Berry Global Group, Inc. (NYSE:BERY) Q4 2020 Earnings Conference Call November 19, 2020 10:00 AM ET

Company Participants

Dustin Stilwell – Head, IR

Tom Salmon – CEO & Chairman

Mark Miles – CFO & Treasurer

Conference Call Participants

Arun Viswanathan – RBC Capital Markets

Ghansham Panjabi – Robert W. Baird & Co.

George Staphos – Bank of America Merrill Lynch

Duffy Fischer – Barclays

Neel Kumar – Morgan Stanley

Adam Josephson – KeyBanc Capital Markets

Josh Spector – UBS

Anthony Pettinari – Citi

Gabe Hajde – Wells Fargo Securities

Anojja Shah – BMO Capital Markets

Salvator Tiano – Vertical Research

Phil Ng – Jefferies

Lars Kjellberg – Crédit Suisse

Jeff Zekauskas – JP Morgan

Kyle White – Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Berry Global Earnings Conference Call. At this time all participants’ lines are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [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, Dustin Stilwell. Thank you. Please go ahead, sir.

Dustin Stilwell

Thank you, and good morning, everyone. Welcome to Berry’s Fourth Fiscal Quarter 2020 Earnings Call. Throughout this call, we will refer to the fourth fiscal quarter as the September 2020 quarter.

Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today’s call, a replay will also be available on our website at berryglobal.com under our Investor Relations section.

Joining me from the company, I have Berry’s Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark’s comments today, we will have a question-and-answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time and then pull back into the queue for any follow-up or 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, a reminder that certain statements made today may be forward-looking statements. These statements are based upon management’s expectations and beliefs concerning future events impacting the company, and therefore, involve a number of uncertainties and risks, including, but not limited to those described in our earnings release, annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

Now I would like to turn the call over to Berry’s CEO, Tom Salmon.

Tom Salmon

Thank you, Dustin. Welcome everyone, and thank you for being with us today to discuss Berry’s September quarter and full fiscal year results. First, I want to take this opportunity to welcome Jill Rahman, to our Board of Directors. Jill is currently the Chief Operating Officer of the Greater Chicago Food Depository, with her past experience at Kraft and Conagra in packaging brand management, marketing and strategic planning. She brings a perspective and experience to our Board of Directors that will be very beneficial to our company.

Reflecting on fiscal 2020, we had a terrific year despite unprecedented market conditions and while integrating our largest ever transformational acquisition. I’d like to give special thank you out to our entire Berry team across the globe, particularly our essential frontline team members for their dedication helping us achieve record financial results and for meeting the critical needs of our communities and customers in this challenging environment, while helping keep each other safe. The resiliency and defensive nature of our end market was clearly evident this year, and the execution on the thing that we can control was exceptional.

Moving now to Slide 3. As we noted, our key strategic priorities in fiscal 2020 were, one, to generate profitable organic growth; secondly, to integrate the business acquired with RPC; and third, further strengthen our balance sheet. I’m very pleased to report success in all three priorities in fiscal 2020.

First, as Mark will provide more in detail, we generated better than expected quarterly and full year organic volume growth. With regard to the second priority, the RPC integration is progressing better than plan, including realized cost synergies which were 17% higher than expected in fiscal 2020. Additionally, we continue to develop long-term global commercial strategies that we expect to benefit us for years to come.

Third, we made significant progress towards lowering our leverage by a half a turn in fiscal 2020, ending the year at 4.3 times net debt to adjusted EBITDA. And lastly, we’re encouraged by organic growth pipeline, and are well-positioned to continue to deliver solid and sustainable organic volume growth, through the development and focused on our growing end markets through strategic expansion into emerging markets, and through growth opportunities driven by sustainability, all while being in a substrate that is growing, and it offers superior characteristics such as barrier, product safety, durability, clarity, design versatility, and the lowest carbon footprint.

Now, I will move to our number one core value on Slide 4, and that is safety. We fully understand that what we do here at Berry is a valuable part of the supply chain, making supplying products that are protecting each other, our friends, our families, and our neighbors and communities around the globe. Our number one priority and core value is the health and safety of our team members. We believe safety doesn’t happen by accident and everything we do at Berry starts with safety.

As you can see on the slide, we have an ongoing commitment to identifying, managing and eliminating risk and are very proud of our safety record, with an OSHA recordable incident rates significantly better than the industry average.

Turning now to a few highlights of our financial results on Slide 5. In the September quarter, we delivered 4% organic volume ahead of our already upgraded guidance with the full year delivering 2% organic volume growth. Additionally, in the quarter operating EBIT increased by 18% to $586 million, and for the full year increased by 41% to a fiscal year record of $2,157,000,000.

And finally, adjusted earnings per diluted share grew an impressive 42% versus the prior year to $4.85. These strong financial results are the byproduct of our entire global team’s focus on organic growth opportunities and driving cost productivity.

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

Mark Miles

Thank you, Tom. I would refer everyone to Slide 6. Fiscal fourth quarter reported sales were just over $3 billion. The quarter revenue included organic volume growth of 4%, partially offset by the pass through of lower resin prices to our customers in the sale of our Seal For Life business.

From an earnings perspective, the September quarter operating EBITDA increased by 18% to a quarterly record of $586 million. All four segments grew organic EBITDA in the quarter including contributions from synergy realization, cost productivity, and the benefit from organic volume growth.

Adjusted EPS increased by 77% to $1.59 in the quarter, which included benefits just referenced relating to EBITDA, along with interest expense savings from debt reduction of over $1 billion in fiscal 2020.

Looking at our fiscal year highlights, we achieved records for nearly every key financial metric, including $11.7 billion in net sales, operating EBITDA of $2,157 million, and adjusted EPS of $4.85.

As a reminder, we do not add back amortization of intangibles from acquisitions, which would increase our EPS by over $1.50. And we believe that should be considered when comparing Berry to other companies that make this adjustment.

Additionally, we significantly surpassed our free cash flow guidance, generating $947 million of free cash, a 24% increase versus fiscal 2019.

These results are driven by the outstanding effort from our entire global team during an unprecedented pandemic and while integrating the RPC business. These results are yet another example as you can see on Slide 7 of our proven performance over many different economic cycles. We have consistently driven top tier results in key financial metrics, including 20% compounded annual growth rates for both free cash flow and adjusted EPS.

Now looking at the quarterly performance of each of our four operating segments on Slide 8. For the quarter, our consumer packaging international division delivered sales of just under $1.1 billion and EBITDA of $202 million. In the quarter volumes were up 1% driven from strength in consumer centric end markets, partially offset by some COVID-19-related headwinds in industrial markets. We are encouraged by the positive volume results and are optimistic given the pipeline build and momentum in the business.

The CPI team delivered an impressive 17% increase in EBITDA, with costs synergy realization, positive product mix and cost productivity. Net sales in our consumer packaging North American division was $746 million, with a 6% increase in organic volumes, offset by the pass through of lower resin prices.

The 6% organic volume in the quarter was ahead of our expectations provided on our last earnings call, as we have continued to strengthen our core consumer businesses from products such as closures, bottles and containers. EBITDA was $160 million compared to the $137 million in the prior year quarter. The 17% increase was primarily driven by the strong volumes in the quarter in cost productivity, including synergies from the RPC acquisition.

Our health, hygiene and specialty division delivered sales of $604 million. The 6% increase included organic volume growth of 12% with growth in all four regions globally, partially offset by the pass through of lower resin prices, and the sale of the Seal For Life business. Segment volume were up high single digits, primarily related to organic growth investments with the balance benefiting from the additional demand for healthcare products.

EBITDA increased by $35 million or 42%, when adjusted for the sale to Seal For Life business. This improvement was driven by the organic volume growth, favorable product mix and cost productivity.

Lastly, sales for our engineers and material division were $587 million. The decrease was primarily attributed to the pass through of lower resin prices and a modest 1% decline in volume. As anticipated our engineer material segments saw a sequential demand improvement compared to fiscal Q3.

Growth in our consumer facing and some of our industrial businesses were offset by weakness in our canned liner business that serves away from home waste disposal. EBITDA grew 5% over the prior year quarter as the team delivered strong cost productivity.

Next on Slide 9, our free cash flow for the fiscal year was an annual record of $947 million, an improvement of $183 million or 24% compared to the prior year, driven by our growth in EBITDA partially offset by higher capital expenditures. This free cash flow is utilized to reduce our outstanding debt by over $1 billion in fiscal 2020, which lowered our annual interest expense by over $50 million and reduced our debt leverage from 4.8 times to 4.3 times.

We remain committed to maintaining a strong balance sheet and are consistently increasing a dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically.

Next, our fiscal year 2021 operating EBITDA and free cash flow guidance as shown on Slide 10, we’re targeting operating EBITDA of $2.15 billion to $2.2 billion, and free cash flow of 875 million to $975 million. The range of free cash flow includes $1.525 billion to $1.625 billion of cash flow from operations and capital expenditures of $650 million. The capital expenditure plan is a nearly $70 million increase from our fiscal 2020 spending, as a result of our growing pipeline of customer linked growth projects.

Excluding the incremental growth capital, our fiscal year 2021 free cash flow is expected to exceed $1 billion. This guidance also considers the divestiture of our U.S. flexible packaging converting business, which we have assumed as completed in the first fiscal quarter of 2021.

This business generated approximately $25 million of operating EBITDA in fiscal 2020. We expect another year of organic volume growth of 2%, which is supported by our robust and growing pipeline, increased level of capital expenditures and the positive trends and momentum we are seeing in each of our businesses. We also anticipate further strengthening our balance sheet in fiscal 2021, and expect our leverage ratio to close between 3.8 and 3.9 times at the end of fiscal 2021, consistent with our previously committed target of below 4 times post the RPC acquisition.

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

Tom Salmon

Thank you, Mark. Our economic resiliency and durability has proven true as it has passed challenge economic periods. COVID-19 as anticipated has impacted our global businesses, however, due to our diverse and stable portfolio, we have grown volumes in the face of these challenges. I’m very confident in our team’s ability to meet our near-term and long-term expectations and commitments to provide sustainable, profitable growth.

Across our company, our teams are performing at a high level with an exceptional sense of urgency to demonstrate organic volume growth by providing advantage products and targeted markets, as evidenced in our quarterly and fiscal yearend results.

On Slide 11, you can see some of the key drivers for organic growth and why we feel confident in our continued trajectory. First, we continue to pivot our portfolio and focus investments on faster growing end markets and global mega trends. Over the past several years, we worked diligently to increase our exposure in these areas. We will continue to focus on collaboration with our global customers to meet their growth and innovation objectives.

In order to further accelerate organic growth across our global footprint, we’ve made some small business movements between our segments at the beginning of fiscal 2021. These changes allow us to create a global rigid healthcare packaging and device business, in order to maximize our global customer relationships, manufacturing and technology knowhow. Our total global healthcare business has grown from $500 million in 2015 to now over a $1 billion in revenue.

Additionally, trends such as health and wellness, food safety and e-commerce continue to be growing opportunities for each of our businesses. We are supporting these trends by allocating resources and capital products, such as clean room, medical packaging to support the biopharmaceutical markets, enhanced Berry products to keep fresh food fresh longer, and increased resources to serve the growing e-commerce lifestyle just to name a few.

Secondly, through investment and acquisition, we’ve enhanced our portfolio and have moved into faster growth emerging markets. Emerging markets such as Asia, South America, Mexico, Africa and Eastern Europe, offering higher growth potential including scalability to manufacture products with stable demand.

Since 2013, we’ve increased revenue in these faster growth regions from $100 million to now over $1.5 billion. Through acquisition and organic investments, we now have 295 facilities around the world with a wide mix of technologies to meet the needs of our global customers.

Third, our substrate continue to provide many benefits that no other substrate can match. Plastics offer the advantages of lighter weight, clarity, design versatility, durability, along with a lowest carbon footprint compared to other substrates. For this reason, plastics has taken considerable share over the past 50 years and is expected to continue to grow for years to come.

And lastly, turning to Slide 12. On the sustainability front, which we have long considered to be core Berry’s operating philosophy. The industry has taken tremendous steps forward in the journey to eliminate plastics waste, while continuously innovating to meet desired performance requirements of consumers.

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Over the past several quarters, Berry worked closely with industry leaders and partners across the value chain, including waste management companies, resin producers and brand owners along with NGOs to improve the circularity of our products.

With our global footprint of scale, we’ve entered into off take agreement to recycle materials globally, and also expanded our own recycling operations in the U.S. and Europe, to help our customers to meet their sustainability goals.

Additionally, you can see the significant benefits by using plastics over other substrates, benefits during the manufacturing process, such as using six times less water, producing five times less waste, while generating two times less greenhouse gas emissions.

With the increased effort to create more circular economy to the use of more recycled materials light weighting, reformulation and tagging in identification, we see a strong and growing opportunity to provide products that not only provide the best customer experience with superior characteristics, but one that will have the smallest impact on the environment.

On Slide 13, we’ve highlighted a few of the amazing products we’ve designed with sustainability in mind. Just this year, our films group was awarded the Flexible Packaging Achievement Award for their design of the Kellogg’s Bear Naked Granola recyclable stand up pouch. This new pouch not only met the customer expectations, but with lighter weight, recyclable and improve the shelf life of the product.

Additionally, we partner with Mondelēz for their Philadelphia cream cheese product to provide a package made from advanced recycled material to achieve our common sustainability goals.

Furthermore, during the year, we were awarded an exciting paper to plastic conversion when of Conagra’s Swiss Miss Hot Chocolate new easy-grip container. This conversion includes an enactable [ph] space efficient tapered design. These are just a few of the highlights of the exciting products that exhibit our development, and intense focus on improving the recyclability, the reuse and reduction of plastics all with the goal to promote a more circular economy.

And finally on Slide 14 to summarize, we had an outstanding fiscal year meeting or surpassing every financial and strategic target we set out, all while working through one of the most unique and unprecedented markets we’ve ever seen. We delivered on all three key strategic goals we set forth for the fiscal year organic growth, improving our balance sheet and integrating the RPC acquisition.

In addition, we set financial records for EBITDA, free cash flow, revenue and earnings per share. We enter fiscal ’21 with both enthusiasm and confidence in our ability to grow organically as we’ve demonstrated this past year. I believe we’re well-positioned to see long-term predictable and sustainable growth, with customer linked capital investments that target continued expansion in both faster growing end markets and emerging markets.

I thank you for your continued interest in Berry. And at this time Mark, and I’ll be happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Andrew first question comes from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

All right. Thanks for taking my question, and congrats on the great results in fiscal 2020. Yes, so I guess I just want to start there, just on the free cash flow. Maybe you could help us understand what drove the significant upside in ’20, a little bit more. And then also the bridge to ’21. Is it possible that you could potentially hit the upper end of that range $975 million if resin prices moderate, or stabilize a little bit here? Thanks.

Mark Miles

Yes. Thanks, Arun. So a number of factors. I wouldn’t just point to one thing that over drove the cash, certainly volumes, earnings contributed, capital expenditure timing of the expenditures actually also benefited fiscal 2020, as we had targeted over $600 million of capital and that came in under $600 million. Interest expense also saw tailwinds as lower interest rates benefited the company. And then certainly working capital, I think the team has done a great job on continuing to drive working capital efficiency within the company. So I can’t point to one thing, it was multiple factors that drove the outperformance in ’20.

And with respect to ’21, yes, certainly, I mean, we gave a range and we’re going to work hard to do everything we can to maximize all the key financial metrics that the company follows and tracks including cash flow.

Operator

Your next question comes from Ghansham Panjabi with Baird.

Ghansham Panjabi

Hey, guys. Good morning.

Tom Salmon

Good morning.

Ghansham Panjabi

Looking back at fiscal year ’20, how much of the 2% core volume growth came from your new products in aggregate versus any estimated COVID benefit? There’s a lot going on with the end markets, et cetera. What do you think that number was for 4Q specifically? And then as you think about fiscal year ’21, how will you guide towards 2% volume growth kind of play out on a quarterly basis? I mean, obviously, comparisons will get tougher during the back-half of ’21. So any visibility you can share on the layering of new products would be helpful. Thanks so much.

Tom Salmon

Ghansham, we’ve been really for several years now focused on three primary areas of investment for the company. And we feel that investing around those larger megatrends with customer link partners is going to generate the most benefit for the company. Now, that being health and wellness, that being food safety, and preservation, keeping fresh food fresh longer, e-commerce, as well as all of those are ultimately guided by our look towards any opportunities to enhance our sustainability position footprint.

So, the majority of the growth continues to be around those three buckets and those three categories. For 2020, clearly the business generated very strong mid-single digit — low single digit growth, as was reported. And for ’21, we similarly expect that we’ll deliver that low single digit growth in the business.

In aggregate, still for our entire portfolio, you mentioned COVID, COVID is a flat to slightly positive impact to our business, the offset to that, clearly is the impact that COVID can have on some of the industrial base businesses. But we really feel that the portfolio is as resilient as ever, as demonstrated in 2020. It gives us a great deal of confidence going forward into ’21. And it’s really guided by the strength of the target positions that we built in all four of our businesses and the momentum that they’re exiting 2020, gives us a good deal of confidence in ’21.

Operator

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

George Staphos

Hi, guys, how are you? Congratulations on the progress in ’20. And hope you’re all doing well. First question for you, Tom. More of a bigger picture question and some around sustainability, which, the company is all fired up on. So there’s greenhouse emissions, there’s PCR usage, there’s light weighting, there’s recyclability. From the work you’ve done and the work your customers have done, what is the single most important sustainability attribute to the consumer? And what are you then doing in terms of marketing or product development around that metric? And then I had a follow on related to one of the businesses?

Tom Salmon

It’s a great question and you could probably ask a variety of different people, you might get different responses. But it literally came up this past week in one of our business reviews. And our end users continue to value the attributes of plastics. And what they’re looking for is different ways that we ultimately can impact the weight of the material that goes into providing them a viable solution that doesn’t compromise physical properties, to help them meet that objective.

And that continues and you know in our long history that has been a value that Berry has brought for many, many years, in finding ways to continue to improve and optimize design and that continues to be for our end users that we are exposed to, one of the most important sustainability attributes that we can bring to them. We are clearly leveraged across a variety of outcomes in terms of sustainability. We’ve referenced the investments that we’re making in North America as well as Europe around mechanical recycling.

We’ve talked about the off-take agreements that we’ve established to make certain that we have access to advanced recycled materials, so we can introduce those to our end customers. We’ve delivered on those and we’re closing applications in those materials. We’ve talked about ways like with Georgia Pacific that we can demonstrate a true circular economy and we’re doing that.

So we feel really good about where we’re at in terms of that journey. It’s still in the early stages, but at this point, plastics continue to be valued. Our end users who want to know how again we can continue to optimize design to maintain functionality while not compromising the integrity of the attributes we’re looking for, whether it’s clarity, whether it’s Berry properties whatever the case maybe and in the efforts ultimately reduce waste.

George Staphos

It’s interesting, Tom. So recyclability isn’t sort of key to the consumer on that, it sounds like?

Tom Salmon

It goes hand in hand, because the design always must incorporate they design for sustainability. So they’re accomplishing two objectives. Objective one is ultimately optimize and design functionality, while using less. Option two and components that expected as a year-over-year incorporating sustainability concepts in that design, so it can be more functional to recycle.

George Staphos

Got it. I want to go back to some of the questions that Arun and Ghansham teed up and more to the extent that you can comment more specifically on health, hygiene and specialty. And I just want to make sure I understood. So I thought you said that your growth in the quarter, or in the year two was about high single digits. And the remaining amount that got you to the 12% was the healthcare, but we’ll call it the healthcare bounce from COVID. Did I hear that correctly? Did I miss characterize anything?

Considering that and considering the high single digit growth, that you’ve got for HH&S on a secular basis, does that mean that we’re looking at pretty flattish growth in 2021, just because the comps are high quality comp are so strong? Thank you guys, and good luck in the quarter.

Tom Salmon

Thank you. To give you, I’ll start with your last first. For ’21 our outlook is that, our HH&S business will be up low to mid-single digits for fiscal ’21. As you’ve heard us discuss, we’ve made a conscious effort in that business to continue to retool and optimize the portfolio around higher growth components, like premium hygiene, fem care, adult and continents, as well as access to faster growing regions of the world. The team’s done a fabulous job in executing against that.

And also the opportunities that we’ve had to further invest in areas in the healthcare space, things like surgical drapes and gowns, had begun that translation in some of the developing regions of the world. So we feel really good about that.

So that business as we originally outlined, we thought that the business would be up in the high singles — or low single digit mid-single digits pre-COVID. And with COVID, it ultimately has taken advantage of some of the versatility of our assets to print the number that it did in Q4 at 12%. It really had a terrific 2020 in aggregate. The business is really well-positioned. We’re more global than we’ve ever been. We’ve got better penetration at key accounts than we’ve ever had. And the team’s executed in a very high level.

George Staphos

Thank you, Tom. I’ll turn it over.

Operator

Your next question comes from Duffy Fischer with Barclays.

Duffy Fischer

Yes, good morning, gentlemen. Two questions around the 2% growth. So one has to do with the $93 million, you call out in your guidance walk to next year. If you just — 2% is about $250 million that your margin, that’d be about $45 million-ish of uplift from volume. Does that imply that there’s kind of cost of $45 million to $50 million that you’ll get irrespective of what volumes do?

And then you just talked about HH&S and kind of what the macro you expect there. Could you walk through the SPUs within that 2% guide and just talk about the macros that you’re putting over that for 2021?

Mark Miles

The first part of your question, you got it exactly right. The cost save are lack the annualization of things that happened in ’20. But we didn’t get the full year benefit. So roughly half of that $93 million actually a little over half is coming from that. It’s just cost synergies that we’re run rating in 2021.

And with respect to your second question, yes, all four businesses, our outlook is for them to continue to grow low-single-digits in ’21.

Duffy Fischer

But I guess the question was more just around what do you expect from the macro world to get to that 2%? What could happen, I mean, what will you do?

Mark Miles

Yes, we’re fortunate. As Tom said, we’ve got a diversified portfolio. Most of our products are — 70% of our products are consumer everyday products, food and beverage, personal care, household products. And so we’re fortunate that we’ve got a diversified portfolio. You can look through past economic cycles, our volumes remain very consistent from period to period. And so I think, the macro while it’s important, I don’t think it would significantly change our result.

Tom Salmon

I think, a unique component to it as well is, we further globalized the business which is a benefit, and we’re exiting 2020 with a more robust target list by business, then we had going into 2020 is an example. So, it gives us a great deal of confidence.

As Mark said, the fact that the majority of our portfolio is nondiscretionary gives us a lot of confidence, given that the target position for growth is greatly enhanced in ’21.

Duffy Fischer

Great. Thanks, folks.

Mark Miles

Thank you.

Operator

Your next question comes from Neel Kumar with Morgan Stanley.

Neel Kumar

Hi, good morning. For CPNA, your 6% volume growth for the quarter came in well above your low single digit expectations. You talked about the cadence of volume during the quarter prep segment and what led to the upside. And how generally would you characterize demand trends currently in the foodservice space?

Tom Salmon

The CPNA is a really strong franchise inside our company, just completed its third consecutive year of organic volume growth. And I will remind it, typically inside a core, you may see ebbs and flows and they had a very high hit rate of new business in the quarter, which was a plus, continued strength in the grocery space, very strong performance and closures dispensing solutions.

And relative foodservice, it’s continued to improve. It’s a very stable point right now as the world’s opened up in terms of kind of modified reopenings, if you will. We continue to see improvement inside that space. But across really all segments of CPNA, they’re executing at a very high level. They continue to take advantage of this trend at some more at home consumption. That frankly, many of our end customers believe is going to be sustainable. But for the last three years, it’s been delivered, and we clearly expect 2021 will be its fourth consecutive year of low single digit organic volume growth.

Operator

Your next question comes from Adam Josephson with KeyBanc.

Adam Josephson

Thanks. Good morning, everyone, and congrats on a really good end of the year. Mark, one question on guidance, and I’ve a sustainability question. On the guidance, can you just talk about your price cost assumption for the year? I think in the appendix you talked about $25 million hit, because a resin cost timing, which I presumably mostly in the December quarter. But I think price cost has been $85 million benefit for you in fiscal ’20. Are you assuming just a $25 million drag in fiscal ’21 or something else?

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And then relatedly just the sequencing of EBITDA. Are you expecting any different mix in terms of 1H versus 2H than normal, just given that resin drag earlier in the year or not necessarily?

Mark Miles

Yes. On your first part Slide 16 in our deck has kind of a layout of our bridge from our 2020 actual to our guide for ’21. Some of the first row they are the synergies that we talked about. When we report price cost, some of that will show up in that price cost bucket. And as you mentioned that next row with respect to the $25 million that factors in timing lag, increases we’ve had in our primary raw material, which is plastic resin. There were several months of consecutive increases in that market.

So we built in some lags. We have a very efficient pass through process for passing through resin, but there is a slight modest timing lag in that. It will impact some of the December and there might be some trickle into March for some of the slower moving items. But you’ve got that right.

And then the prior year mixed benefit, which is the next row, that would also be in that price cost column. The pivot of some of the healthcare products have generated higher profits. We’ve got two quarters of benefit in our fiscal ’20 from that improved mix. In our guidance, we’ve got one quarter built into the low end of the outlook. So the extent the world stays the same, and this healthcare demand increase precipitates beyond the first quarter, obviously, that would push us higher on the range with respect to that specific category of the guidance, but that would also impact price mix.

So kind of a net of that Adam, short answer is, it’s kind of a loss, but it depends on how some of these factors come in over the course of the year.

Adam Josephson

Perfect. Thank you, Mark. And Tom, just on the sustainability topic. With respect to the recycled content, specifically, can you talk about how important that is to your customers in light of the pledges they’ve made? I was looking at the recent update or the progress report from Ellen MacArthur Foundation.

And you can see that all the CPG companies that have made these pledges to use call it 25% recycled content by 2025. And they’re well below that target in most cases. And I know, recycled resin is not abundant, and it’s more expensive than virgin resin. So can you talk about that issue, how important that is relative to all the other issues you’ve talked about on the sustainability topic?

Tom Salmon

Yes, I think it continues to be front of mine. I think there’s a number of ways to get there. We can get there via mechanical recycling, we can get there via in addition to the advanced recycling. So the energy and effort around using advanced recycling as a means by which to help them meet those goals and objectives. And at the same time, help eliminate plastics waste is an exciting development.

I said about it in past calls, the amount of collaboration from the industry around development of these technologies and knowhow is unprecedented. And, even inside Berry as well, we’re making more investments in North America, as well as Europe, just to your point with a lot of the aggressive goals that our end customers are asking for around sustainable solutions. It puts Berry in unique position that, we can offer materials that cover a range of solutions, whether that’s bio-based materials that we recently introduced this year, whether it’s circularization opportunities, whether it’s incorporating mechanical, [indiscernible] materials, or advanced recycling needs.

So, I think advanced recycling in my view, is going to play a big impact on that strategically. We like the fact that we become very comfortable with the new introductions of capacity that have been introduced, securing percentages of that so that we can work in collaboration with our end users to get them comfortable, and successfully close more business. Like we did with Mondelēz as a great example, with a premier brand, eliminating the barriers of risk or concern and then ultimately having a successful launch.

So it’s not going to be just one way that we get there. I think mechanical and the infrastructure development is also going to be supported by the advanced recycling, which is quite exciting. Every major resin company in the world in some form is focused on that.

And I’d be remiss if I didn’t give a quick advertisement for the alliance and plastics waste. But there’s anywhere from 11 to 15 different projects going on right now around the world, focused on infrastructure development, education, and demonstrating real monetized business models to ultimately scale. And more of those will be introduced, once we have the data that you guys can scour and then review.

But I’m pleased with the progress in that regard. And certainly that will be something that in due course, the alliance will be introducing as well. But long winded answer, but it’s not a straightforward solution, for sure.

Adam Josephson

Sure. Thanks a lot, Tom.

Operator

Your next question comes from Josh Spector with UBS.

Josh Spector

Yeah. Hey, guys, thanks for taking my question. You mentioned during the presentation and you have a slide in the back showing some of the segment realignment. You’re creating some more global business lines and healthcare products and films.

I was wondering if you could talk about, how those business would be managed differently. Is there any cost aspect that you’d benefit from? Or is it more growth driven? And from the outside perspective, when do you think we start to see some of the benefits of maybe that realignment? Thanks.

Tom Salmon

Yes. The creation of our global rigid healthcare business is exciting. We felt that given the global nature of the business harmonizing that under one leadership organization that’ll be led by Jean-Marc Galvez out of our CPI organization, will allow us ultimately to harness the manufacturing technology and commercial knowhow relationships to drive a better outcome in terms of growth faster.

Listen, we always look at one another on a year-over-year basis. So wouldn’t quote a number in terms of the improvement that we’re targeting. But we clearly believe this is an optimal way to manage that exciting growth category, which, by the way, is consistent with those megatrends we’ve talked about, that we can structure the business differently, not to focus on cost reduction, but to accelerate growth, differentiation, innovation. And I’m pleased with the collaboration with this global team, residing obviously throughout the world, and the progress we’re making in terms of their pipeline and opportunity with key end users.

So, it absolutely is the right thing to do. And I’m excited about the prospects, because it’s a business that we feel has a lot of runway, it’s going to provide benefit for our company for years to come.

Operator

Your next question comes from Anthony Pettinari with Citi.

Anthony Pettinari

Good morning. On the divestiture of the flexible converting business, I was wondering if you could talk about the rationale just quickly and maybe the margin and growth profile for that business? And are there any additional businesses that could potentially be non-core? And then just generally in your comments and presentation, there’s a big emphasis on organic growth, which is great. Should we view Berry as maybe potentially less interested in big acquisitions or bolt-on still potentially attractive? Just any kind of comments there.

Tom Salmon

Yes, the business we divested was a lamination pretty flexible packaging business. It served both food and industrial markets. And frankly, it allowed us to remove what was otherwise a channel conflict for our flexible packaging film portfolio, which has shown high single digit growth over the last few years. Surprisingly, not enough, but it’s supporting spaces like new e-commerce packaging, stand up pouches, barrier films and life where you heard us talk about. I look at this move similar to what we did in our Seal for Life divestiture. And again, it is consistent with our commitment to grow organically in spaces that we deem as core attractive. So it’s relatively a minor divestiture.

I would not say this, Berry, our three strategic priorities are, balance sheet improvement, delivering profitable organic growth in 2020, and then as well integrating RPC. We’re very fortunate to have an improving balance sheet. And we have an array of opportunities for us to deliver shareholder value.

And so I wouldn’t say anything, “is ruled out,” but our priorities, clearly as you can see, by our results, and our outlook are to continue to improve the balance sheet, deliver on their organic growth commitment and execution that we demonstrated in 2020 in 2021 and beyond, and continue to find ways to optimize what we do in terms of supporting megatrends like e-commerce, health and wellness and food safety.

So that’s where you’re going to see the array of capital investment. For that end, we’re very excited about the pipeline of opportunities that we have to do customer linked investments, where we’re supporting our key end users, helping them pull through, exciting opportunities for demand. And we’re excited about that position. We think the teams are in a very good place, we’re excited about where we’re actually in 2020 from a pipeline perspective. And we feel confident that we’ll deliver on the commitments that we’ve outlined in terms of 2021 for this call.

Anthony Pettinari

Okay, that’s helpful. And then just Tom, quickly, the investments that are driving that $70 million step up in CapEx. Is it possible to say how those are sort of roughly split out between the four segments or any sort of major projects you’d flagged that are driving that?

Tom Salmon

We’ve announced a couple of them. In HH&S, we’ve got a new $70 million of healthcare line in China that’s going on, that will support healthcare in Southeast Asia. So we’re really excited about that. But in general, across all the businesses, you’re seeing investments that support health and wellness, food safety preservation, e-commerce, all with an overriding banner of sustainability and how we can use sustainability as a competitive tool to deliver profitable sustainable growth.

Anthony Pettinari

Great, that’s helpful. I’ll turn it over.

Operator

Your next question comes from Gabe Hajde with Wells Fargo.

Gabe Hajde

Good morning. Tom, Mark, congratulations on a solid year. Real quick on CPI, and then I had a follow-up. But that’s a business where I feel like maybe from the outside world, it felt like a little bit of a black box given RPC had been fairly acquisitive, kind of in its existence. 1% volume growth came a little bit quicker than what we were thinking about it given even the headwinds on the more industrial side of the business. So can you talk about maybe with a little bit more granularity, where you’re seeing, I guess, business wins? And then maybe how sustainable that it might be encouraging from our standpoint?

Tom Salmon

Yes. First and foremost, we continue to be thrilled with that acquisition. It’s now part of Berry. Our team is comprised of Berry people who are focused on a common objective. And frankly, the caliber of the organization that we acquired is exceptional. The team did an amazing job in what was arguably a difficult growth environment to optimize profitability throughout the year.

And in the quarter with 1% growth, we saw the benefits again, of that strong stable portfolio around consumer non-discretionary support supporting food growth, healthcare. And we’ve talked about our goals and objectives around closures and dispensing solutions we make. And we are making terrific progress in that regard as well, another global business where best practices can be shared between CPNA and CP International.

So, we’re excited about this business. And, and clearly, as you’ve seen some improvement in the economies, and you’ve seen some improvement as well in the industrial base businesses. But really feel solid about that business, that team and their outlook for ’21. This is a true value contributor for our company to serve global customers with the footprint and core capability and the DNA of that team, we continue to be excited.

Gabe Hajde

All right. Thanks for that, Tom. And then I guess real quick, in terms of capital redeployment. I don’t know if you kind of addressed you talked about the elite side of the equation. But as you have visibility to be less than four times levered, would you envision maybe laying out a range for the investment community, I don’t know, sometime in the middle of 2021?

And then, are acquisition still part of the DNA? I would suspect that they are, but just kind of any update or framework you can provide, what you’d be looking for out in the market?

Tom Salmon

Yes. Anything we do, is always guided by what’s going to maximize shareholder value. It’s something that we talk to our Board of Directors about every single quarter. We’re excited to be able to give a range between 38-39 by the end of the fiscal year. As we get closer to that objective, clearly we will be in a better position to evaluate for ’22 and beyond what that expectation is in terms of our commitments, actually the marketplace.

And the reason I say that, at that time we’ll have to evaluate what the economic circumstances are, what the conditions are, the markets that we play, will all factor into that decision. But feel really good that we’ve executed against that strategic objective of balance sheet improvement at a faster pace than I think people expected.

And relative to M&A, now that’s clearly one of the components of optionality that we have. We have a number of things that we can consider. We can continue to pay down our debt. We can consider, all the other type of capital allocations up to and including M&A in consideration. But that is something we review every single quarter with our board and it’s a reasonable expectation you have as we get closer to this goal, being in a better position at that time to talk further about it.

Gabe Hajde

Thank you.

Operator

Your question comes from Anojja Shah with BMO Capital Markets.

Anojja Shah

Hi, good morning, everyone. It sounds like closures and dispensers continue to do really well. And I believe you said in the past that including RPC it’s now about a $2 billion revenue business for you. One, is that correct? And then two, are you thinking about further investment in that business?

Tom Salmon

It is correct. It’s about a $2 billion business. It’s a component of where we’re investing CapEx, because many of those products ultimately can support some of the mega trends that we’ve outlined in the past. And I’d argue the portfolio has been strong, whether its food, whether it’s healthcare related or closures and dispensing solutions, but clearly dispensing and closures is a global opportunity that we ultimately communicate quite often between North America and the international groups to serve our global customers. We’ll continue to invest and grow in that space for sure.

Operator

Your next question comes from Salvator Tiano with Seaport Global.

Salvator Tiano

Yes, hi. Couple of questions from me. On Koll’s [ph] little bit longer-term earnings potential. Firstly, on coast, unless I missed it but can you elaborate a little bit on this $25 million headwind from resin? What does it incorporate in terms of resin price and outlook? And also, has there anything changed with regard to the RPC synergies? I think the target was $150 million. How should we think about these two items?

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Tom Salmon

I’ll answer the last one and then Mark can talk about the assumptions on the resin side. We’ve maintained our guidance that we provided last time on RPC. Though extensively, we feel we’re in a really good spot in terms of delivering on that commitment. But more importantly, what we believe is going to be a benefit for our company, just the opportunity for growth synergies that are enabled by this global platform.

Clearly, we know what we saw in 2020, having a global value delivery capability in terms of 295 sites around the world, gave us an amazing amount of agility to ultimately allow us to execute and really demonstrate from a global perspective, what we think is best-in-class feed the market capabilities, and we think that’s only enhanced by CPI. And we’ll continue to take advantage of that to help support organic growth objectives certainly in ’21, and beyond.

Mark Miles

And the guidance includes all of the resin changes through the last several month, which would be October. And again, we have very efficient pass through. So, to the extent the resin market changes between October and the balance of the year, wouldn’t expect that to be significant.

Tom Salmon

And also the teams did a nice job in 2020, making good progress in terms of terms and pass through mechanisms. As Mark said, this is a pasture extensively for us, but we’re really good position in terms of that especially with higher utilization rates, and a richer pipeline. And again, similar, what RPC is enabled is for Berry to have a global marketplace to ultimately to procure key raw materials.

Salvator Tiano

Perfect. And just a little bit on 2022. It will be too early, but as we try to think about your long-term free cash flow and EBITDA potential. Is it safe to say that based on the bridge, you have roughly $50 million of low hanging fruit of EBITDA growth in fiscal ’22, even without any volume or additional synergies? And on the free cash flow, at which point do you think it’s going to come down closer to what would be a more typical sustainable level? And would that be around $500 million, I guess?

Mark Miles

Yes. I mean, we remain committed to growing our business, both topline and bottom-line, again, low single digits. We remain committed to doing that.

In terms of cash flow, we do still have some integration related costs that are impacting ’21, that we would expect again to go away in future years. And then as we continue to pay off debt, we’re continuing to reduce our interest cost, which helps drive further free cash flow generation.

Salvator Tiano

Okay. Thank you very much.

Operator

Your next question comes from Phil Ng with Jefferies.

Phil Ng

Hi, guys. $82 million of positive price cost in the quarter was really impressive and then step up sharply from the last few quarters. Anyway to kind of tease out whether that improvement was perhaps upside on synergies or some of the good work you’re doing on productivity. And did you start seeing some resin headwind already in the quarter?

Mark Miles

Yes. I think component of that was certainly synergies help drive part of that mix, again, benefited our HH&S business in the quarter. And then productivity was strong, it helps when the plants are full, when they’ve got volume, that certainly is a catalyst for productivity. So those are kind of the three big buckets, probably a little more towards the synergy side, if you’re slicing and dicing it, and I think we gave the mix benefit, we estimate to be about $25 million in the balance being productivity.

Phil Ng

Okay. Outside of mix, it sounds like most of the gains you saw in the quarter was sustainable, maybe you get a little headwind on resin to start the year. That’s great. And in terms of your CPI and EM segment, I mean, it’s got a little more industrial exposure there. Any color on the cadence from a volume standpoint in the quarter and how trends are shaking out in October? And do you have any — have you seen any impact from just your broader portfolio overall, with the uptick we’re seeing in COVID cases, whether it’s Europe in the U.S.?

Tom Salmon

So industrial for both CPI and EM were improved. In engineer materials, it’s largely a distribution based business, so there can always be a component of pre-buying in that space. But nonetheless, we saw really strong sequential improvement there from Q3 to Q4. You saw improvement in businesses like automotive, in CPI as well as our automotive business in North America.

I think what’s interesting is this is that in Europe, even with a quote uptick in COVID cases, it’s a different type of shutdown and communities that are shutting down to a large extent most businesses continue to operate and where in the previous period, were you not deemed an essential business, those businesses literally shut down. And that’s not the case in terms of what’s happened in the fourth quarter, and what’s anticipated to happen here and in Q1. But both businesses showed improvement on the industrial side. And as hopefully we get closer to some range of normalcy, those businesses should continue to meter up.

Phil Ng

Okay, great. Thanks a lot.

Operator

Your next question comes from Lars Kjellberg with Credit Suisse.

Lars Kjellberg

Hello. Thank you. I just had a quick question. In terms of the shift to guidance to EBITDA, you mentioned confident a number of times, does that mean you’re now more confident in generating EBITDA as opposed to just talking about free cash flow, which there are elements what you can’t control?

But also in that free cash flow, you called out CapEx is $650 million. Can you share with us what you expect for cash interest expense and cash taxes and other items that you have shared in the past in free cash flow guidance [indiscernible]?

Tom Salmon

Yes, relative to the confidence for ’21, like I said, we’re exiting 2020 with a lot of momentum. Each of the businesses have stronger pipelines going into ’21. And the level of execution is very high. So I think, given the capital investments that we’ve made over the last several years to position ourselves in faster growing market spaces, faster growing regions of the world with advantage products, all guided and centered around our focus on sustainability, it puts us in a really good position.

So yes, we feel comfortable and confident that we’ll deliver on the commitments that we’ve outlined for 2021 on this call.

Mark Miles

With respect to some of your detailed questions on the P&L, I think interest on the cash side were in the $340 million range for the yearend taxes. We continue to believe 25% is a good effective tax rate for the company, consistent with past guidance we provided.

Lars Kjellberg

Thank you.

Operator

Your next question comes from Jeff Zekauskas with JP Morgan.

Jeff Zekauskas

Thanks very much. Two questions. You made very nice working capital progress and that your receivables and inventories were down, and your payables look like they were up on flat sales. Is there something unusual in that number? Or is that a good number going forward such that next year you do expect the working capital benefit or detriment or it will be about the same?

Mark Miles

Yes, I mean, as we talked about resin is a really efficient pass through. So to the extent there is inflation or deflation on resin, obviously, that changes our working capital with higher receivables, higher inventories partially offset by higher payables. And there were some increases late in the fiscal year that impacted that. But the team again continues to execute well on minimizing the working capital needs of the business. And those initiatives aren’t stopping, we’re going to continue to drive improvements, just as we have historically in our working capital efficiency.

Jeff Zekauskas

So is your base case that you’re going to use working capital or not?

Mark Miles

Yes. Our goal is generally flat year-over-year to be able to offset the growth that we see, expecting the business to be offset with working capital efficiency. That’s certainly our target on an annual basis for sure.

Jeff Zekauskas

Thank you.

Operator

Your next question comes from Kyle White with Deutsche Bank.

Kyle White

Good morning. Thanks for taking the question. A bit of a nuanced question. I want to focus in on the price cost a little bit. Maybe I missed this Mark. But if I tried to adjust for the synergies, the resin cost timing and kind of the mix impact you’re seeing on a year-over-year basis. I’m just trying to get a sense of what you guys are assuming for inflationary things such as transportation coatings, labors. Are you kind of expecting a neutral price cost on those things where you’re offsetting any inflation there with pricing?

Mark Miles

Yes, the latter. We expect productivity and price to offset any inflation. As I think you heard in the fiscal quarter, most recently completed Q4, we had strong execution in that regard. That was actually favorable pretty significantly. So we think a flat assumption is very achievable.

Kyle White

Great. That’s helpful. And then going to the free cash flow. I just curious, why such a large range $100 million versus an even smaller range on the EBITDA? Is it mainly just any fluctuations on the working capital side with resin, or anything else there?

Mark Miles

Yes. I mean, obviously, we’ve got $50 million of range for EBITDA which would obviously fall to the cash flow. The remaining balance is exactly what you said, working capital and how resin ultimately cycles through the year can impact the ending working capital number.

Kyle White

And I guess if I could follow-up. To me it sounded like on the previous question, you’re targeting flat. But I don’t know, what are you actually targeting in your assumption for your cash flow this year?

Mark Miles

Yes, we target flat every year. The assumption for next year is essentially flat. We’ve got a small use, and I think it’s around $50 million for integration related costs and working capital in the aggregate.

Kyle White

Okay, that’s helpful. I’ll turn it over. Good luck in the year.

Mark Miles

Thanks.

Operator

Your next question is a follow-up from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

Great, thanks for taking my follow-up, guys. I just wanted to ask about the potential — the part of your portfolio that is potentially disadvantaged. What are your assumptions for food service and industrial next year within that 2% volume growth? Thanks.

Mark Miles

Yes. So the majority of our food service business is actually QSR. I mean, we certainly have some products that service in dining, but we’re over weighted towards quick serve restaurants, and we’re anticipating those businesses to continue to operate in fiscal 2021.

Tom Salmon

To that, the relationships that we have from a QSR perspective, we think we’re in a good spot. It continues to be a preferred means for people to dine out unquote, albeit that they’re getting their food through a drive up window. And the number of QSR that are actually preparing their restaurants and considering models that are drive-thru only, only further benefits our current mix of business inside that space.

And again, the products that we sell there, continue to have the attributes that they offer clarity and security as well, and it continues to be a very steady space for us. As we saw in engineer materials and CPI, as you see some improvement in terms of the reopening of the economies, you clearly begin to see the industrial businesses continue to improve. Automotive has had strong recovery in both engineered and materials or I should say, with our HH&S and CPI. And we expect that to gradually improve over time throughout the course of ’21.

Arun Viswanathan

Thanks.

Operator

And your final question is a follow-up from George Staphos with Bank of America.

George Staphos

Hi, guys. Sorry for coming in here late to finish up. But a question on capital allocation, really acquisitions. So, as we heard you today, and really the last couple of quarters, Tom and Mark, the company seems to be growing at least as well, if not more quickly than the industry. You seem to be very pumped about your sustainability products, and would probably put them here, I’m putting words in your mouth, at least in line, if not ahead of what your peer set would be offering. And you’re doing quite well for activity.

So when you look at making acquisitions, doesn’t that suggest that the bar has to get progressively higher? What kind of acquisitions would you be looking towards? I know, there’s no guarantees in life, but would it be small and more technologically driven? Are there larger deals out there that would be transformational at this juncture? And is there any way you could have us think about what the right return you would be targeting presumably higher and higher, based on the fact that you don’t really need to seem to need too many acquisitions, given your performance last few quarters? Thanks, and good luck in the year.

Tom Salmon

Thanks, George. The latter probably is true, but clearly, we’ll continue to evaluate those aspects that can drive and maximize shareholder value. And anything that we can do that we feel we can execute and deliver against that will allow us to have a better offering to meet the needs of our end customers, and our shareholders, our opportunities that we would take strong consideration in and around.

We are pleased with how our teams and I would be remiss if I didn’t thank our global organization for the way they’ve executed. And the way, they are executed their commitment around productivity, around growth, around operational excellence and around driving continued benefits around cost reduction via sustainable solutions.

So, feel really bullish in that regard. Suffice to say, pockets and areas of opportunity that enhance our position around health and wellness, around food safety and preservation, around e-commerce and sustainability, will continue to be areas of opportunity for us to continue to grow and expand our business.

Operator

Now I’ll turn the call back over to Tom for any closing remarks.

Tom Salmon

Thank you very much. I want to thank everybody for their interest. I’d be remiss, the business is exiting 2020 with very strong momentum. Pipelines that are robust just give us a high degree of confidence in meeting or exceeding our growth outlook and conviction that we’ve talked about. And as an organization, we’re continuing to pivot to an investing in and around higher growth regions and market areas. They’re just as we have around healthcare and premium hygiene, stack in, e-commerce and closures and dispensing solutions.

We do believe that our global platform is offering best-in-class speed to market with global capability. And lastly the creation for Berry of our global healthcare rigid packaging business, medical device platform. We believe will provide a business that’s going to generate higher growth for many years to come. Thanks for your interest in our company. Look forward to our next call.

Operator

Ladies and gentlemen, thank you again for joining us today. This concludes today’s conference call. You may now disconnect.



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