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Edited Transcript of BERY earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q3 2019 Berry Global Group Inc Earnings Call

Evansville Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Berry Global Group Inc earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dustin Stilwell

Berry Global Group, Inc. - Head of IR

* Mark W. Miles

Berry Global Group, Inc. - CFO & Treasurer

* Thomas E. Salmon

Berry Global Group, Inc. - CEO & Chairman of the Board

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Edlain S. Rodriguez

UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Tyler J. Langton

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Lawrence, 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) Thank you.

Mr. Dustin Stilwell, you may begin your conference.

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Dustin Stilwell, Berry Global Group, Inc. - Head of IR [2]

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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 have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website at berryglobal.com, under our Investor Relations section. Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we'll 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, 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.

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [3]

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Thank you, Dustin. Good morning, 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, our recent divestiture of our Seal For Life business as well as guidance for fiscal year 2020. Afterwards, Mark and I will be happy to answer any questions you may have.

On July 1, 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 underway, with multi-disciplined teams working together to identify incremental opportunities to create value for our customers and shareholders.

Berry is now the 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 this shared approach and as we previously communicated, we anticipate $150 million in annual cost synergies. Additionally, I'm happy to report that volumes, sales and operating EBITDA on a constant currency basis for RPC were modestly up in the most recent 6-month 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 opportunities to strengthen our combined platform with the wealth of experience and expertise this team has to offer.

Next, on July 23, we completed 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 decision to provide resources to further focus our efforts to deliver growth in target markets with advantaged 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. Contribution from the Laddawn acquisition and continued growth in our Consumer Packaging business unfortunately were more than offset by big 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 4 quarters ended free cash flow to $665 million.

Now looking at some details specifically by segment. Our Consumer Packaging business reported strong volume growth in the quarter of 3% led by our foodservice, containers and closure products. We continue to be encouraged by the momentum of the division delivering 5 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 towards 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 plastics pollution at its source. On June 24, we signed a 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 commitment to our recently announced sustainably strategy Impact 2025. At Berry, we stand behind the power of plastics and are placing a priority on creating a more sustainable future. We're innovating our products to encourage recyclability, more use of recycled content and lightweighting. By signing the global commitment, we are pledging 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 towards a more circular economy.

The bottom line is that plastics has become an indispensable part of all our lives. It 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'll 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?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [4]

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Thank you, Tom, and good morning, everyone. Turning to Slide 5 now. As Tom referenced, third quarter sales were $1,937,000,000. 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/cost in Engineered 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 cost. Sales volumes grew 3% as the business has continued executing its long-term strategy focusing on advantaged products in targeted markets. Operating EBITDA for Consumer Packaging in the quarter was $126 million compared to $122 million in the prior year quarter. The 3% increase was primarily driven by the continued organic volume growth within our foodservice, 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 the Laddawn acquisition.

During the quarter, as Tom expected, we made progress regaining share with local and regional distribution customers and nondistribution accounts. However, during the quarter, we had 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 in 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 on 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 as lower depreciation and amortization, along with lower business optimization cost related to prior year acquisitions 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 pretax expense related to derivative instruments entered into as part of the RPC transaction to protect its 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. The $31 million decrease included a $36 million prepayment of accrued interest as part of the RPC financing, which was recovered on July 1 upon closing on 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 for the last 4 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 market capitalization. The $800 million of free cash flow includes $1,400,000,000 of cash flow from operations, partially offset by capital expenditures of $600 million. This guidance also includes the use of cash for 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'll turn it back to Tom.

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [5]

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Thank you, Mark. As I have previously discussed, I'm very pleased with the progress of our integration of RPC. With this, generated improved results for the 6-month 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 health care 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 of 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 in 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 Packaging-International, Consumer Packaging-North America, Engineered Materials and Health, Hygiene & 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. Jean-Marc and Bill have been instrumental in developing a growth strategy, promoting advantaged products in targeted markets resulting, most recently, in 5 consecutive quarters of volume growth for the Consumer Packaging division.

Continuing to lead our Engineered Materials division is Mike Hill, and continuing 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 towards stable markets with the greatest opportunity to innovate and generate sustainable growth by leveraging our manufacturing know-how, aligned with material science and application development. We will generate consistent, dependable free cash flow, while maintaining a strong balance sheet as the leading global supplier in the markets we serve.

As you can see on Slide 14, we have a proven track record to rapidly delever post acquisition to our committed targets with substantially more free cash to continue to 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 advantaged 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 focusing on lightweighting numerous products, while not compromising physical properties enabled by alternate 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 we'll 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 towards 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 in 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 whites 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 growth in these global markets. Also, we are well positioned with our asset base and product solutions related to discretion and comfort, which is augmented by our Clopay acquisition to build on our leading market share position in the faster-growing incontinence segment.

Without question, the decline in the North American baby demand has been a challenge. By pivoting our resources in the more attractive market such as adult incontinence, feminine care, biopharmaceutical and specialty applications, we expect to reverse the negative demand trend. We believe for the next 3 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 addressed unmet needs. The division is making excellent progress towards replicating our successful strategy within our closures and containers product offerings, both which contributed 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 market 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 product. Our pharma business growth potential is also a key highlight of our acquisition and positions Berry as the growing Global health care packaging market player. RPC brings niche and specialty health care products, innovative respiratory devices amongst others.

Sustainability is also a great opportunity. Our on-site recycling facilities will help close the end-of-life loop and brings our sustainability leadership to the next level, with plastics waste as the 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 our relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. The management at Berry continues to be laser focus on finding ways to attract 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 am confident that the people at 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 will be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Gabe Hajde.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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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 re-win business in the market.

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [3]

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The qualifications are behind us. And as we noted in our prepared comments, many of the qualifications we did was targeted around material science advances that allow us to further lightweight packages and products. We're pleased with that progress. And we also are pleased with the fact that we did make progress sequentially in recovering demand from the small, midsize regional distribution accounts that we noted. Clearly, with generally softer demand and 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 of improvement that we've outlined over the coming quarters, targeting positive growth in the first part of 2020.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [4]

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Maybe -- and then congratulations on closing RPC deal, getting 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, I know you had some more international components, if you've given some thought to FX 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.

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [5]

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Yes. Sure. Thanks, Gabe. Yes. So the details are obviously outlined on the slide and the materials relative to the breakout of the $800 million of free cash, which includes $500 million of interest, which is in line with our estimate when we did the financing. So everything is in line there as well as the $600 million of capital 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 and the first half of the year relative to Engineered Materials and Health, Hygiene & Specialties as we lap 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 1% 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 2 largest currencies that impact the translation. There's not a lot of transactional FX in the combined business, so most of it is just translation of earnings, as most of our businesses are local made, local sale.

I would also point out and sorry for the long-winded answer here, Gabe, 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 0 for working capital for the year as well as it does not have the full synergy realization that we expect to achieve relative to this transaction. So it's dual synergy and also is impacted negatively by the onetime cost associated with achieving synergies. And again, I apologize for the long answer there, Gabe, but hopefully that helps.

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Operator [6]

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Your next question comes from the line of Mark Wilde.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [7]

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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?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [8]

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Sure. Yes. That business was operated in our Health, Hygiene & 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%.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [9]

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

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [10]

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Absolutely.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [11]

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [12]

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

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Operator [13]

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Your next question comes from the line of Brian Maguire.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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Tom, just a question on the volume outlook. I think I heard you say that you think you can get to positive volumes by the March 2020 quarter, and then for HH&S by the second half of fiscal '20, if I heard you right. Just wondering what gives you confidence in that. I know you mentioned some progress in the pipeline, $120 million of new revenue, but we've heard the story before about getting to positive volumes and there always seems to be some offset to that. So for the sake of conservatism, 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?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [15]

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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 us in and of itself to the low single-digit growth rates inside of Engineered Materials. Inside of HH&S, 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 in 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 am pleased to say that we are already in the phases right now of prequalification on our R5 expansion in China. That will be sold out by the end of 2020. The Meltex technology that 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.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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I guess to switch gears into RPC. Just any thoughts or update on the cadence of the cost synergies, how much -- what kind of run rate you expect it to be in by the end of 2020, or any color on how much would be achieved in 2020?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [17]

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I can't give you specific color 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 on 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 health care and pharma businesses. Everything from dispensers, inhalers, doses control, pumps that really gives us a lot of confidence. We're pleased that during this process, we have -- we have not disrupted customers. We've met with senior management. And again, we are more excited about this transaction than we were at the day that we put the bid in to buy it, and very excited about the prospects going forward.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Okay. Just last one for 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 LTM, EBITDA, even pro forma for current currency rates or anything like that, that you'd be able to provide?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [19]

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Yes. Sure, Brian. So they were, as you probably recall, they run a 6-month reporting cycle as a U.K. traded company, so their processes are centered around the 6-month cycle. So I think it was in maybe in Tom's prepared remarks, but the 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.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [21]

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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.

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Operator [22]

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Your next question comes from the line of Ghansham Panjabi.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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I guess, looking back at fiscal year '19, you started the year with implied EBITDA guidance of roughly $1.5 billion. It looks like you're tracking closer to $1.4 billion at this point. Can you first of, confirm that? And then also as it relates to your implied EBITDA guidance at $2.150 billion for 2020, can you disaggregate for us, Mark, what you're expecting for legacy Berry and also the volume growth expectations for RPC?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [24]

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Okay. Thanks, Ghansham. Yes. 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 in volume, which has led to a miss relative to -- 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 -- and by the way, I should add to that, that 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 apologize Ghansham, what was the second part of your question?

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [26]

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Got you. Yes. Okay. So we have, I think maybe in 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 reached an inflection in the back half. In volumes overall, I would say, as you know, the business is relatively flat and so our typical assumption going into the year is flat volumes with again some pressure in the beginning part of the year inflecting in the back half.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Okay. Then just my second question, maybe for Tom on Consumer Packaging. Can you just give us a better sense of growth by the major subcategories for this segment? Where are we in the share gains phase specific to your new products? And are you kind of thinking about the next few quarters as we cycle into 2020?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [28]

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Yes. Thanks, Ghansham. We continue to believe that Consumer Packaging will continue to deliver low single-digit growth just as it demonstrated here better than the last year. So the division continues to focus on areas and ways in which we can ultimately innovate. Clearly, the polypropylene drink cup was a great opportunity for us as well as the lid technology. There's a tremendous amount of opportunity right now in replicating the success that we've had in foodservice to our containers as well as our closures business. The demand for child-resistant packaging, especially around emerging markets like the Canada 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 continue to be real and visible.

There's efforts under way in terms of pod containers around child safety and resistance. So yes, 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 the foodservice space. So we feel really bullish about that, and I think clearly, with Jean-Marc's leadership, having ran Consumer Packaging-North America, now running Consumer Packaging-International, I think it allows us to take that exact same strategy to the teams in RPC and begin that momentum as quickly as possible, on top of a business that has been a growth business in -- throughout Europe. So bullish about Consumer Packaging and the opportunities in front of us.

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Operator [29]

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Your next question comes from the line of Anthony Pettinari.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [30]

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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 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?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [31]

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Yes. Let me first speak to the guidance in terms of the European economy. Clearly, it's in the late stages of robust growth cycle. We have been conservative in terms of our forecasting inside that space. But I'll remind everybody we're heavily overweighted towards the consumer side of the business. More than 65-plus percent of that portfolio is tied to the consumer, so it's typically less cyclical. But clearly, we've accounted for some potential headwinds in demand overall into 2020.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [32]

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

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [33]

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I'm sorry, Brian, what was the question and it is with respect to value? I'd like to mention, volumes, sales and earnings were up for the most recent reported period. We can't comment beyond March as they were on a 6-month reporting cycle and their processes were not established to create reporting outside of that 6-month cycle. We're working on improving that obviously to get them on Berry's quarterly reporting cycle.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [34]

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Okay. Got it. And then just separately, over the past year, you've seen a lot of cost increases on the nonresin side, categories such as freight. I know that recovering those costs can take longer than the resin cost. Are there opportunities for nonresin 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?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [35]

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Any time you have generally weaker market, it creates more competitive pressures inside your business, and it definitely creates a headwind, if you will, towards 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 verbalizing our cost structure, deploying resources around innovation and cost reduction, leveraging Six Sigma throughout our business.

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Operator [36]

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Your next question comes from the line of George Staphos.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [37]

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I want to go through a few questions here. We've talked directionally about the guide for 2020 relative to what we should know from prior forecasts. When we look at the -- it wasn't guidance, but the analysis you provided the last quarter, which was kind of a hybrid $2.178 billion of EBITDA for Berry and RPC in an LTM basis from September. We know RPC has been growing. You said that. That figure, the $2.178 billion did not have synergies, 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 any way 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 the 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-ons.

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [38]

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Yes. George. You bridged it, I think, very well, with again...

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [39]

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I had no numbers in there though, Mark. So that's what I'm counting on you guys for.

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [40]

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

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [41]

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Okay. Do you think we've seen bottom -- and 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 hit bottom in EM and HH&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 towards the March and then June quarter inflection points in 2020?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [42]

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No. I do believe that, and that -- there is some modest seasonality, I guess, you would have to consider with the December quarter, our fiscal Q1 being our weakest quarter. It's not dramatically seasonal, but I would also consider seasonality when you think about that.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [43]

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Okay. My last 2 real quickly. It sounds like consumer is doing well for you, Tom. You're getting the volume growth. You're talking about innovation. You're getting things qualified for next year. That's all good. Depreciation was adjusted lower. Can you remind us why we're seeing that effect in Consumer when fundamentally, we've seen 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 probably have mentioned in the past, I missed, but just wanted some clarification.

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [44]

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [45]

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Depreciation.

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [46]

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Oh, depreciation...

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [47]

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

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [48]

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Yes. Now look, we continue to work to become more efficient with our capital deployment, trying to purchase more flexible assets as things -- as there's products or things that occurred so that we can utilize assets to make other products. I think the business continues to find opportunities and ways to improve that. I'm confident that with the acquisition and combination of RPC, we will find additional opportunities.

In fact, just 1 month in, we've already identified a couple of opportunities where independently, the companies would have had capital deployment that have 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.

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [49]

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And in general, relative to the converting technologies that we use throughout the company now, this global platform has given us unique opportunity to share best practices and ultimately partner with vendors and converting companies and, ultimately, will bring the greatest value for Berry, as Mark said. We continue to be focused on aligning the businesses with as versatile an asset mix as possible. It has given us the opportunity to pivot from business A to business B seamlessly without hesitation and need for incremental capital. And we feel very good about that opportunity that's going to play out in the coming quarters and years for the company.

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Operator [50]

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Your next question comes from the line of Edlain Rodriguez.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [51]

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Just one quick one on Health & Hygiene. If I'm looking on Slide #8, I mean, I'm trying to figure out like those volume impact on EBITDA. I mean last quarter it was $1 million. In this quarter, it's $11 million. And volume is down almost the same amount for both quarters, like 6%. Like why such a drastic swing in the volume impact on EBITDA?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [52]

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Yes. So last quarter, we still had to lap the acquisition that we made of Clopay. That was a year ago, and we've lapped that 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.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [53]

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Okay. And on price declines that we're seeing in EM and Health & Hygiene, are those price just flow-through of lower cost? Or is there something deeper going on in terms of trying to be more competitive to recoup lost market share?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [54]

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In the case of HH&S, it's definitely predominantly pass-through of lower resin. In Engineered Materials, it's a combination of pass-through of 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 cost, which is about half of our cost structure, with those 2 businesses actually having a slightly higher component of resin of the total.

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Edlain S. Rodriguez, UBS Investment Bank, Research Division - Director and Equity Research Associate, Chemicals [55]

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Okay. And also in EM, when you've talked about like regaining some of the market share that you lost on the business, how exactly are you doing that to gain that business back?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [56]

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Well those are customers that we had previously, again, demonstrating our ability to deliver on time, every time and high-quality product. Historically, they were used to our ability to innovate with those accounts, and we're competing 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 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.

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Operator [57]

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Your next question comes from the line of Arun Viswanathan.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [58]

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I was just curious if there are efforts to continue to broaden into other products in HH&S outside of baby care? It looks like there's some structural weakness has been persistent for a little while. Maybe you could just update us on your efforts there.

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [59]

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So happy to. The last several quarters, we've been talking about first and foremost that, yes, we're a leader in baby, and the majority of the weakness that we're seeing is specifically in North America and that we've been making real efforts towards transitioning across geographies with faster growth rates as well as markets that have faster growth rates and higher growth rates, specifically adult incontinence, feminine care. We've had successes in biopharmaceuticals as well as higher-end specialty applications, so it continues to be ongoing. They're making very good progress, and as I said, I'm very pleased that as we've committed, as we get to the back half of 2020, HH&S turned positive, supported by capital investments that we've made in Asia that we've committed to previously as well as the portfolio pivot around incontinence as well as fem care. And as I said, real happy that we're well underway with the prequalifications and preselling our new asset in China, collaboratively with our end customers, and we feel comfortable that the value that asset is bringing us 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 was going to do in bringing the kind of value to our customers that they expect and that we expect it. So really pleased with that pace. Again, second half of 2020, we get positive.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [60]

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [61]

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Yes. Listen, we're similarly disappointed with the results though we're pleased with the progress we're making against some key deliverables, specifically share recovery, specifically pivoting our portfolio. The company has a long track record and history of delivering free cash flow and improving it 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 is going to expect, certainly around free cash generation. The organization as a whole, top to bottom, is continuing to be laser-focused around demonstrating to 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.

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Operator [62]

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Your next question comes from the line of Tyler Langton.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [63]

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Just had a question on cost recovery. I know previously you had mentioned that in fiscal 2018, you sort of had $100 million cost 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, does that still hold? And I guess, 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?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [64]

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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, it 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.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [65]

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Okay. 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 just standalone for Berry pre-RPC. So I'm just -- is that $160 million -- I guess, how sustainable is that as a cash tax rate?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [66]

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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.

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Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [67]

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Okay. And then just a 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 there be sort of potential upside or downside to that?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [68]

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Yes. We view that as a normalized number, certainly to the extent demand creates opportunity 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 pull 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 of that capital. But also get those -- there's also flex in that number to the extent the market factors change.

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Operator [69]

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Your next question comes from the line of Neel Kumar.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [70]

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In EM, and now that you've largely completed the material qualification activities, can you just talk about what type of benefit we should expect to see from this in terms of your lightweighting ability and resin flexibility?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [71]

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Well it's just part of our ongoing portfolio, the kind of flexibility that we're trying to embed in the company. It gives us the opportunity during periods of raw material inflation to qualify alternate raw material that minimize the impacts in terms of cost, gives us the opportunity to bring value delivery on customers who are ultimately interested in lightweighting their product to tie in with their sustainability efforts. And that will 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, tied to formulation changes, it's clearly advantageous. To our end customers, that provides them an opportunity to address their sustainability goals and objectives and then ultimately, it should lead to the greater market and market penetration and share gain for our company, which we are committed to maintaining and growing our share.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [72]

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [73]

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No. I do not expect it would have any impact on the growth prospects for RPC. We remain completely committed towards applying our capital resources towards a stable market as we can find with 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 2 companies simply comes from scale and frankly, the elimination and need for certain investments because we may already have that capability inside the system. We were very excited, I think, week 1, 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. A 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.

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Operator [74]

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Your next question comes from the line of Adam Josephson.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [75]

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Mark, just one last question on your EBITDA, the implied EBITDA guidance for next year. So based on the last 8-K, I think RPC's TTM EBITDA was about $785. Assuming the synergies are, call it, 50-ish, you split them across the next 3 years and then assuming you're divesting $25 million-or-so of the EBITDA from Seal For Life, that implies about legacy Berry EBITDA next year in the low 1.3s, which seems to fit with what you were saying about run rating HH&S and Engineered from the past quarter, Mark. Does that sound right to you, the low 1.3s for legacy Berry next year?

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Mark W. Miles, Berry Global Group, Inc. - CFO & Treasurer [76]

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There were some -- we're not going to break out specifics and to 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.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [77]

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Okay. And just a bigger picture question, Tom. So last 7 quarters, your organic EBITDA has declined. I know last year was primarily cost inflation, but it was also volume weakness. This year has been on 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?

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [78]

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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 and 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 as a low-cost producer. We're going to maintain and grow our share.

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Operator [79]

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

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Thomas E. Salmon, Berry Global Group, Inc. - CEO & Chairman of the Board [80]

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

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Operator [81]

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This concludes today's conference call. You may now disconnect.