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Berry Plastics Group Inc (BERY) Q3 2019 Earnings Call Transcript

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Berry Plastics Group Inc (NYSE: BERY)
Q3 2019 Earnings Call
Jul 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Florence[Phonetic] and I will be your conference operator today. At this time, I would like to welcome everyone to the Berry Global Earnings Call. [Operator instructions] After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr.Dustin Stilwell, you may begin your conference.

Dustin Stilwell -- Head of IR

Thank you.

Good morning, everyone. Welcome to Berry's third fiscal quarter 2019 earnings call. Throughout this call, we will refer to the third fiscal quarter as the June 2019 quarter. Before we begin our call, I would like to mention that on our website, we've 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. In order to allow everyone the opportunity to participate we do ask that you limit yourself to one question at a time and then fall back into the queue for any follow-up or additional questions. As referenced on Slide2 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, our annual report on form 10-K and other filings with the SEC.

Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

Now let's turn the call over to Berry's CEO, Tom Salmon.

Thomas E. Salmon -- Head of IR

Thank you, Dustin and good morning to everyone. This morning, we'll be discussing several topics, including an update on our recently closed acquisition of RPC, our financial results for fiscal third quarter, a recent divestiture of our Seal for Life business as well as guidance for fiscal year 2020. Afterwards, Mark and I'll be happy to answer any questions you may have. On July 1st, we completed our acquisition of RPC Group Plc. I want to welcome our employees from RPC and reiterate my excitement about this transformational combination. The integration process is well under way with multi-discipline teams working together to identify incremental opportunities to create value for our customers and shareholders.

Berry is now a leading global supplier of value-added protective solutions. Our global footprint consists of over 290 locations worldwide, with over 48,000 employees across 6 continents providing combined pro forma sales of $13 billion. We're excited to move forward together as a global plastics and recycled packaging industry leader,serving thousands of customers with our high quality, innovative and protective solutions along with the industry's most diversified and expansive manufacturing platforms.The acquisition of RPC gives us the opportunity to leverage our combined know how, to create significant value for our shareholders. Through the shared approach and as we previously communicated, we anticipate $150 million in annual cost synergies.

Additionally, I'm happy to report that volume sale on a constant currency basis for RPC were modestly up in the most recent six months period ended March 2019. We remain highly impressed by the tremendous depth of talent and resources embedded within RPC and are looking forward to the opportunity to strengthen our combined platform with the wealth and experience and expertise this team has to offer. Next, on July 23rd, we complete the sale of our Seal for Life or SFL business to Arsenal Capital Partners for approximately $330 million. The SFL business had annual sales of approximately $120 million.

The decision to sell SFL was made as part of our ongoing portfolio analysis and decision to provide resources to further focus our efforts to deliver growth and target markets with advantage products as we remain firmly committed to this objective. I want to thank the SFL team for their years of commitment and dedication to Berry and our customers. We have used the proceeds of the sale to repay debt and expedite our primary goal of improving our balance sheet.

Turning now to our overall financial results and highlights for the quarter on Slide 4, net sales in the quarter came in at $1.94 billion and we generated operating EBITDA of $348 million. Contributions from the Laddawn acquisition and continued growth in our Consumer Packaging business, unfortunately, were more than offset by base volume weakness in our Engineered Materials and Health, Hygiene, & Specialties businesses.

Our adjusted earnings per share was $0.90 in the quarter and we generated $136 million in free cash flow, bringing our four quarters added free cash flow to $665 million. Now, looking at some details, specifically by segment, our Consumer Packaging business reported a strong volume growth in the quarter of 3% led by our food service containers enclosure products.

We continue to be encouraged by the momentum of the division delivering five consecutive quarters of positive volume growth. Our Health, Hygiene & Specialties division, has continued to see weakness in the North American baby care market. And while our near-term demand outlook for this market remains soft, we're pleased with the progress our team made in the quarter toward securing a strong pipeline of new business awards.

Inside our Engineered Materials division, while overall demand was softer, I'm pleased to report we regained share with local and regional distribution customers. Additionally, we continue to be pleased with the growth of the Laddawn acquisition and made progress in the quarter of moving other Berry products that are suitable for this e-commerce model brought to us from this acquisition. Next, I'm excited to discuss our announced commitment to eliminate plastic pollution at its source.

On June 24th, we signed the New Plastics Economy Global Commitment, which is led by the Ellen MacArthur Foundation in collaboration with UN Environment. Our involvement with this global commitment is complementary to our efforts with the Alliance to End Plastic Waste and furthers our commitments to our recently announced sustainability strategy. Impact 2025. At Berry we stand behind the power of plastics and are placing a priority on creating a more sustainable future. We are innovating our products to encourage recyclability, more use of recycled content and lightweighting. By signing of the Global Commitment, we are pledging to take action to: take action to eliminate problematic or unnecessary packaging, strive for 100% of plastics packaging to be reusable, recyclable or compostable. A target of 10% post consumer recycled content across all packaging and to take action to increase reusable packaging. In conjunction with the Ellen MacArthur Foundation, we are proud to accelerate the transition toward a more circular economy. The bottom line is that plastics has become an indispensable part of all of our lives and makes our lives better and safer and we must work together to take the necessary steps to drive sustainability throughout the value chain.

And finally, before I turn the call over to Mark, who will review our financial results in more detail, I'd like to highlight that the company is well positioned to achieve our historical track record of growing our free cash flow and delivering on these commitments. Just as we've done every single year as a publicly traded company. So today I'm happy to announce that we are committing to free cash flow of $800 million in fiscal 2020. Mark will provide more detail in his remarks and then I will come back and discuss our strategy and new business structure and then open the call for questions. Mark?

Mark W. Miles -- Chief Financial Officer

Thank you, Tom, and good morning, everyone. Turning to Slide 5 now. As Tom referenced, third quarter sales were $1.937 billion, continued strength in our Consumer Packaging business, along with the Laddawn acquisition volume was more than offset by decreased selling prices from the pass through of lower resin costs along with weaker volumes in our Engineered Materials and Health, Hygiene & Specialties segments and an unfavorable currency impact. From an earnings perspective, the June quarter operating EBITDA came in at $348 million. Contributions from the Laddawn acquisition and cost reduction efforts were more than offset by lower organic volumes, unfavorable price costs in Engineering Materials and an unfavorable currency impact. Looking at the results of each operating segment starting on Slide 6, sales in our Consumer Packaging division were $652 million in the quarter, which was 1$lower than the June 2018 quarter as a result of the pass-through of lower resin costs. Sales volumes grew 3% as the business has continued executing its long-term strategy, focusing on advantage products in targeted markets. Operating EBITDA for consumer packaging in the quarter was $126 million compared to $122 million in the prior year order. The 3% increase was primarily driven by the continued organic volume growth within our food service. closures and container products.

Next On Slide 7 sales for our Engineered Materials division were $639 million for the quarter compared to $687 million in the prior year quarter. The decrease was primarily attributed to the pass-through of lower resin prices and lower organic volumes, partially offset by Laddawn acquisition. During the quarter, as Tom expected, we made progress regaining share with local and regional distribution customers and non-distribution accounts. However, during the quarter, we did not anticipate the softening of overall demand. Operating EBITDA in our Engineered Materials division was $113 million, a decrease of $16 million compared to the prior year, primarily as a result of the lower organic sales volumes and unfavorable price cost spread.

Turning to Slide 8, our Health & Hygiene Specialties division delivered sales of $646 million in the quarter compared to $726 million in the prior year quarter. The decrease was primarily attributed to weaker volumes, the pass-through of lower resin prices and an unfavorable currency impact. Specifically, the sales volume decline was primarily driven by weakness in the North American baby care market and the customer product transition and hygiene we referenced on our last earnings call. We remain focused on leveraging our scale and low cost position to secure incremental demand. We have worked hard to foster great relationships with the leading end users in the hygiene category and our capabilities, know-how and low-cost global platform position us well for the future as these brands will lead the way in terms of innovation and differentiation. Operating EBITDA decreased to $109 million in the quarter compared to $123 million in the prior year quarter.

The decrease in operating EBITDA was primarily a result of the lower volumes in the base business and an unfavorable currency impact partially offset by cost reduction initiatives. Slide 9 provides a summary of our income statement for our fiscal third quarter. Overall, operating income was essentially flat compared to the prior year quarter at lower depreciation and amortization along with lower business optimization costs related to prior year acquisition offset the operating EBITDA decline. Just discussed. Our net income for the quarter was down $97 million from the prior year quarter as the June 2019 quarter was negatively impacted by $138 million pre-tax expense related to derivative instruments. and AVINTIV [Phonetic] as part of the RPC transaction to protect the purchase price from foreign currency movement and match the financing to the ongoing cash flows of the business from a currency perspective.

Next on Slide 10, the company generated $240 million of cash flow from operations in the quarter, compared to $271 million in the June 2018 quarter, a $31 million decrease Included a $36 million prepayment of accrued interest as part of the RPC financing, which was recovered on July 1st upon closing of the RPC acquisition. Net capital expenditures in the quarter were $104 million as we incurred spending on cost reduction initiatives as well as growth related projects. Our free cash flow over the last four quarters of $665 million represents a free cash flow yield of nearly 10% using our quarter end market capitalization. Our consistently increasing, dependable and substantial free cash flow provides us the opportunity to quickly improve our balance sheet, as we have demonstrated historically.

Today, we are reaffirming our fiscal year 2019 free cash flow guidance and are providing our fiscal year 2020 free cash flow guidance and assumptions shown on Slide 11. We are targeting fiscal 2020 free cash flow of $800 million, which represents a free cash flow yield approaching 12% using our quarter end in market capitalization. The $800 million of free cash flow includes $1.400 billion of cash flow from operations, partially offset by capital expenditures of $600 million. This guidance also includes a use of cash from working capital and other restructuring related costs related to the RPC acquisition of $90 million, along with cash taxes of $160 million and cash interest of $500 million.

This concludes my financial review and now I will turn it back to Tom.

Thomas E. Salmon -- Chief Financial Officer

Thank you, Mark. As I previously discussed, I'm very pleased with the progress of our integration of RPC with the business generating improved results for the six months period ending March 2019 for sales, volumes and operating EBITDA compared to the prior year period. On Slide 12 commercially, this transformative acquisition has created one of the world's largest dispensing solution providers, supporting our healthcare and pharma portfolio with worldwide die delivery capabilities. Similarly, RPC's presence in emerging markets complements various growth objectives in multiple industry segments. The rationale for this transformative acquisition remains strong. The strategic merit, long-term benefits and financial impact of this combination represents an extremely exciting opportunity for Berry, its customers, suppliers, employees and shareholders. Being able to leverage our combined know-how, material science, supply chain, product development and manufacturing technologies gives us confidence that this was the right franchise move for Berry. The pro forma combined franchise has revenue of $13 billion and over $2 billion of EBITDA. We look forward to updating you and discussing more in future calls.

On Slide 13, you can see the new structure and how we've organized our new four operating divisions consisting of Consumer Packaged International, Consumer Packaging North America, Engineered Materials and Health, Hygiene and Specialties. This new structure will allow us to further develop our presence and best serve our customers in key geographic regions. We've appointed Jean-Marc Galvez to lead the newly formed Consumer Packaging International Division and Bill Norman to lead our Consumer Packaging North American Division. Jean-Marc previously served as the President of our Consumer Packaging division. And Bill moves from his role of Executive Vice President of Consumer Packaging Commercial Operations. John, Jean-Marc and Bill have been instrumental in developing a growth strategy promoting advantage products in targeted markets, resulting most recently in five consecutive quarters of volume growth for the Consumer Packaging division. Continue to lead our Engineered Materials Division is Mike Hill and continue to lead our HH&S Division is Curt Begle.

I'm extremely excited about the transformation ongoing at Berry and I'm confident that this will accelerate our growth and create the value that our shareholders expect. We remain committed to applying our extensive human and capital resources toward stable markets with the greatest opportunities to innovate and generate sustainable growth by leveraging our manufacturing know-how align with material science and application development. We will generate consistent, dependable free cash flow while maintaining a strong balance sheet as a leading global supply in the markets we serve.

As you can see on Slide 14, we have a proven track record to rapidly de-lever post acquisition to our committed targets with substantially more free cash to continue invest and grow our businesses while enhancing shareholder returns. Furthermore, we will continue to work diligently across all of our businesses and have been able to demonstrate organic volume growth by providing advantage products in targeted markets exhibited by our consistent growth within our Consumer Packaging division. What are we doing specifically to drive growth, within our Engineered Materials division we're focused on light weighting numerous products while not compromising physical properties enabled by alternate [Phonetic] material qualifications recently completed. In addition, we have recently modified our commercial organization, leading to a substantial pipeline of business opportunities of $120 million in new revenue that will be onboarding over the next several quarters.

As I stated earlier, we made progress toward our objective of regaining lost share with our local and regional distribution accounts during the quarter and remain committed to sequential improvement toward our continued objective of positive low single digit growth in the March 2020 quarter subject to relative market demand. Within our Health & Hygiene Specialties division, our previously announced investments in China and a state-of-the-art technology for premium hygiene and air filtration applications along with our North American investment in our proprietary Spinlace technology for the wipes market, all remain on target. These capital expenditures reinforce our commitment to investing in growth regions and segments to further strengthen our leadership position and provide additional momentum for sustainable sustainable growth in these global markets. Also, we are well-positioned with our asset base and product solutions related to discretion and comfort, which was augmented by our Clopay acquisition to build on our leading market share positions in the faster growing incontinence segment. Without question, the decline in the North American baby demand has been a challenge by pivoting our resources into more attractive markets such as adult incontinence, feminine care, biopharmaceutical and specialty applications.

We expect to reverse the negative demand trend. We believe for the next three quarters that we will experience improvement in our comparative organic volumes and expect to achieve year-over-year growth in the second half of fiscal 2020. And within our Consumer Packaging North American business, our value proposition and recent success around connectivity, sustainability and cost innovation has led to innovative packaging solutions which address unmet needs. The division is making excellent progress toward replicating our successful strategy within our closures and containers product offerings both which contribute to the positive growth inside consumer packaging in our recent quarter. We continue to have a strong pipeline of growth opportunities, including recent wins in blood diagnostics and infection control markets and expect further continued success generating positive volumes. With respect to our newly acquired Consumer Packaging International business, we're excited about the potential of our new dispensing portfolio with unique, airless pump technologies and specialty valves. Global dispensing solutions will become a key focus for Berry and complements nicely our closures products. Our pharma business growth potential is also a key highlight of our acquisition and positions Berry as a growing global healthcare packaging market player. RPC brings niche and specialty healthcare products, innovative respiratory devices, among others. Sustainability is also a great opportunity.

Our onsite recycling facilities will help close the end of life loop and brings our sustainability leadership to the next level with plastics waste as a true valuable resource. Berry is uniquely placed to help customers with their recyclable PCR based and reusable packaging solutions. And finally, Berry will continue to take the steps necessary to remain a leader in the markets where we participate through a relentless focus on building and strengthen our competitive advantages to ultimately maximize shareholder value.

The management of Berry continues to be laser focused on finding ways to extract more value for our shareholders by reinvesting in our leading low-cost position, leveraging our resources around the businesses with the greatest opportunity to grow and create value for our customers, all while doing our part to protect our environment. A cornerstone of Berry's success is our people, and our objective is to remain an employer of choice in all our geographies, given the tightness in the labor market that manufacturing companies are facing around the world. I'm confident that the people of Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important. Thank you for your continued interest in Berry and at this time, Mark and I would be happy to answer your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Dave Hedge[Phonetic]. Your line is open.

Unidentified Participant

Good morning, gentlemen.

Thomas E. Salmon

Good morning.

Unidentified Participant

I was hoping maybe you could confirm for us that, in fact, the material qualification issues that you experienced earlier in the year are in fact resolved. And then to the extent that you can comment at all about , if there's been a competitive response as you went out to go rewin [Phonetic] business in the market?

Thomas E. Salmon

The qualifications are behind us. As we noted in our prepared comments, many of the qualifications we did was target around material science advances that allow us to further light weight packages and products. We're pleased with that progress. And we also are pleased the fact that we didn't make progress sequentially in recovering demand from the small, mid-sized regional distribution accounts that we noted. Clearly with generally softer demand tied to the industrial space we did see competitive pressures in our business, but we've been more than capable of addressing those issues and feel very comfortable with our progression and improvement that we've outlined over the coming quarters targeting positive growth in the first part of 2020.

Unidentified Participant

Thank you, Tom. Maybe and congratulations on closing the RPC deal. Get it over the finish line there. Mark, maybe if you can give us a few sensitivities in and around sort of the $800 million free cash flow number and or sort of the implied $2.15 billion of EBITDA. Now that you have more international components, if you've given some thought to affect sensitivity or perhaps the free cash flow implication could be neutral given some where the financing was placed and then sort of just sensitivities around what could cause you to come in above or below and appreciating. It's very preliminary? Thanks for all the details.

Mark W. Miles -- Chief Financial Officer

Yeah, sure. Thanks, Dave. So the details are obviously outlined on the slide in the materials. You know, relative to the break out of the $800 million of free cash, which includes $500 million interest, which is in line with our estimate when we did the financing. So everything's in line there as well as the $600 million of capital, you know, with about half of that being maintenance and churn related. The EBITDA puts and takes I would say with respect to our LTM numbers would be obviously the disposition of our Seal for Life business. Some continued pressure on earnings in our base business in the first half of the year relative to Engineered Materials and Health, Hygiene and Specialties as we lost the customer product transition that we referenced on the last call, which should inflect to positive growth in the back half in both of those segments as well as obviously the acquisition of RPC and the related synergies associated with that transaction.

With respect to FX synergies which I think was part of your question as well, we would estimate -- we're still working on finalizing the calculation, but about a percent move on the pound sterling would be about $1.5 million, a similar move on the euro would be about $5 million and we've assumed constant currency rates from today's rates with respect to the guidance. The other currencies that impact the numbers are relatively small. So those are the two largest currencies that impact the translation. There's not a lot of transactional FX in the combined business. So most of it's just translation of earnings as most of our businesses are local make, local sale.

I would also point out I'm sorry for the long winded answer here, Dave but I would also point out that $800 million of cash flow assumes $90 million of transition related costs as well as working capital, which obviously we would not expect to be recurring. We would typically assume target zero for working capital for the year as well as does not have the full synergy realization that we expect to achieve relative to this transaction. So it's total synergy and also is impacted negatively by the one-time costs associated with achieving synergies. And again, I apologize for the long answer here Dave, but hopefully that helps.

Unidentified Participant

No, very helpful. Thank you.

Operator

Your next question comes from the line of Mark Wilde. Your line is open.

Mark Wilde -- BMO Capital Markets

Good morning, Tom. Good morning, Mark.

Thomas E. Salmon

Good morning.

Mark W. Miles -- Chief Financial Officer

Good morning.

Mark Wilde -- BMO Capital Markets

I wondered, just on the Seal for Life sale. Mark, can you give us some sense of the impact of the sale from a segment EBIT or EBITDA standpoint? And then also what the after-tax cash proceeds look like?

Mark W. Miles -- Chief Financial Officer

Sure. Yeah. That business was operated in our Health, Hygiene and Specialties segment. The sales as I think was disclosed, was about $120 million annually. The EBITDA margins were above the company average. And the tax, while we're still finalizing the calculation, we would expect the tax to be under the company's effective tax, the gain would be under the company's effective tax rate of 25%.

Mark Wilde -- BMO Capital Markets

Okay. And we get kind of more color on that over the next quarter, Mark?

Mark W. Miles -- Chief Financial Officer

Absolutely.

Mark Wilde -- BMO Capital Markets

OK. And then Tom does this. potentially hint to us that there may be more portfolio moves over the next year or so?

Thomas E. Salmon

We are -- we're on a frequent review of our portfolio always, as you can imagine, with the size of our business. To diversify our business we're always evaluating fit and we'll continue to do that. This is part of a normal course of a portfolio analysis review that we do on an ongoing basis.

Mark Wilde -- BMO Capital Markets

Ok, that's fine. I'll turn it over.

Operator

Your next question comes from the line of Brian Maguire. Your line is open.

Brian Maguire

Hey. Good morning, everybody. Tom, just a question on the volume outlook, I think I heard you say that you think you can get the positive volumes by the March 2020 quarter and then for HH&S by the second half of fiscal '20, if I heard you right. So what gives you confidence in that? I know you mentioned some progress in the pipeline, $120 million of new revenue. But, you know, we've we've heard the story before about get into positive volumes and there always seems to be some offsets to that. So, you know, for the sake of conservatism, you know, do you think you can really get there or is this just a case of plugging in the new revenue and not assuming any further declines in the base business?

Thomas E. Salmon

Fair question. The $120 million pipeline. If you consider our normal churn rate on top of the $120 million of pipe inside of Engineered Materials that gets up in and of itself to the low single digit growth rate inside of Engineered Materials. Inside of HHS you know, we have spoken over the last several quarters the need for the business to pivot to the higher growth regions as well as product lines and categories to deliver more consistent growth. We committed that over the last several quarters. We've talked about the long cycle to ultimately deploy that capital. It's coming to fruition. I'm pleased to say that we are already in the phases right now, a pre-qualification on our R5 expansion in China that will be sold out by the end of 2020. The melt tacks [Phonetic] technology, the we commercialized in April of 2019, we're already 60% sold out on that asset. So the actions that we've taken relative to capital deployment, relative to resource allocation to pivot the portfolio are on track and on schedule as we previously committed, giving us confidence that we'll deliver on that expectation.

Brian Maguire

I just to switch gears to RPC, thoughts or update on the cadence of the cost synergies how much what kind of run rate you expected to be in by the end of 2020 or any color on how much would be achieved in 2020?

Thomas E. Salmon

I can't give a specific color on a on a sequencing of timing, but I will say the integration is progressing better than planned. We are very impressed with the team inside of RPC, as I suggested in my prepared comments, one of the great opportunities for this combined packaging powerhouse is that it really has created now one of the world's largest dispensing solution providers to support healthcare and pharma businesses, everything from dispensers, inhalers, dosage, control, pumps. That really gives us a lot of confidence. We're pleased that during this process we have, we've not disrupted customers, we've met with senior management and again, we are, we're more excited about this transaction than we were that the day that we put the bid in to buy it. And I'm very excited about the prospects going forward.

Brian Maguire

Okay just last one from me, and I apologize if I missed it. Any way you can give some color on the performance of the RPC business over the last couple of months or any, you know, LTM EBITDA even pro forma for current currency rates or anything like that you'd be able to provide?

Mark W. Miles -- Chief Financial Officer

Yes, sure, Brian. So they were, as you probably recall, they were on a six month reporting cycle as a UK traded company. So their processes are centered around the six month cycle. So I think it was in maybe in Tom's prepared remarks, but March ended period, which was their fiscal year end both top line volumes and EBITDA were up modestly from the last LTM reported period, which would have been September '18. And more details to come out as the audit is completed and filed by Berry here in the next couple of months.

Brian Maguire

Do you guys anticipate providing like historical financials before it sometime before the next financial report?

Mark W. Miles -- Chief Financial Officer

Yes. By the end of this quarter, we will have an 8-K filed with the audited financials included as well as pro forma statements Berry plus RPC.

Brian Maguire

Okay, thanks very much.

Operator

Your next question comes from the line of Ghansham Panjabi. Your line is open.

Ghansham Panjabi -- Robert W. Baird & Company

Thank you. Good morning, everyone. I guess looking back at fiscal year '19, you know, you started the year with implied EBITDA guidance of roughly $1.5 billion. Looks like you're tracking closer to $1.4 billion for at this point. Can you first up confirmed that and then also as relates to your implied EBITDA guidance of $21.50 million [Phonetic] for 2020. Can you disaggregate for us, Mark, what you're expecting for legacy Berry and also the volume growth expectation for RPC.?

Mark W. Miles -- Chief Financial Officer

Okay. Thanks, Ghansham. Yeah. With respect to the first part of your question, I think your numbers are generally pretty accurate. Obviously, the miss with respect to implied EBITDA would be centered around weakness and volume, which has led to miss relative to volume -- or excuse me, price cost that Tom referenced not only from a pass-through perspective, but also negative overhead carry in our facilities from the weaker than expected volumes predominantly in our Engineered Materials business. And then I'm sorry, what was the second part of your question? And by the way, I should add to that that, you know, in spite of that weakness, we remain committed to achieving our cash flow objective, as we have every year as a public company. And I apologized Ghansham, what was the second part of your question?

Ghansham Panjabi -- Robert W. Baird & Company

It was on legacy Berry assumption for EBITDA for 2020 and also RPC volume growth?

Mark W. Miles -- Chief Financial Officer

Got you. Yeah. Okay. So we have. I think maybe an earlier question. We have some modest pressure in Engineered Materials and HHS built into our guidance with respect to earnings in the first half of the year as we reach an inflection in the back half in volumes. Overall, I would say, you know, as you know, the business is relatively flat. So our typical assumption going into the year is flat volumes with again, some pressure in the beginning part of the year in selecting in the back half.

Ghansham Panjabi -- Robert W. Baird & Company

Okay, then just my second question maybe for Tom on Consumer Packaging. Just give us a better sense of growth by the major subcategories for the segment. Where are we in the share gain phase specific to your new products and how you kind of thinking about the next few quarters as we cycle into 2020? Thanks so much.

Thomas E. Salmon

Thanks, Ghansham. We continue to believe that Consumer Packaging will continue deliver low single digit growth, just that demonstrated here the better than the last year or so. The division continues to focus on areas the way that which we can ultimately innovate. Clearly, the polypropylene drink cup was a was a great opportunity for us as well as the lift [Phonetic] technology. There's a tremendous amount of opportunity right now in replicating the success that we've had in food service to our containers as well as our closures business. The demand for child-resistant packaging especially around emerging markets like the cannabis space, both in terms of dry goods as well as liquid form, continues to create a great opportunity for us to piggyback on our know-how and technology. The demand for fresh food packaging continues to be real invisible. There are efforts under way in terms of pod containers around child safety and resistance.

So, yeah, we feel very bullish and the focus is really around innovating and innovating to create differentiation, meeting those unmet customer needs, just as we've done in just we've done the food service space. So we feel really bullish about that. And I think clearly with Jean-Marc's leadership having ran Consumer Packaging in North America now running Consumer Packaging international. I think it allows us to take that exact same strategy to the teams at RPC and and begin that momentum as quickly as possible on top of a business that has been a growth business in and throughout Europe, so bullish about consumer packaging and the opportunities in front of us.

Ghansham Panjabi -- Robert W. Baird & Company

Thanks, Tom.

Operator

Thanks. Your next question comes from the line of Anthony Pettinari . Your line is open.

Anthony Pettinar -- Citigroup

Good morning. Just just following up on Brian's question, you've owned RPC for a month now. Is it possible to say how organic volumes have been in that month versus maybe what they saw in the last 12 months? I guess specifically in Europe, where other producers have seen some softness. And then I guess just generally, as Europe has gone from maybe 10% of the, you know, Berry to over 35% post RPC. Have you incorporated some conservatism around the European economy over the next 12 months in terms of the 2020 guidance?

Thomas E. Salmon

Yeah. Let me first speak to the guidance in terms of the European economy, clearly it's in the late stages of a robust growth cycle. We have been conservative in terms of our forecasting inside that space. But I'll remind everybody were heavily overweighted toward the consumer side of the business, more than 65 plus percent of that portfolio was tied to the consumer. So it's typically less cyclical. But clearly, we've accounted for some potential headwinds in demand overall into 2020?

Anthony Pettinar -- Citigroup

Okay. And so the performance of the business over the last month has been sort of in line with expectations?

Mark W. Miles -- Chief Financial Officer

I'm sorry, Brian, what was the question is, is with respect to -- as I just mentioned volumes. sales and earnings were up for the most recent reported period. We can't comment beyond March as they were on a six month reporting cycle and their processes were not established to create reporting outside of that six month cycle. We're working on improving that, obviously -- [Indecipherable] Berry's quarterly reporting cycle.

Anthony Pettinar -- Citigroup

Okay, got it. And then just separately, over the past year, you've seen a lot of cost increases on the non-resin side, categories such as freight. I know that we're covering those costs can take longer than than the resin costs. Are there opportunities for non-resin price increases and just as you look at the past year, sort of how would you judge the effectiveness of recovering, I guess maybe 15%, 20% of COGS that's outside of resin, including the freight piece?

Thomas E. Salmon

Anytime you have, you know, generally weaker markets, it creates no more competitive pressures inside your business and it definitely creates a headwind, if you will, toward offsetting inflation with price. We remain committed to find a way to extract and find value and in circumstances where we are not meeting our expectations in terms of cost recovery, we'll focus on variablize our cost structure, deploying resources around innovation and cost reduction leverage in six segments throughout our business.

Anthony Pettinar -- Citigroup

Okay, that's helpful. I'll turn it over.

Operator

Your next question comes from the line of George Staphos. Your line is open.

George Staphos -- Bank of America Merrill Lynch

Hi, everyone. Thanks for the details. I want to go through a few questions here, we're talked directionally about, you know, the guide for 2020 relative to what we should know from prior forecasts. When we look at the guidance -- it wasn't guidance, but the analysis you provide last quarter, which was kind of a hybrid, $2.178 billion of EBITDA for Berry and RPC on an LTM basis from September. We know RPC has been growing, you said that, that figure that $2.178 billion did not have synergies in it, presumably the $2.150 billion that you're guiding for 20 has some synergies. You lose a little bit with Seal for Life, is there anyway you can bridge a bit further for us, the old -- if you will EBITDA to the guidance for $2.150 billion, how much is pressure from EM and HH&S?

I know you said you're not in a position on synergies, but a little bit more color would be helpful just to figure out what's going on beneath the surface and then I had a couple of follow on's.

Mark W. Miles -- Chief Financial Officer

Yes, George, you've bridged it I think very well, but again ...

George Staphos -- Bank of America Merrill Lynch

I had no numbers in there though, Mark. So that's what I want to count on you guys for.

Mark W. Miles -- Chief Financial Officer

Yeah. I think you've got it right. I think you can look at the run rate were operating at Engineered Materials and H,H&S and probably get pretty close to what our assumption is in 2020. Again, we've got some year-over-year headwinds to still lap but do expect that to have bottomed and will improve sequentially going forward but I would look at the rates of those businesses...

George Staphos -- Bank of America Merrill Lynch

Okay. Do -- you think we've seen bottom? Look, we're not going to hold you to this. It's obviously hard running any business. We're just analysts. But do you think you've hit bottom in EM and H,H&S as of the quarter that just passed or is the fiscal fourth quarter going to be the bottom? And then from there you're going to see sequential improvement toward the March and then June quarter inflection points in 2020?

Mark W. Miles -- Chief Financial Officer

No, I do believe that and that there is some modest seasonality, I guess you would have to consider with December where our fiscal Q1 being our weakest quarter, it's not dramatic...

George Staphos -- Bank of America Merrill Lynch

Right.

Mark W. Miles -- Chief Financial Officer

...but I would also consider seasonality when you think about that.

George Staphos -- Bank of America Merrill Lynch

Okay, my last two real quickly, you know, it sounds like consumer is doing well for you, Tom. You're getting the volume growth, you're talking about innovation and you're getting things qualified for next year, that's all good. Depreciation was adjusted lower. Can you remind us why you were seeing that effect in consumer when fundamentally would seem like the values on assets would be higher because you're seeing good performance there? And then just quickly, what is the incremental assumption agreement that you call out in the footnotes related to financing? You've probably mentioned in the past I missed but just want some clarification? Thanks, guys. Good luck in the quarter.

Thomas E. Salmon

The incremental assumption agreement must just be language, there's nothing. There's nothing different. There must just be language in -- I'm not sure where you picked that up, there is nothing unusual about that -- it's normal debt. We issued a senior term loans in the bank market as well as some bonds into the high yield market. But there's nothing nothing unusual there, George. So we can -- we can talk off line maybe about the wording that was used and what your'e looking at. And what was the first part of your question, sorry.

George Staphos -- Bank of America Merrill Lynch

Consumer is doing great but depreciation is coming down, so what's the disconnect there? Thank you.

Thomas E. Salmon

Yeah. Now, look, we continue to work to become more efficient with our capital deployment, trying to purchase more flexible assets. As things -- as their product churn things that occurred so that we can utilize assets to make other products I think the business continues to find opportunities in ways to improve that.

Mark W. Miles -- Chief Financial Officer

I'm confident that with the acquisition and combination from RPC, we will find additional opportunities, in fact just one month in we've already identified a couple of opportunities where independently the companies would have had capital deployment that had been avoided as a result of the combination. So I would say continued improvements relative to deployment of capital within the business as we've been able to achieve the growth rates and actually spend less than our depreciation.

So I think it's just a function of depreciation catching up with that more efficient capital deployment.

Thomas E. Salmon

And in general, relative to the converting technology that we use throughout the company now, this global platform has given us a unique opportunity to share best practices and ultimately partner with vendors and converting companies that ultimately will bring the greatest value for Berry, as Mark said.

We continue to be focused on aligning the businesses with commercial [Phonetic] and assets next as possible, given us the opportunity to pivot from business A to business B seamlessly without foundation, a need for incremental capital and feel very good about that opportunity that's going to play out in the coming quarters and years for the company.

George Staphos -- Bank of America Merrill Lynch

Understood. Thank you very much, guys.

Operator

Your next question comes from the line of line Edlain Rodriguez . Your line is open.

Edlain Rodriguez -- UBS

Thank you. Good morning, guys. Just one quick on health and hygiene. If I'm looking on Slide number 8, are trying to figure out like the volume impact on EBITDA. Last quarter it was $1 million and this quarter it's $11 million. And volume is down almost the same amount for both quarters at 6% . Like, why such a drastic swing in volume impact on EBITDA?

Thomas E. Salmon

Yeah. So last quarter we still had to lap the acquisition that we made of Clopay . That was a year ago and we've lapped up this quarter. So last quarter the volume impact was higher when you exclude the acquisition impact of the Clopay transaction. So apples to apples, it would have been similar.

Edlain Rodriguez -- UBS

Ok. Thanks for the clarification. And on price declines that we've seen in EM and health and hygiene. Those price just flow to of lower cost or is there something deeper going on in terms of trying to be more competitive to recoup lost market share?

Thomas E. Salmon

In the case of H,H&S it's definitely predominantly pass-through with lower resin, in Engineered Materials, it's a combination of pass-through

Mark W. Miles -- Chief Financial Officer

resin as well as there's more transactional business in that particular division. And so you're competing at market prices on a daily basis in that transactional portion of the business. But in both cases, the majority of it still remains the pass-through of lower plastic resin costs, which is about half of our cost structure. With those two businesses actually having a slightly higher component of resin of the total.

Edlain Rodriguez -- UBS

And also in EM, when you've talked about like we're getting some of the market share that you lost out the business. How exactly are you doing that to gain that business back?

Thomas E. Salmon

Well, those are customers that we had previously, again, demonstrating our ability to deliver on time every time with high quality product. Historically, they were used to our ability to innovate. You know, with those accounts and we're competing that at market prices and leveraging our scale to drive incremental productivity improvements to help offset some of those headwinds. But we have clearly made a commitment inside of that space to grow our business. We will bring to bear the leverage, the size, the scale of Berry to deliver on that as we've committed.

Edlain Rodriguez -- UBS

Okay, thank you very much.

Operator

Your next question comes from the line of Arun Viswanathan. Your line is open.

Arun Viswanathan -- RBC Capital Markets

Great. Thanks. Good morning. I was just curious if there are efforts to continue to broaden into other products and H,H&S outside of baby care. Looks like there's some structural weakness that's been persistent for a little while. Maybe just update us on your efforts there? Thanks.

Thomas E. Salmon

Happy to. And you know, the last several quarters, you know, we've been talking about first and foremost that, yes, we're a leader in baby and the majority the weakness that we're seeing is specifically in North America and that we've been making all efforts toward transitioning geographies with faster growth rates, as well as markets that have faster growth rates, higher growth rates, specifically adult incontinence, feminine care.

We've had successes in biopharmaceutical as well as higher and specialty applications . So it continues to be ongoing. There is making very good progress. And as I said, I'm very pleased that, you know, as we've committed, as we get to the back half of 2020, HHS turns positive, supported by Apple investments that we've made in Asia that we've committed to previously, as well as the portfolio -- portfolio pivot around incontinence as well as fem care. And as I said, real happy that we're well under way with the pre-qualifications and pre -selling. You know, our.

You ask that In China. Collaboratively with our end customers and we feel comfortable that the value that assets bring enough will allow us to be sold out by the end of 2020 year end. So it's on track and doing what we thought it is going to do and bringing the kind of value to our customers that they expect and that we expect it. So I'm really pleased with that pace. Again, second half of 2020, we get positive.

Arun Viswanathan -- RBC Capital Markets

Great. Thanks. And then when you think about the quarterly performance and your future free cash flow guidance for 2020. You know, if you were to characterize this quarter's performance, I guess, would you indicate that you kind of feel that you're at a bottom on EBITDA and free cash on an annualized basis. And if that's the case, what gives you that view? Thanks.

Thomas E. Salmon

Yeah, listen, we are. We're similarly disappointed with results, though we're pleased the progress are making again in some key deliverables. Specifically share recovery, specifically activity in our portfolio. The company has a long track record in history delivering free cash flow improvement year-on-year. We've got a tremendous number of levers that we can pull as a company and an organization. And we'll continue to pivot and deliver on what everyone's going to expect, certainly around free cash generation. The organization as a whole top to bottom is continue to be laser focused around demonstrating in the marketplace our ability to grow. And the acquisition of RPC gives us an incredibly unique platform to draw from to deliver global value delivery in the markets that we serve as well as now an entirely new region of the world. In addition to emerging markets that will be transformational for the corporation.

Operator

Your next question comes from the line of. Tyler Langton,. Your line is open.

Tyler Langton -- Research

Good morning, Tom and Mark. Thanks. Just had a question on cost recovery, I know previously you mentioned that in fiscal 2018, you sort of had a $100 million of costs that you couldn't pass through and thought you could sort of get roughly half of that back in '19 and the other half in '20 . And I guess Is that so hold and I guess you know, sort of in relation to that I guess could you talk a little bit more about what's driving the negative price cost spread that we're seeing this quarter?

Thomas E. Salmon

It's generally weaker markets, generally weaker markets creates more competitive pressures in those businesses, which puts pressure on pricing. So as I said to run counter to that, when you have weaker demand overall makes it more difficult to push price forward. That's the primary driver. We continue to focus on ways to cost reduce across the company as a whole and leverage the capital. We deploy not only around growth, innovation, but also automation and cost reduction to support our level of competitiveness as a low cost producer.

Tyler Langton -- Research

Okay, thanks. And then just Mark, I guess I think you guided to cash taxes of I think $160 million for '20. And I think previously it was $150 million to stand-alone for Berry pre-RPC. So I'm just -- is that a $160 million how sustainable is that as a cash tax rate?

Mark W. Miles -- Chief Financial Officer

Yes, there's no unusual items in the 2020 guidance, so that is viewed as a normalized effective rate in the mid-20s for Berry on a combined basis, including RPC.

Tyler Langton -- Research

Okay. And then just final question on the capex sort of the $600 million I think you sort of had done sort of $300 million, sorry $350 million historically, I think RPC was closer to $300 million. Is that $600 million a decent number to use going forward or could it be sort of potential upside or downside to that?

Mark W. Miles -- Chief Financial Officer

We do that as a normalized number, certainly to the extent demand creates opportunities to deploy more capital to create value. We'll look at that. And the converse is also true to the extent demand is weaker. That's certainly a lever that we would call and reduce that capital spend. So that number, I would say, is normal. And we think we can achieve low single digit growth on both top line and bottom line with that capital, but also gives a -- there's also flex in that number to the extent of the market factory change.

Tyler Langton -- Research

Got it, great. Thanks so much.

Operator

Your next question comes from the line of Neel Kumar . Your line is open.

Neel Kumar -- Morgan Stanley

Hi, In EM, now that you've largely completed the material qualification activities. Can you just talk about what are the benefits we should expect to see from this in terms of your light weighting ability and resin flexibility?

Thomas E. Salmon

Well, it's a -- it's just part of our ongoing portfolio and that kind of flexibility that we're trying to embed in the company gives us opportunities during periods of raw material inflation to qualify also in raw materials to minimize the impact in terms of cost. It gives us the opportunity to bring value delivery on customers who are ultimately interested in lightweight in their product to tie in with their sustainability efforts. And that'll continue to play out as part of an overall portfolio upgrade for us that we would do as part of an ongoing. component of our business, but we're pleased with it because again, when we can deliver 2% weight reduction, in some instances tie the formulation, changes . It's clearly advantageous to our own customers that provides them an opportunity to address their sustainability goals and objectives. And that also may should lead to greater market and market penetration and share gains for our company, which we're -- which we are committed to maintaining and growing our share.

Neel Kumar -- Morgan Stanley

And then just a follow-up on the capex just seems to be some embedded, you know, capex synergies in the guidance of $600 million versus seems to be about $650 million and combined LTM capex. So can you just talk about where those synergies are coming from and do you expect those reductions to have any impact on, you know, some of the growth projects in the pipeline for RPC?

Thomas E. Salmon

No, I do not expect that to have any impact on the growth prospects for RPC. We are -- we remain completely committed toward applying our capital resources toward stable markets as we can find where the greatest opportunities to create innovation, generate organic growth and we remain committed to doing that. Clearly, any type of synergies in terms of capex between the two companies simply comes from scale and frankly, the elimination need for certain investments because we may already have that capability inside the system.

We were very excited. I think week one to identify a couple of opportunities where capex was going to be deployed. And it was ultimately no longer needed because we identified that capacity inside the system. Lot of work going on right now relative to that and we'll continue that but it's a great source for synergy realization that we're very comfortable with.

Neel Kumar -- Morgan Stanley

Great. Thanks.

Operator

Your next question comes from the line of Adam Josephson. Your line is open.

Adam Josephson -- KeyBanc Capital Markets

Thanks. Good morning, everyone. Mark, just one last question on your EBITDA, did you imply the EBITDA guidance for next year. So based on the last 8-K, I think RPC CTM [Phonetic] EBITDA was about $785 million assuming the synergies or call it 50-ish, you know, you split them across the next three years and assuming you're divesting $25 million or so EBITDA from Seal for Life that implies about legacy Berry EBITDA next year in the low 13s, which seems to fit with what you were saying about run rating H,H&S and engineered from this past quarter. Mark. Does that sound about right to you the low 13s for legacy Berry next year?

Mark W. Miles -- Chief Financial Officer

I mean, there were some you know, we're not we're not going to break out specific, and for that level of detail, I'd say there were some differences in some of your numbers. Again, directionally, I think they're the right way, but we're not going to -- we're not prepared to go into that level of detail at this point on the call.

Adam Josephson -- KeyBanc Capital Markets

Ok. And just a bigger picture question Tom. So last seven quarters, your organic EBITDA has declined, I know. Last year was primarily cost inflation, but it was also volume weakness. This year has been volume weakness. And I just wonder if there's something structural going on because your organic EBITDA was up pretty nicely in '16 and '17 and it's been down ever since. And again, it's been owing to a variety of factors. But is there something that's changed in the last couple of years relative to where the company was before that?

Thomas E. Salmon

We over our history have made numerous decisions around price volume, trade offs throughout our history. The company is laser focused and 100% committed on being able to generate organic growth. We're going to leverage our scale, our manufacturing, know-how material science, application development to deliver on that expectation that we have internally to deliver on our ability to grow the company. We're going to compete at market prices, we're going to compete at market prices at a low cost producer. We're going to maintain and grow our share.

Adam Josephson -- KeyBanc Capital Markets

Thank you, Tom.

Operator

There are no further questions at the moment. You may continue.

Thomas E. Salmon

I want to thank everybody for your time today on the Call. We look forward to further follow ups. Take care.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

Dustin Stilwell -- Head of IR

Thomas E. Salmon

Mark W. Miles -- Chief Financial Officer

Unidentified Participant

Mark Wilde -- BMO Capital Markets

Brian Maguire

Ghansham Panjabi -- Robert W. Baird & Company

Anthony Pettinar -- Citigroup

George Staphos -- Bank of America Merrill Lynch

Edlain Rodriguez -- UBS

Arun Viswanathan -- RBC Capital Markets

Tyler Langton -- Research

Neel Kumar -- Morgan Stanley

Adam Josephson -- KeyBanc Capital Markets



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