Berry Global Group, Inc. (NYSE:BERY ) Q1 2022 Earnings Conference Call February 3, 2022 10:00 AM ET

Dustin Stilwell - Head, IR

Adam Samuelson - Goldman Sachs

Angel Castillo - Morgan Stanley

George Staphos - Bank of America

Salvator Tiano - Seaport Research

Mike Roxland - Truist Securities

Mark Wilde - Bank of Montreal

Lei White - Deutsche Bank

Josh Wilson - Raymond James

Good day, thank you for standing by. Welcome to the Berry Global Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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

Thank you, and good morning, everyone. Welcome to Berry's first fiscal quarter 2022 earnings call. Throughout this call, we will refer to the first fiscal quarter as the December 2021 quarter. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today's call, a replay will also be available on our website 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 you to limit yourself to one question with a brief follow-up and then fall back into the queue for any additional questions

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

Thank you, Dustin. Welcome everyone and thank you for being with us today.

Let's begin this morning on Slide 4 where we've laid out our key takeaways for today. First, we are reaffirming our full year fiscal 2022 outlook. Despite the impact of ongoing unprecedented inflation and supply chain challenges across the world, the convergence of these continuing issues and the new Omicron variant negatively impacted earnings in the quarter with the strongest effect felt in the month of December.

Overall demand finished in line with our expectation, but could have been stronger had we seen improvements in supply chains. We have focused our efforts on meeting customer demands, while actively combating rising costs and investing for future growth in this dynamic macro environment

As we manage these disruptions, we are continuing to work alongside our customers to provide the innovative and sustainability focus products they require. I will highlight a few of these projects in my closing remarks, and they play a pivotal role and maintain our growth momentum in fiscal 2022 and beyond We are confident in our demand outlook and even more confident in our long-term strategy, our people, and strong leadership position in the market.

Next, delivering value to our customers and shareholders remains a top priority. We've been committed to a flexible and disciplined capital allocation strategy that balances returning capital to our shareholders and investing in our business for long-term growth through both organic and inorganic opportunities.

Our financial performance and balance sheet have strengthened considerably over the past several years. We are now at a solid position to return capital to shareholders, while still maintaining financial flexibility to execute our strategic plan, further strengthen our balance sheet, and invest in future growth.

As a result, as we announced earlier today, the company's Board of Directors has approved a $1 billion share repurchase authorization program, which replaces the existing authorization. We anticipate fully utilizing this new program over the next two to three years and expect to repurchase at least $350 million of shares of outstanding common stock in fiscal 2022 including the $50 million we repurchased in the first fiscal quarter.

This authorization demonstrates the Board and management's confidence in the company's future and its ability to generate consistent and dependable free cash flow. As we stated on previous calls, we are committed to a balanced capital allocation strategy to maximize shareholder value, which is supported by our strong free cash flow and will thoughtfully include continued investment to grow our business organically, grow through strategic acquisitions that will enhance our ability to grow organically returning capital to shareholders and debt reduction.

We are highly confident in our ability to generate significant shareholder value based on our historic track record and future growth prospects backed by a very strong order backlog an active pipeline of opportunities and a number of planned organic growth initiatives. We are optimistic and committed to our long-term organic growth strategy.

Next, let me turn to our number one core value on Slide 5 and that is safety, keeping all of our teammates healthy and safe. We have an ongoing commitment to identifying, managing, and minimizing safety risks. During the past few years, the pandemic presented many challenges across our global footprint.

Our global Berry team stepped up and took on the challenge by implementing to maintain new protocol, all while keeping each other safe, and in spite of these added challenges and operating during the pandemic, our safety performance has continued to show improvement and we're very proud of our industry leadership, delivering an OSHA incident rate below 1 for the fiscal year 2021, significantly better than the industry average of 3.7.

Our team's emphasis on working safely and servicing our customers in a challenging environment has made us a stronger and better company giving us great optimism on the company's future success.

Additionally, as you can see on the Slides, we have a strong commitment to ensure that we are providing better opportunities and bringing innovation to provide multiple lives to natural resources while heading many initiatives with industry and external partners to improve circularity and our carbon footprint.

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

Before we move ahead into the details for the quarter, please note that the prior year December 2020 quarter contained additional shipping days for our US-based businesses. When we discuss volumes, we have made the necessary adjustments to exclude the additional days and then provide a normalized data for proper comparison just as we did last year.

Additionally, we will compare the current period quarter to the pre-COVID quarter two years ago, the December 2019 quarter and will refer to this on a two-year basis. We believe this comparison provides meaningful and useful information to investors about the longer-term trends in our businesses and mitigates any impact that the COVID-19 pandemic that both benefited and negatively impacted portions of our markets.

I would like to refer everyone to Slide 6 now. For the first fiscal 2022 quarter, reported sales were $3.6 billion. Normalized sales were 18% higher than the prior year and up 30% on a two-year basis. Organic volumes were 3% lower than last year in line with our expectation as we recorded 7% organic volume growth a year ago.

When compared to pre-COVID levels on a two-year basis, organic volumes were up 4%. From an earnings perspective, we generated operating EBITDA of $457 million, which was down from the prior-year quarter primarily as a result of the product mix benefit realized a year ago, an unprecedented inflation and supply chain disruptions this year.

Despite these challenges, on a two-year basis, operating EBITDA increased 4% and adjusted earnings per share increased by 33%. These strong results over the past two years are driven by our focused strategy to invest organically in each of our businesses and strong execution in the face of significant cost increases in our primary raw material resin as well as inflation and other raw materials, freight and labor, on top of ongoing supply chain challenges.

Our employees around the world have shown an unwavering dedication to executing against our strategies, which has delivered 2% organic volume growth in fiscal 2020, 4% in fiscal 2021, and we expect another 2% in fiscal 2022.

And we have demonstrated historically and we'll again throughout fiscal 2022, we remain committed to passing through cost inflation and believe we are well-positioned given our scale to serve customers with our facilities in close proximity to our customers' locations, providing cost and sustainability advantages. Our ability to efficiently pass through inflation was demonstrated as our selling prices were over $700 million higher than the prior year, with a pass-through percentage of approximately 95%.

Now I'd like to turn to the quarterly performance by each of our four operating segments, starting on Slide 7. For the quarter, our Consumer Packaging International division delivered a 7% increase in revenue over the prior year and a 15% improvement on a two-year basis, including organic volume growth of 3%.

Regionally, we have seen modest positive volumes in developed markets along with stronger growth in emerging markets such as India and Eastern Europe. From a market perspective, categories such as food and beverage and food service have seen solid volume growth while industrial markets continue to experience some modest headwind related to supply disruptions experienced by our customers.

Operating EBITDA on a two-year basis is up 10%, primarily attributed to the organic volume growth and cost productivity, partially offset by the timing lag in recovering inflation.

Next, our Consumer Packaging North America division delivered a 40% improvement in revenue on a two-year basis including organic volume growth of 6%. Selling prices increased by over 30% versus the prior year from the pass through of inflation. From a market perspective, we have seen solid demand for food, beverage, and healthcare markets, partially offset from the impact of supply chain challenges.

Operating EBITDA on a two-year basis is essentially flat as the organic volume growth has been offset by the timing lag of recovering significant inflation. On Slide 9, our Health, Hygiene and Specialties division delivered a 36% increase in revenue on a two-year basis, including an impressive organic volume growth of 11% during the same period, partially benefited by strong demand in response to the COVID-19 pandemic.

In the quarter, similar to our other divisions, we saw selling prices increased significantly from the pass-through of inflation as expected volumes were modestly lower than the prior-year quarter as a result of strong year-over-year comparisons and our hygiene and health care markets. On a two-year basis, the segment benefited from organic capital investment and support a strong market growth in healthcare, hygiene and PPE-related products. Operating EBITDA on a two-year basis is up 13%, primarily attributed to strong volume growth, partially offset by the timing lag of recovery and inflation.

And lastly, our Engineered Materials division delivered a 36% increase in revenue on a two-year basis with a modest volume decline over the same period. In the quarter, we saw selling prices increased by 32% from the pass-through of inflation. Volumes were down modestly as the recovery in business was negatively impacted by COVID-19 along with the onboarding of new business were offset by supply chain and labor challenges. On a two-year basis, operating EBITDA was down 9%, primarily attributed to the timing lag of recovery and inflation.

Next, as you can see on Slide 9, we are reaffirming our fiscal 2022 guidance of adjusted earnings per share of $7.20 to $7.70 and organic volume growth of 2% as provided on our November earnings call. We are also reaffirming our full year free cash flow range of $900 million to $1 billion.

And as Tom noted, we expect to repurchase at least $350 million of shares in fiscal 2022 including the $50 million we repurchased in our first fiscal quarter. We are pleased with the efforts of our teams and the resilience of our business to reaffirm guidance given the persistence of inflation, supply chain disruption, and labor constraints.

As referenced on our last call, we remain committed to recovering the significant inflation we witnessed in fiscal 2021and here early in fiscal 2022. We anticipate from both an earnings and volume perspective, a stronger second half of the fiscal year as we continue to recover inflation, supply chains improve, and new business and capital investments ramp up.

On Slide 10, again for free cash flow, we continue to expect to generate $900 million to $1 billion. This includes cash from operations of $1.7 billion to $1.8 billion, less capital expenditures of $800 million. As we continue to see a strong pipeline and of growth and cost reduction projects with returns well above our cost of capital.

I'm extremely proud of our execution and delivering on our free cash flow guidance every single year since we started providing guidance nine years ago.

Our capital allocation plan is clear with a flexible return-based focus. We intend to use our strong dependable and consistent free cash flow to fund customer-supported investments to drive sustainable long-term organic growth together with active portfolio management that enhances our organic growth potential through strategic acquisitions and divestitures with the target leverage range of 3.0 to 3.9 times.

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

As you can see on Slide 11, we have consistently driven top-tier results in nearly all key financial metrics, including strong compounded annual growth rates for revenue, earnings and free cash flow and have grown our adjusted earnings per share every year as a publicly-traded company. Likewise, on Slide 12, you will see the significant value created for shareholders since our IPO, which is favorable compared to the S&P 500 returns.

Our business model is extremely resilient and includes the broadest portfolio of Packaging Solutions with strong, dependable, and stable free cash flows to allow us the flexibility to drive the greatest returns for our shareholders. We are very well positioned to continue to deliver significant value for our customers and shareholders.

The strategic choices we've made guide how we prioritize our investments into the business, and we're investing now in several areas that will continue to drive long-term organic growth such as the initiatives highlighted on Slide 13. We continue to invest in each of our businesses to build and maintain our world-class low-cost manufacturing base with an emphasis on key end markets, which offer greater potential for differentiation and growth, like e-commerce, healthcare, and pharmaceutical.

I'm very confident in our team's ability to meet our near-term and long-term expectations and execute on our commitments to provide sustainable, profitable growth. Near term, we are a dependable growing business that is supported by our robust pipeline of new earned and secured business, which we believe is enhanced as we increase our presence in these faster growth end markets.

In line with our focus on faster growing end markets, we commercialized our first U.S. comprehensive commercial scale clean room for our nine-layer blown film manufacturing line, which supports business applications in the fast growth markets of healthcare and pharmaceutical.

Next, we will continue to invest and expand our emerging market position in support of our unwavering commitment to global growth. We believe that by an increase in our presence in the faster-growing end markets along with continuing to invest into emerging market regions, we will further enhance our ability to provide consistent, dependable, and sustainable long-term growth.

We will continue to focus on our global megatrends as we expect emerging markets to grow faster than advanced economies, and we believe there will be a considerable demand for our protection products and regions with rapidly increasing populations and lastly, we remain uniquely positioned to provide a consistent stream of innovative new packaging solutions.

We continue to invest in global innovation capabilities and centers of excellence to capitalize on what we believe is one of our strongest opportunities for both growth and differentiation, that being the overwhelming demand for sustainable packaging solutions.

For example, we believe our recyclable polypropylene drink cup is the most widely recycled cup for quick-serve restaurants and convenience stores, having the ability to incorporate recycled content while maintaining the performance and clarity attributes our customers require. Our demand and growth pipeline for these products including other beverages, spirits products is strong, and we expect to continue to grow in these areas and capture share from alternative substrates.

In line with the strong customer demand, just recently, we announced a $110 million expansion for our clear sustainable foodservice packaging business. These investments are customer aligned and the clear design meet an increased demand for a cup it showcases premium brand image and beverage appeal while improving restaurant operational efficiencies and offering an effective sustainable packaging solution as compared to the other cup offerings in the market.

We are committed to remaining at the forefront of the industry and innovating to meet and exceed our customer sustainability goals. In line with these initiatives, as you can see on Slide 14, Berry has received a minus rating for our leadership action on climate change from the Carbon Disclosure Project or CDP, which is a not-for-profit organization that runs global disclosure systems for investors, companies, cities, states, and regions to manage their environmental impacts.

Berry is part of only 12% of companies in the plastic product manufacturing group, who have reached this leadership level. Additionally, Berry was honored to be named number 35 out of 2000 public companies on America's Most Responsible Companies presented by Newsweek and global research firm, Statista.

Further demonstrating our commitment to sustainability leadership, we recently announced our partnership in collaboration with TotalEnergies to make food packaging more circular and divert waste from landfills. This will help reduce weight and allow us to use more recycled plastic in our food and beverage packaging and health care products.

Through our collaborations with suppliers, we aim to provide customers with premier access to the in-demand sustainable resins like those already served in the European region. In conjunction with the multiple recent collaborations, we just recently announced our most ambitious sustainable packaging goal today as you can see on Slide 15, 30% circular content use across our fast-moving consumer goods packaging by 2030.

This is an increase from our original target of 10% and includes both recycled and renewable materials. Our new 30/30 goal aims to give natural resources multiple lives and introduce alternative renewable resources as the industry continues to pivot towards recycled and renewable resources. We look forward to continuing to lead the way in driving innovation and sustainability-based growth and announcing many more opportunities over the next several years.

In summary, Berry delivered solid first-quarter results in the face of supply chain challenges and persistent inflation. This leaves us with much work to do for delivering on the expectations that we had provided for the balance of the year, and our teams are ready for the challenge.

As Mark stated earlier, we are confident in our fiscal 2022 plan for both volumes and earnings as we continue to recover inflation, experience supply chain improvements, and see new business and capital investments ramp up in the back half of this year. We are very proud of our accomplishments in achieving our stated goals set forth in May of 2019, including growing organically, integrating our most recent acquisition, and deleveraging the balance sheet.

These results, along with our expectations going forward including generating $1.7 billion or more cash flow from operations to continue to allow us to drive sustainable and consistent organic growth are the result of the resilient business model and the hard work and perseverance of our entire team globally.

We will continue to focus on driving organic growth supplemented by inorganic opportunities while providing more consistent return capital to create maximum value for all stakeholders. I thank you for your continued interest in Berry.

At this time, Mark and I will be glad to answer any of your questions.

[Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

As it relates to the 2% volume growth assumption for the fiscal year 2022, I mean obviously first quarter down three you have top-line comparisons for 2Q and 3Q and so I guess what are you seeing in the pipeline and end markets that is giving you confidence that you'll be able to hit those numbers. It seems like the world is more likely to normalize as the year unfolds post-Omicron, and I'm just curious, wouldn't that be a headwind for you in terms of volumes?

We have invested Ghansham in each of our businesses to enable low single-digit growth and frankly, we will see that sequential improvement play out in quarter two and beyond. The only segment that will build based on the difficult comp from a prior year that will face further headwinds would be our HHS business, but yet very pleased with this performance here in the first part of the year given the exceptional quarter one that it had, but it's really tied to the capital investments that we've made.

We anticipate onboarding at least $400 million of new revenue tied to capital investments going forward. Lastly, I would say the pipeline and backlog that we have as a business right now gives us good confidence going forward to achieve the 2%.

Okay. And then for my second question obviously price-cost was negative $41 million for the December quarter. Resin did decline in the quarter but towards the back end. So will that benefit sort of flow-through in the March quarter and if so, what does that price cost line look like relative to that $41 million?

We would anticipate being neutral price cost no later than quarter three.

Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

This is actually Bryan Burgmeier sitting in for Anthony. In the last quarter, you called out a $90 million headwind from the pandemic mix benefit largely fading away. Where does that stand now given Omicron and the U.S. government's plan for free mask distribution?

This is Mark. Good morning. We have assumed that, that benefit doesn't happen in fiscal 2022. In Q1 here, inventories were higher and so there was some inventory depletion that occurred in Q1 and I think we all certainly hope this virus is behind us, but to the extent inventory to get back in line and there is more variants or whatever that would be a tailwind for that business. In Q1, impact was very modest and we do not have any impact built into our guidance for the balance of the year.

Got it. Thanks for that. And on your goal for the 30% circular materials by 2030, can you talk about the supply and availability of those materials right now, how Berry as industry leader can help drive further availability of those materials in the coming years and then any incremental CapEx or impact to P&L that we should be mindful of as Berry ramps up their use those materials.

Berry has, I think, been a very strong advocate for the use of circular materials. The announcement relative to Total with an additional source of advanced recycled material is just adding to that position. We are hoping to secure close GPB 1 billion of advanced recycling material to satisfy our customers' needs.

So that pipeline continues to grow similarly. From a post-consumer recycle perspective, we've invested in our Plasgran facility in Europe that will contribute to our pipeline as well as we just recently joined the WWF bioplastic feedstock alliance and this is, I think, testimony of the fact that we don't believe one solution will solve the problem.

It's going to take a variety of solutions and the advent of a bio-based component will continue to further our efforts to reduce our dependence on fossil fuels. So it continues to grow and it's all supported by what is unprecedented and customer demand, which continues to be very robust. I don't anticipate beyond the norm capital investment that would be incremental beyond what we would normally do in that any capital investment would be to support an organic growth initiative as the priority.

Our next question comes from the line of Jesse Zekauskas with JPMorgan. Your line is now open.

Thanks very much. In your guide you say that your shares outstanding in 2022 will be 139, which is flat with what they are and 2021 and you said that you'd also buy back $350 million worth of stock, which at $65 is about $5.4 million shares. So is there $5.4 million shares of issuance in shares and options in 2022 and are there similar numbers for 2023 and 2024 or is it two and a half. Can you talk about your share issuance?

Yes, I mean, certainly the timing matters that number is an average over the course of the year and so your assessment is correct and that basically, the shares purchased are offsetting incentive compensation shares, but the numbers are significantly lower than what you were coming up for us.

So maybe offline, we can work through the math, but that number is closer to $2 million than the $5 million, but I suspect part of it is again the way you're averaging it over the course of the year. That $5 million would depend on the timing of when you purchase it and again, that would be averaged over the course of the year, but we can offline go through the math within that.

Secondly in purchasing circular material, is it mostly polypropylene, is that where there is an easier avenue to get circular material or is it also significant and polyethylene?

Polypropylene is the primary area of focus but you'll see it across all polyolefins at some point, but polypropylene is the predominant polyolefin right now where the advanced materials are coming from.

And our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

Yes, thank you. Good morning, everyone. Maybe first, I was hoping to just clarify the price cost commentary that I thought I heard in response to an earlier question, neutral price cost by the third quarter, which would be similar to what you said last quarter, but I think last quarter you talked about resin being flat and resin has come off.

So I'm just trying to make sure I'm understanding, kind of, if something has actually changed there and if so, what is it, is it more freight, labor availability, just help me think about that price cost balance a little bit.

Yes, sure two things, One is, there has been some decreases in resin in the U.S. That same dynamic has not occurred in Europe where we also obviously have a very big presence, but effectively there is a benefit we're expecting to come through from that drop in resin from the guidance we provided a year ago and that's being offset by higher inflation in other categories such as freight, other raw materials, energy specifically in Europe, as you've probably seen in the news has continued to escalate.

Again, we're committed to passing those costs through, but there is a timing lag in passing through those incremental costs. So those two dynamics are effectively offsetting each other.

And on those non-resin-related costs, those maybe less contractual or the lag on how those can work through on pricing, just take longer. I'm just making sure I'm understanding the cadence.

Yes, that's a fair assessment.

Okay. And then maybe just quickly otherwise think about the operating environment and supply chain challenges. Did you have any volume issues or lost volume related to labor availability in your own operations or were customers not able to take volumes that you'd have otherwise anticipated based on labor and supply chain challenges in their operations?

I think it's a little bit of both. And I think you've heard other companies report, other major CPGs report disconnects in their supply chain and it ultimately creates a cascade down to us where orders at our plants may not be ultimately shipped or because the beginning raw material they may not be able to be made to meet that specific demand.

So it's a little combination of both. Clearly on the prime resins today, we're seeing improvement in those materials in terms of supply and availability, similar to some improvement as well on the specialty resin side as well, but we do anticipate that in the coming quarters, we will see continued improvement in those supply chains created a more steady state of operation reducing the amount of disruption to operations.

Our next question is from Angel Castillo with Morgan Stanley. Your line is now open.

Hi, good morning, and thanks for taking my question. I just wanted to follow along the lines of the raw material question. I guess, as we think about obviously, what we've seen with energy and oil prices moving higher, I think you've talked about keeping everything flat in terms of your assumptions for the guidance, but are you assuming also maybe some inflation, whether it's energy particularly in Europe or other areas as we think about the March quarter and perhaps a little bit beyond that?

Yes, no, that's fair. I mean I think the resin assumption we've assumed flat. But on the other costs as mentioned, a couple of questions ago into the response to that, we do have incremental inflation assumed for those other costs such as energy.

That's helpful and then just a quick clarifying one, I didn't see I guess an EBITDA table in the Slides, just curious if the range is still 2.25 to 2.35 that you're thinking about or have the kind of pieces within guidance kind of moved around a bit.

Yes, I think, look, we're committed to driving EBITDA growth here in fiscal 2022. Obviously, our guidance we provide with is with respect to full-year EPS and cash flow and we're committed to achieving, both of those as well as again growing our EBITDA organically in fiscal 2022.

Our next question is from Mike Leithead with Barclays. Your line is now open.

I guess just to kind of piggyback on that real fast. I guess you did provide an operating range last quarter, and I don't see it this quarter. So is it fair to assume it's lower now since you haven't reaffirmed it?

No, that's not the intention. We just, again, we have a Slide in there. We just had an update at this quarter.

Okay, fair enough. And then Tom, on the upsized buyback, I think in the release, the company highlighted rightfully the strong and dependable cash flow and desire to returning cash to shareholders.

So I guess can you maybe just give a bit more color on how the Board ultimately decided to go this route versus maybe starting a modest dividend or I guess even doing both with the steady cash flow you highlighted.

Yes, it's a balanced approach. We highlighted three primary objectives for the company. First and foremost been invest in our organic growth, secondly, finding ways inorganically to complement that and thirdly returning cash to shareholders in the form of the share repurchase. I think it's a very strong statement relative to the confidence that both management and the Board have in the growth prospects for our company.

And I think demonstrated by the commitment to repurchase at a minimum $350 million worth of stock in fiscal 2022 including the $50 million ASR, we've already completed, and this allows us to do all three of those things and again further support our organic growth goals objectives.

And our next question is from Josh Spector with UBS. Your line is now open.

Thanks for taking my question. Just curious if you would comment on, if you were at a stable resin environment and you recovered inflation as you expect to do over the course of this year, where could EBITDA have been in this quarter versus two years ago. I guess I look at that in the context that organic volumes were 4% higher. We should have more synergies from RPC in that base, but EBITDA was essentially flat, so can you help us think about what the right base would or could have been?

Yes, I'm just trying to think, there are so many moving pieces over that stretch of period. I mean I think certainly there were a lot of challenges over the holidays as you might suspect a lot of suppliers, customers took extended shutdowns over the holiday breaks. Last year, we had an extra week in there as well and ran solid over that time period.

So look, I would say it's probably in the $10 to $20 million range of incremental EBITDA that could have been and maybe even a little more when you think about cost inflation recovery, but probably somewhere in that order of magnitude.

Okay, that's helpful. And just within Engineered Materials, your comments on the year-over-year decline with supply chain issues, was that more you getting suppliers or is that more customers ability to take supplier shifting and how does that evolve now into the next quarter versus what you saw in December?

Yes, the business ultimately in terms of, from the demand perspective, was predominantly consumer films supporting the snacking and cereal category and you've probably read some transcripts of major well-known brands that had similar issues that we in turn were impacted by. I would say also though that the businesses that were negatively impacted by COVID may made strong improvements in line with our expectations.

And in this business, we continue to have about $70 million of new investment to support some of the higher growth markets like e-commerce that will play out over the coming quarters. So that's a little bit of the space insight into your material.

And our next question is from George Staphos with Bank of America. Your line is now open.

Good morning, thanks for taking my question, and thanks for all the details. I guess I wanted to come back to the overall outlook for the year. If you could give us a bit more in terms of your assumptions that are embedded in growth or the volume outlook for HH&S and also the cadence and seasonality of EBITDA. Did performance in 1Q come in as a company below expectations and in turn how are you making that up and how has it occurred over the quarters, so that you're maintaining your guidance?

George, thanks for the question. Each of our businesses ultimately have been invested in to deliver low single-digit growth. From a seasonality perspective, Q1 is traditionally soft this quarter and then we'd see ramp improved in Q2, Q3, and Q4 subsequently.

In fact, CPNA CPI, Engineered Materials, we continue to expect low single-digit growth, and we'll continue to see some headwinds in HH&S, which we anticipated again given the incredibly strong comp that we had in the prior year.

The backlog of opportunity, the pipeline of new growth is such that it gives us confidence that we have an improving dynamic going into Q2, Q3 and Q4, we can offset and mitigate some of those gaps, in addition to fully offsetting the resin inflation and other raw material inflation that we've experienced no later than Q3.

Yes, George on the seasonality, I mean, traditionally, our strongest quarter as you know is June, followed closely by September, then March and as Tom said, the December quarter is almost always our seasonally weakest quarter. It's typically around 21% for the full year from an EBITDA perspective.

This year maybe a point different than that for the factors that we've discussed here this morning, but generally pretty close to the kind of the normal seasonality trend that we see every year last year. I would say it was kind of abnormal year if you will, and part of that was just due to the fact that we have that extra week where every six or seven years, we have a 53rd week to our fiscal year.

Understood. Right. Thanks for that Mark and Tom. And just a follow-on regarding sustainability. You're obviously partnering with lots of folks, you mentioned Total today. I think there's something going on with PureCycle. Can you talk at all about which technologies that you're looking at right now seem to be the most promising in terms of your sustainability goals and the 30% that you articulate. What is that actually measuring, You say GBP1 billion, but I would seem to recall that 30% of your total resin buy would be higher than GBP1 billion. So help me understand the disconnect, what am I missing there. Thanks guys and good luck in the quarter.

Sure. It's 30% circular plastics across our fast-moving consumer goods packaging business by 2030, that includes post-consumer PIR and bio-based relative to technologies. I think you've seen that we're spreading ourselves across and to give us maximum optionality, both in terms of investments for post-consumer, advance recycled materials as well as the new alliance that we're in around bioplastics feedstocks as well.

It's going to take them all to help our end customers meet their goals and sustainability. That said, the technology that in my view personally, I believe has the ability to handle the largest amount of waste would be the advanced recycled technologies that are out there right now and it's very exciting.

We continue to work to secure additional feedstock and early on, George, we always said that our number one role in this demand creation. I think as a company, we continue to be able to deliver more and more examples how to incorporate these materials successfully in conjunction with our end users to meet their sustainability goals objectives.

And our next question comes from the line of Salvator Tiano with Seaport Research. Your line is now open.

Yes, good morning. So my first question is that, a bit about some of the new investments that you've been discussing over the past year including disposable wipes and films for e-commerce plastic mailers. And I just wanted to see if you see any risk to demand there given that when it comes to disposable wipes obviously in the long-term, we may go to an endemic stage.

And when it comes to plastic mailers it certainly comes to our attention that companies like Amazon have been using a lot of new craft paper envelopes instead of the traditional plastic mailers. So what are you seeing there and is there any risk that the demand may not be as strong?

Yes, great question. We continue to believe that the e-commerce space is going to continue to create incremental growth opportunities for a variety of technologies and given the current penetration that we have in that market, we expect that to be a growth vehicle for our company going forward.

And then relative to hard surface disinfectant wipes, this is a global market and the penetration since the pandemic when you contrast the demand levels versus the pre-pandemic period have grown exponentially. So we feel really good about our leadership position in that space in addition to translating that technology to geographies like Europe, where they were previously under-penetrated. So we're looking forward to that.

Great. And so for my second question, I wonder as you think about both organic investments in M&A, does it make sense to go a little bit beyond plastics to other substrates.

We're seeing a number of other large packaging companies willing to diversify more recently. Would that be something Berry would consider?

We continue to believe that plastics provides an amazing opportunity to deliver the future benefits that our end customers demand and our ability to ultimately incorporate unique design to minimize, await composition, as well as provide them the opportunity to have sustainable solutions to meet those performance criteria.

We believe we're uniquely positioned and if you consider the growth outlook for plastic substrates, certainly beyond the developed regions of the world in terms of per capita consumption, there is exponential benefit that leads us to believe we're in the right substrate.

That said, if there is opportunities for us ultimately to create value in other materials, we will certainly give that thought and consideration in the future, but at this point, we believe that clearly we're in a really good spot and the commitment we've made towards sustainable solutions is the best place to be because our end customers need it and they similarly value and benefit from the attributes of plastics and they want to see that continue well in the future.

Our next question is from Mike Roxland with Truist Securities. Your line is now open.

Thanks for taking my questions. First one, just how much inflation you experienced in the quarter relates to the raw materials versus labor. Obviously, labor and some of the costs maybe a little more stickier, so it's hard to recruit than raw materials. I just want to get a sense of the breakdown between the percentage that was raw material inflation in the quarter versus labor and other costs, maybe a little stickier.

Yes. Again, the largest cost for us is certainly resin, it's about half of our total cost structure. Labor is the second-largest cost category, followed by energy and freight. On a percentage basis, certainly resin moves the needle most significantly given that half of the total cost.

But if you're looking at it just as an inflation percentage by category, I would say some of the other categories have had very substantial inflation in excess of 20% in many of those categories that fall below the top four, but resin is really going to be the one that moves the needle for the company.

Thanks, Mark. And just wanted to get your thoughts just around the broader portfolio of businesses. As you constantly analyzed the portfolio, are there any businesses that you think don't have as well as a strategic fit within the broader organization, let's say, maybe like the business in Engineered Materials, obviously you mentioned this recently, the $70 billion of new investment to support e-commerce within Engineered Materials.

So as you have constantly evaluated the portfolio, would you look to target the areas where there are growth and would you consider getting out of areas where maybe there are less strategic fits?

Yes, we noted that in our earnings conference call of supplemental materials relative to our capital allocation that is part of our capital allocation, organic growth being number one and then number two being inorganic growth as well as the prospects for potential divestitures, if there is pieces of the portfolio, we think ultimately could have greater value for someone else and that is an active part of reviews that we do with our Board and management on a regular basis, is probably all I can say on that at this point.

And our next question is from Mark Wilde with Bank of Montreal. Your line is now open.

Thanks, good morning, Tom. Good morning, Mark, first of all, can you just tell us real quick like how much of an Omicron drag would you anticipate in the second quarter. Anyway to quantify - I think I was thinking of labor I guess.

Yes. It's a fair point. I mean, look, our teams are doing a great job, everyone is finding absenteeism as a result of COVID, and we're certainly not immune from that. We're certainly still going to have some headwinds in that regard in the current quarter. Last quarter, again, I think it was probably somewhere in the $10 million range. And again, that's a combination of that not just our own internal absenteeism. So I think it's going to still be in that range, would be my guess here in Q2.

Okay. For my second question. I wondered, Tom, can you just update us on a couple of issues around resin over in Europe. One this, these proposals for kind of resin taxes and then, what kind of impact have you seen, if any, and demand for any types of plastic packaging in Europe over the last two or three years. Is European seen to have moved faster on this issue than we have in North America?

They have moved faster and those that have embraced sustainability upfront are winning and that's clearly the stance that we took that we were going to embrace sustainability as a growth vehicle and lead in that market and we're doing just that, whether it's with what we announced today with Total on advance recycled materials or whether it's the internal investment we've made in post-consumer materials.

That's providing a huge benefit for us. That has also been matched by the continued investments that we make around designing for sustainability as well, things like on our dispensing solutions having it, all plastic solution that it makes it easier to recycle.

From a macro perspective on tax, in areas that we'd be impacted by a tax, that is getting pass along the consumer and it's not yet impacted demand because we have ultimately been able to showcase opportunities for continued productivity and weight reduction in some of those applications.

But I thought something just recently just came out in Spain that was really notable was that you know from a material, that being advanced recycling was removed from the taxation list in Spain, which I think is a great sign of the opportunity out there in terms of incorporating these sustainable solutions and materials to meet the CPGs global requirements and do it responsibly and sustainably, so it's a growth vehicle for our company.

Our next question comes from the line of Phil on with Jefferies. Your line is now open.

Good morning, Tom. Good morning, Mark. This is actually John sitting in for Phil. I appreciate all the details, and thanks for taking my question late in the call here. I just wanted to touch on a couple of things. I think you said that you expect in the guide, resins to be flat, I assume that's flat to January levels, but you got to break out some of the other assumptions that are built into your price cost guide of getting back to neutral in fiscal 3Q?

Sure. Yes, I know that your assumption is correct that it's January polymer costs and relative to other assumptions, we've got price increases but started taking effect in January 1, continuing again in Feb 1, just a couple of days ago and ongoing, right? So we're continuing to combat increased inflation with additional price increases to customers.

As we talked about earlier, we have very efficient pass-throughs on resin. The other costs are a little less efficient, but we're committed to passing them through. So I would say broadly our assumption is flat resin, increasing costs in other categories being pass through with the incremental price as the year progresses.

And are there any buckets that you, I guess, assume will improve by 3Q, thinking like free. I mean labor is obviously going to be on our next quarter but freight, energy, any of that coming down baked into the guidance or that's all continued to kind of stay flat to where it is.

Yes, it's a good question. Some of the other purchased items that tend to follow polymer. You can think about inks, some colorants, some of those have started to moderate and I'm referring to the United States. Following some of the recent reductions in resin costs, so some of those have some moderation built-in and that's actually happening. That's not a forecast. It's actually happening.

Got it. I appreciate the color. And then just jumping back over to the increase in your sourcing the circular resins, again, it's still very early in the process for sourcing these going out to 2030, but you noted that the premise for increasing your sourcing is really helping with some demand creation. Your customers are obviously looking to get more sustainable, but is there any direction in this early stage of what you're seeing, cost comparisons for the circular resins compared to your traditional polyolefins.

Are they at least as of right now, pretty in line or do you actually see potential for margin creation as you're able to increase your sourcing of circular resins and they become more in demand from your end customers?

So it's interesting during periods of inflation on virgin material, they become a lot more comparable. In periods of deflation, they become less comparable. That being said, the commitments externally that the brands have made around sustainability and content are driving adoption.

The great thing about these materials, they can be metered in, in different percentages to ultimately mitigate some of the overall cost impact, especially when it's incorporated in addition to new design iterations that might ultimately take out weight while not impacting functionality.

So I don't see this stopping by any means. In fact, the demand from the consumer packaging houses has been incredibly strong. They're pushing the industry for more choices and optionality for them to incorporate in their products, and I think just with some of them publicized clauses that Berry has made in this regard, these are very well-known global brands and our speculation is that the adoption rate will only continue to grow.

And as we continue to get further access to more feedstock, it will increase the supply and as the supply created, the cost will come down and the great news is it's all supported by demand and that is what early on we stated with our number one goal, to make certain that we are doing our part to create the necessary demand to support the capital investment and it's beginning to happen.

Our next question comes from the line of Lei White with Deutsche Bank. Your line is now

Thanks for taking the question. I wanted to follow up on the last one in regards to the alternative resin use. I'm curious if there is an opportunity to margin up when using that feedstock, but I'm also wondering is this just cannibalizing existing business or are you actually seeing new business wins and potential growth from that as well.

Both. I mean part of it is going to be a transition in some applications, but the primary opportunity near-term has been in new business.

And as the supply growth increases, I think you'll see it migrate into the core portfolio and we're going to do everything in our power to capture the appropriate value that we bring up to and including what we incorporate in terms of material, design, proximity of our manufacturing locations in which we're advantaged by being to put them in close proximity, reducing the environmental footprint by shortening the transit time. All those will become factors in terms of margin optimization.

Berry has a quite a good record I think over quite a long period and doing a very good job in terms of maintaining and growing our margins.

And then on the share repurchase. I appreciate the target for this year, but I'm just wondering, you'll be at the midpoint of your leverage target range by the end of this year. I guess on a long-term basis, should we then expect any kind of excess cash outside of M&A to go towards repurchases or do you see the need to further reduce your leverage beyond this year?

We are pleased to operate within our targeted range. And again, part of the rationale for this evolution in our capital allocation strategy was, it enables us to focus on those things that we think will maximize shareholder value, organic growth, inorganic growth as well as returning cash to shareholders, and we're able to do all of those while staying within that range.

Our next question is from Aaron Viswanathan with RBC. Your line is now open.

Great, thanks for taking my question, I guess I was just kind of curious if you could update us on how to think about resin within your system, both from a P&L and free cash flow standpoint. So in the past, I think you've noted that each penny is about $10 million on working capital each year, I guess, is that accurate. And then how do you think about on the P&L, just given some of the pricing and negotiated pass-through that you have on an annual basis if you could help us with that, that'd be great. Thanks.

Yes, sure. On the first part of your question there. With respect to the balance sheet and one-time kind of cash flow, the numbers you described are accurate. I think last year you saw our sales go up 20%.

This year, first quarter were up mid-teens again. So obviously, the impact on working capital was very modest last year as we took actions to mitigate the impact of the increase to the extent there decrease will have to make those decisions. But just as we said in our prepared comments, we're committed to achieving the cash flow guidance irrespective of what happens with polymer costs.

So, we're committed to achieving the cash guidance on the P&L side, which is obviously the important part. We have very efficient pass-throughs in both directions. When it goes up, it is fast as efficiently in the same thing on the way down. So we've done a really good job of mitigating that over the years.

We used to have a much longer lag. It's about a net one-month lag for us now and again it was much longer than that years ago and you can see that with the massive volatility in resin and you see very little impact on our results quarter-to-quarter.

So really proud of our team's execution there. Obviously, the inflation now we've seen in some of the other cost categories is pushing us to make further adjustments for those other cost categories that weren't necessary in the past. So we continue to work on that and proud of our progress to date.

Great, thanks. And then if I could follow-up just on the capital allocation standpoint you've provided that 350 for fiscal 2002 and $1 billion program. What are you seeing, I guess on the M&A side, is there any focus there? Would you expect to do anything transformative, and if not, what is the potential to see some upside on that repurchase number? Thanks.

As you noted, our supplemental materials inorganic growth was listed as the second most important component to creating shareholder value. We continue to be inquisitive and seek out opportunities to complement and support our organic growth goals and objectives, both in terms of targeted markets and geographies, relative to the size, transformative or otherwise, less important than, it is a part of our overall growth strategy and again, it's all going to be focused on how it complements our growth objectives long-term.

And our next question is from Chris Parkinson with Mizuho. Your line is now open.

Great, thank you, given all the commentary kind of on the ESC fronts in some of your efforts there. Can you speak to one of the agreements I think people find particularly interesting is done with Wendy's and Lyondell. In terms of your overall goals over the long-term, how important are these types of agreements to achieve them in terms of just overall having a collaboration model? Thank you.

Yes, we believe, whether it's in our foodservice space or any part through our businesses. having projects that are customer linked create the highest likelihood for success because those ultimately reduce risk because there's mutual commitment on both sides. So we're going to continue to strive to align our capital investments with customers to help them meet their growth objectives and find way to do it sustainably.

We're thrilled to have a partner in Wendy's and you should expect throughout in the near-term to hear more announcements and communications around similar partnerships that we will be thrilled to communicate.

Just as a quick follow-up just given all the puts and takes in 2022, when we think and step back and look at some of your growth markets, specifically HH&S and as an e-commerce just for those trying to dissect your longer-term assumptions on the volume organic volume fronts, do you have any updates in terms of newer products or anything we should be considering on extra? Just any color there would be appreciated. Thank you.

Yes, I'll remind you that HH&S grew before the pandemic. And we had made an active effort to pivot more of our portfolio to faster-growing components inside of nonwoven space, adult incontinence, premium baby and Fem Care, aligning our business around faster-growing geographies like China, Southeast Asia, pivoting more of the portfolio to things like in the healthcare space and areas to serve some of these developing regions that we're going to be converting from antiquated technology to contemporary one.

So that continues to be alive and well and gives us great excitement about that space, especially given has continued to success really from the great year we had in 2021. Similarly inside our Engineered Materials business, we continue to modernize and innovate that business, we continue to invest in areas like snacking and cereal that continue to be supported by a larger at-home consumption component of the market.

We communicated a new investment in a nine-layer line that will support barrier films and help replace PET films in Engineered Materials business. So yes, we have a tremendous pipeline. The capital investment we're making in our business continues to be robust and the opportunity set for us to continue that to drive and support the organic growth, continues to give us the ability just to maintain our outlook for growth in 2022 and beyond.

Our next question is from Josh Wilson with the Raymond James. Your line is now open.

Yes. Thanks for squeezing me in, couple of cash flow questions here. First your inventory turns got little worse in the quarter, can you speak to what drove that and also give us a sense of what the working capital assumption is within your cash from ops guidance?

Sure. Yes. Inventory built for a couple of reasons, one most importantly is supply to customers, we continue to build as we talked about seasonally Q1 is our weakest. So that's our opportunity to build inventory for the stronger upcoming seasons here, especially the spring and summer where many of our products. Just have higher volume rates and our assumption for working capital for the year is zero, we basically assume a flat working capital assumption for the year.

Got it. And as we think of your cash needs more longer-term, should we think CapEx in fiscal 2023 is similar level to what you're guiding 2022?

Yes, we continue to have a really strong pipeline of projects both on the growth and cost reduction side, and so we're excited about the opportunity set in front of us and we'll continue to update the market with respect to our capital going forward. But I think this year is not an abnormal year in either direction, tither high or low. I think it's pretty consistent with what we're expecting going forward.

And our last question is from George Staphos with Bank of America. Your line is now open.

Thanks for taking the follow-on. I'll make it very, very quick, you talked about some of the lags that you had on your other raw material costs. What can you do? And would you like to just the tracking of your adjusters for those costs away from resin or would there be some disadvantage that arise from the longer term, how do you think about that. Thanks and good luck in the quarter.

Yes, it is just some of those are tied. As you said, George, resin escalator, de-escalators and those types of Indices and frankly in periods like now where we may be temporarily disadvantaged, there's other times that we are advantaged.

Nonetheless, we are bringing all forms of inflation to our end customer partners as we prioritize supply above anything else during this period, they recognize that and we're looking to offset all the inflation that we're incurring to do during this time, given the unprecedented nature of it that we've been dealing with, so there will be continued work and effort, continue to optimize those agreements and there is no better time than now. So it's a fair question. we'll continue to work on it.

Listen, guys, thanks for everybody for your time and attention and we appreciate your interest. Look forward to talking to you next quarter. Be safe.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.