real quick, appreciating it's late in the call. Two, if you will. The $50 million -- and I apologize if I missed it, but the $50 million that kind of came out in the new EBITDA bridge of procurement savings or, I think, cost synergies you guys call it out. If you talked about that, again, I apologize, but can you tell us kind of what's driving a lot of that? And then your ability to kind of, as you talked about in the past, leverage kind of a global procurement network. I'm assuming part of that relates to resin, but just your ability to continue to do that given port congestion and ocean freight availability.

Yes. The first part of your question, Gabe, the $50 million, that was simply -- we broke it out separately. It was combined in the last call so that had not come up. So thanks for asking that. So it was -- we had volume growth and synergies combined, we simply pulled those out this time. So no change to that. The $50 million is what we had expected on our last call and we continue to expect $50 million of synergy.

Sourcing would be a component of that. There's obviously some other categories that are providing for that $50 million of incremental synergies. And that's simply just getting the full year benefit of actions that we took in fiscal 2020, or in some cases, fiscal 2000 -- late '19.

With respect to the second part of your question, obviously, we've got a global sourcing organization that's always working to minimize the impact of inflation on our company and our customers. RPC brought us, obviously, a lot more scale to be able to move a product internationally. We're continuing to look at those opportunities as those markets potentially get disconnected. So I think we're well positioned from a scale and capability perspective to minimize the impact of inflation. Relative to our competition, I think we're advantaged in that regard.

Okay. And then real quick, somewhat of a housekeeping question. There's an other expense line item of $25 million in the income statement. I think it was $30 million last year. It looks like it's included for EPS purposes but excluded for EBITDA. I know you guys call off the $21 million that I think is mostly stock option expense. But can you describe what that $25 million is, Mark?

Yes. It's almost all some noncash FX movements on intercompany loans. And it has been added back to both EPS and adjusted EBITDA. It's related to the RPC transaction and some of the structuring considerations when we completed that acquisition. But it's all FX on intercompany activity.

(Operator Instructions) Next question is from Salvator Tiano from Seaport Global.

Another very good quarter. One question on sustainability. We see -- you talked a lot about the bioresins and the chemical recycling, all these things. One other (inaudible) is -- a lot of the products have to be made to be recycled. And I guess, I understand this is a challenge for flexibles from a lot of the films that you may make. Can you talk a little bit about initiatives to make a lot of the products that just cannot be recycled, even if they're made with post-consumer resin? What are you doing there to actually make them recyclable in the end?

We've talked about some success stories we've had and pivoting end customers to, for example, all polyethylene solutions to support recycling, and pouches. We made significant investment in our Engineered Materials business. And I'm pleased to say that the asset that will support more like products to what we've announced previously with the Bear Naked product line, we expect to be fully committed for by the end of our fiscal year.

That gives you the sense of type -- some of the energy and momentum around that space right now. So I think where possible, you're going to see customers look to pivot to those more recyclable materials. In the end, it's kind of also why we're getting behind advanced recycling. Advanced recycling is somewhat of an umbrella, if you will, in the recycled world. It will allow those materials that are typically and traditionally considered difficult to recycle. They ultimately are converted into liquids and ultimately become new petrochemicals in a mass balance process.

And as such, that's something that I think is going to get a lot more attention going forward. You might have a follow-up and say, "Gee, Tom, how do they ultimately certify that? And how do they keep track of that in those mass balances?" Berry actually now have 14 sites around the world that are what's called ISCC, International Sustainability and Carbon Certified, which ultimately allows for certification of circular polymers to assure that the mass balance equation is correct and that claims can be supported by our end users.

So when you look at the holistic range of solutions that Berry has in material science to make films thinner, while not impacting physical properties to make substrates that are fully recyclable like the polyethylene pouch and then ultimately having a means like advanced recycling to support difficult recycled materials, we're in a really good spot. And I think when we talk about this being a growth component for us, the initial interest in the materials is very high. So we're bullish, going forward.

Okay, perfect. And very quickly, you talked a little bit about volumes and what has changed. Just from this 2% bump this year, what do you expect to be more transitory and could be reversed in fiscal 2022? And what do you think can actually stick because of, let's say, higher demand for wipes and masks and other products?

Yes. I think as we said, we've got some incremental benefit in our HHS business related to PPE products. I mean, I think the diversity of our portfolio, we've got things that are doing well and things that have been pressured by, certainly, the pandemic. So as things normalize, the items that are negatively impacted by the pandemic will improve, like our can liner business that we referenced in Engineered Materials and our industrial businesses. And vice versa may happen, some of the products who have been advantaged. But I think net-net should be a pretty small impact on the company with the diversity of our product portfolio.

We think the megatrends we're investing around have a lot of legs, if you will, in terms of continuing their ability to deliver that consistent dependable growth that we're looking for, whether that's health and wellness, whether that's food safety or whether that's e-commerce and we're well invested. And I think the regions that we target to make those investments will certainly benefit us for years to come. Nonetheless, Berry is committed to be a consistent predictable grower. So we're pleased and confident in our outlook for '21.

Well, if there's no further questions, I want to thank you all for the interest in Berry. We think the company is at a great point right now in its ability to deliver on its strategic commitments. Its balance sheet has improved, the organic growth is certainly being delivered. And the global footprint that we've been able through targeted investment as well as transformative acquisitions puts Berry in a very unique spot right now, and certainly, one that is very confident, poised to continue to grow and deliver the results that we're committing to. Thanks very much.

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