Berry Global Group, Inc. (NYSE:BERY) Q1 2023 Earnings Call Transcript

Berry Global Group, Inc. (NYSE:BERY) Q1 2023 Earnings Call Transcript February 2, 2023

Operator: Good day and welcome to the Q1 2023 Berry Global Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker Mr. Dustin Stilwell. Please go ahead.

Dustin Stilwell: Thank you and good morning, everyone. Welcome to Berry’s first fiscal quarter 2023 earnings call. Throughout this call we will refer to the first fiscal quarter as the December 2022 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 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 in investor presentation on our website. Please note that in our commentary today and within our presentation, when we compare our results to the prior year quarter or full-year, we have adjusted to present on a constant currency basis and remove the impact of divested businesses to provide the appropriate comparable results. Reconciliations to reported results have been provided in our earnings release and the appendix of our presentation. And finally, a reminder that certain statements made today may be forward-looking statements.

These statements are made, based upon management’s expectations and beliefs, concerning future events impacting the company and therefore involves a number of uncertainties and risks, including but not limited to those described in our earnings release, our annual report on Form 10-K, and other filings with the SEC. Therefore the actual results of operations and financial conditions of the company could differ materially, from those expressed or implied in our forward-looking statements. Now, I’d 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. Turning to our key takeaways for the quarter on Slide 4. Our business delivered solid first quarter results including 3% operating EBITDA growth and strong adjusted earnings per share growth of 11%. Throughout the last two years, we have made concentrated investments to gradually pivot our portfolio into higher growth markets and regions. We have a robust pipeline of investment opportunities ahead of us in several areas such as food service, health care dispensing, and pharmaceutical markets, including sustainability focused customer linked projects. Also, we’ve seen significant cost inflation taken proactive pricing actions, invested in cost reduction projects, and work diligently on cost productivity across all of our businesses.

During the quarter, those cost reduction efforts along with a modest easing of inflation helped offset short-term soft market demand across our businesses. Furthermore, we continued our focus on returning capital and repurchased another $178 million of shares outstanding, nearly 3 million shares or 2.4% of total shares outstanding and expect to repurchase at least $600 million of shares in fiscal 2023. Additionally, we’ve lowered our long-term leverage target to 2.5x to 3.5x net debt to adjusted EBITDA. And finally, we are confident in our ability to sustain earnings growth and have reaffirmed our guidance provided on our last earnings call, which includes an 8% EPS growth target at the midpoint and strong free cash flow generation, which will continue to support our focus on investments for long-term earnings growth along with strong capital returns to shareholders.

Turning now to the financial highlights on Slide 5. The December 2022 quarter performance for both earnings per share and EBITDA met our expectations, including strong price cost spread, primarily driven by our cost reduction efforts. These internally driven actions were partially offset by a 6% volume decline, primarily driven by short-term softer market demand, which was in-line with what our global customers have reported. From an earnings perspective, operating EBITDA was up over 3% and adjusted EPS increased 11% from the comparable prior year quarter, including a $55 million benefit from positive price cost spread. As we’ve demonstrated historic and during the most recent quarter, we remain committed driving cost improvements, passing through inflation, and believe we’re well-positioned given our scale along with our ability to service customers from our facilities in close proximity to their location, which provides both cost and sustainability advantages.

During the quarter, we’ve taken additional actions to reduce our cost structure, optimize our assets, and further automate our facility, which will bring our total savings from cost initiatives for the fiscal year to over $100 million. In-line with our long-term strategy to provide strong capital returns to our shareholders, we returned $211 million to shareholders through both share repurchases and dividends in the quarter. Now, before I hand over to Mark, I want to review Slide 6 and what we’re focused on in both the near and long-term. We remain focused on driving consistent, dependable, and sustainable organic growth and 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 long-term growth, such as healthcare and the pharmaceutical markets.

Additionally, we will continue to invest and expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster growing end market along with continuing to invest in emerging market regions, we will further enhance our ability to provide consistent, dependable, and sustainable long-term growth. We’ve done a great job since our IPO in 2012 growing our emerging markets from less than 2% to now 15%. Longer-term, we believe our emerging market presence can be 25% or more of our total revenues. And lastly, innovation and sustainability are increasingly embedded in everything we do and we continue to believe this represents a great opportunity for growth and differentiation. These drivers when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capabilities give us the confidence we will continue to consistently deliver solid earnings growth from our stable portfolio of businesses.

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

Mark Miles: Thank you, Tom. I would like to refer everyone to Slide 7 for our quarterly performance by each of our four operating segments. Our businesses continue to perform well and focus on inflation recovery, and generating cost productivity, while driving long-term sustainable revenue and earnings growth. Our Consumer Packaging International division reported modestly lower revenue dollars, primarily driven by softer demand from our customers, partially offset by higher pricing from the pass-through of inflation. Demand was relatively stable across our consumer facing categories such as retail food and beverage with weaker overall customer demand in discretionary markets such as automotive and surface coatings. And the outbreak of COVID in China also negatively impacted volumes and earnings in the quarter.

Operating EBITDA was essentially flat as positive price cost spread offset softer customer demand. The positive price cost spread was driven by cost productivity, inflation recovery, and our focused effort to improve our product mix by increasing our presence in healthcare packaging, pharmaceutical devices, and dispensing systems. We continue to recover cost inflation through pricing actions and cost reduction initiatives while driving revenue growth from our sustainability leadership. Next, on Slide 8, revenue in our Consumer Packaging North America division was down 10% from the prior year quarter from lower selling prices as a result of the pass-through of lower resin costs in the U.S. and softer overall customer demand, primarily in our industrial markets.

We continue to deliver strong growth in our food service market as we continue to see conversion from other substrates to our clear polypropylene cup. We continue to add incremental supply for cups, including an additional manufacturing location for this technology as demand continues to outpace supply. Operating EBITDA increased by an impressive 23% over the prior year quarter, primarily driven by our internal cost reduction efforts along with continued inflation recovery and improved product mix. And on Slide 9, revenue in our Engineered Materials division was down 15% for the quarter, due primarily to volume declines in lower selling prices from the path to a lower resin cost. The volume decline was related to soft overall customer demand, including our European industrial markets.

Volumes were also impacted by our focused effort to mix up in certain categories like , along with customer destocking as supply chains normalize. Operating EBITDA was up an impressive 15% over the prior year quarter, primarily from our focused effort on improving sales mix and higher value product categories and internal cost reduction efforts. On Slide 10, revenue in our Health, Hygiene, and Specialties division was down 17% due to volume declines along with lower selling prices in the past curve of lower resin costs. We continue to see stable demand inside our hygiene markets, while portions of our business continue to see ongoing inventory destocking along with softer demand in our specialties markets such as building and construction.

Operating EBITDA was down 21% for the quarter as expected due to a timing lag in recovering inflation on costs other than polymer. We continue to pass-through these cost increases to our customers and expect earnings will improve sequentially. Next, our fiscal 2023 guidance and assumptions are shown on Slide 11. Today, we are reaffirming our guidance for both adjusted EPS and free cash flow. We have a strong track record of EPS growth, improving every single year as a public company and continue to expect between $7.30 to $7.80 of adjusted earnings per share, which at the midpoint would be another fiscal year record and our tenth consecutive year of delivering EPS growth. Additionally, we expect free cash flow to be in the range of $800 million to $900 million with cash from operations of $1.4 billion to $1.5 billion capital expenditures of $600 million.

Our cash flow year-in and year-out has been a dependable core strength and core value of our company. It provides us the opportunity to invest in our businesses to grow and become more efficient by returning capital to shareholders. As you can see on Slide 12, our capital allocation strategy is a return-based and includes continued investment in organic growth and cost reduction projects, share repurchases, debt repayment, and a growing quarterly cash dividend. In fiscal 2023, we expect to return $700 million or more to shareholders via share repurchases and dividends, including further reducing our shares outstanding by 8% at current valuation levels. During the quarter, we repurchased another $178 million of shares or 2.4% of shares outstanding and paid our first quarterly dividend, thus returning $211 million back to shareholders in the first fiscal quarter.

As Tom mentioned earlier, given our strong dependable cash flows and earnings, we have moved our long-term leverage range down to 2.5x to 3.5x as we continue to focus on driving long-term value for our shareholders. We believe we are well-positioned for continued value creation through both our resilient business model and strategic portfolio management opportunities. This concludes my financial review, and I’ll turn back to Tom.

Tom Salmon: Thank you, Mark. Our business model has proved resilient, including a broad portfolio of polymer-based packaging solutions with strong dependent on stable cash flows to allow us the flexibility to drive strong returns for our shareholders. Our in-house design centers footprint and build to serve local and regional customers and markets all while being both a top 5 global toolmaker and the top 5 recycler in Europe provides us with scale advantages and differentiation capabilities unmatched by our competitors. While the demand environment has remained choppy, we’ve been able to offset softer customer demand with stronger price recovery and productivity improvements. From our current viewpoint, we believe our industrial markets will be in-line with our global customers demand and remain challenged throughout much of fiscal 2023.

We will focus our internal cost reduction efforts and inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint to offset any demand challenges. We believe very stable and dependable portfolio will allow us the ability to provide earnings growth and demand stability as we had historically demonstrated. As you can see on Slide 13, we have consistently driven top-tier results in nearly all key financial metrics, including strong compounded annual growth rate for revenue, earnings, and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company. The targets we’ve settled over the past several years, including our focus on driving shareholder value continues to be our top priority.

Starting several years ago, in each of our four segments, we began investing more heavily in growth with the emphasis in faster growing markets and regions, while working to improve the mix of our product portfolio. As you can see on Slide 14, we delivered results at or above the peer average from these strategies and commitments. Historically, we have used the majority of our cash to reduce our debt and improve our balance sheet post an attractive acquisition opportunity. Now, we’ve chosen to make a concerted effort to keep our leverage in a lower range, providing us the opportunity to return the majority of our cash to shareholders via share repurchases and now similar to our peers, initiated a quarterly dividend. We believe our new long-term leverage range of 2.5x to 3.5x will further strengthen our balance sheet and be rewarded in the equity market over time and believe these strategies will continue to close our valuation gap, which provides a very attractive opportunity for investment.

Next on Slide 15. Since the RPC acquisition in mid-2019, over the past three years and including our expected use of cash in fiscal 2023, we’ve reduced our net debt by nearly $3 billion. Furthermore, in fiscal 2022 and fiscal 2023, we will have returned over $1.3 billion to shareholders via share repurchases, while also paying our first ever quarterly dividend. These uses of cash from debt reduction, share repurchases and dividends will total $4.3 billion of value returned to shareholders while growing our adjusted earnings per share more than 70% since the RPC acquisition. We believe our cap return model underscores our commitment to enhancing long-term value for our stakeholders and the stability and consistency of our portfolio. The RPC acquisition has provided substantial cost and revenue synergies over the past several years, and we believe there are additional attractive opportunities ahead.

The ability to leverage our combined know-how include sustainability and innovation, product development and technology has created significant value for shareholders. On Slide 16, we’re excited to announce a new international Center of Excellence and Circular Innovation Hub that will be located in Barcelona, Spain. This new location is designed to foster our One Berry spirit and demonstrates Berry’s commitment to global growth, sustainability and talent development. Several locations were considered for the new center with Barcelona being the preferred option, due to high scoring and international talent, sustainability, diversity, and economic indicators. Barcelona was elected recently as one of the best cities to live in the world. This new innovation hub will house an interactive and learning customer experience center, a showpiece for various designs and innovation capabilities and be a focal point for circularity sustainability underlining how Berry’s products are part the solution in achieving a net zero economy.

Furthermore, as you can see on Slide 17, through our strategic customer linked investments, innovation and sustainability have been a strong part of our value creation. We believe we are well-positioned to deliver significant value for our customers and shareholders through investments like these recent innovations presented here with an unmatched global footprint and design capability to support circularity. We’re proud to highlight a few recent innovations, starting with Berry’s SuperLock container that provides healthy spreads with an innovative and reusable packaging solutions, combining improved imaging and longer shelf life. Next, as you might have seen in a recent press release, I’m pleased to announce our collaboration with Coca-Cola to provide tethered caps in the European Union markets.

Berry was recently given a Prestigious Sustainability Award at PACK EXPO International for this circular solution. We became the first plastic packaging manufacturer in Europe to supply the Coca-Cola company with a lightweight tethered closure for its carbonated soft drinks in PET bottles. The new tethered closure for Coca-Cola is designed to remain intact with the model, make it less likely to be littered and more likely to be recycled. And finally, we worked together with a leading German dairy customer, Milchwerke Schwaben and met their sustainability needs and goals by providing 19% weight reduced product offering, while at the same time providing smart logistics and efficiency improvements for their filling lines. Innovation and sustainability are core strength of Berry.

We have leading R&D and material science capabilities and considerable expertise. When coupled with our unmatched scale and geographic reach, these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our global customers. Next, on Slide 18. I want to discuss the key investment highlights for Berry long with our long-term targets for our key metrics. We are a global leader across several manufacturing platforms with extensive innovation technologies and capabilities. With our more than 255 locations around the world, our scale benefits from both procurement and proximity to our customers, provide us with a low-cost platform, providing products to the largest CPG customers in our primarily stable non-discretionary market.

We have a proven history of earnings growth, as shown earlier on Slide 13, along with exceptionally stable and consistent set of cash flow businesses. Additionally, we’ve taken a sustainability leadership role as one of the largest plastic manufacturers in the world, evidenced by a portfolio of products, innovative with our customers and a focus on reducing greenhouse gas emissions supporting a net zero economy. Our long-term targets further evidence the consistency and dependability of our model, which includes operating EBITDA growth of 4% to 6%, EPS growth of 7% to 12%, and total shareholder returns of 10% to 15%. As you can see, over the past three years, we’ve met or exceeded these long-term growth targets and expect to similarly do so going forward.

Additionally, we expect our newly initiated dividend to grow annually, and we’ve updated our long-term leverage target to be in the range of 2.5x to 3.5x. We believe we can achieve these similar metrics while operating the business with lower leverage and providing consistent capital returns to shareholders. In summary, our strategic priorities remain unchanged. Our entire global team emphasis on working safely and servicing our customers remains our Number 1 priority and has made us a stronger, better, and safer company. We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth while recapturing inflation. At the same time, we remain focused on executing our long-term strategy of driving shareholder value, expanding our competitive advantages and delivering on our financial priorities to position Berry for long-term success.

I’m very pleased with the hard work of our employees, delivering solid results in the face of persistently higher costs and a dynamic global economy. Thank you all for your continued interest in Berry. Now, before we turn to Q&A, I want to note that we announced today that I plan to retire at year-end. As we make the transition throughout 2023, the company remains very well positioned to continue to deliver significant value for all stakeholders. With that, Mark and I will be glad to answer any questions you may have.

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Q&A Session

Operator: Thank you. First question will come from Ghansham Panjabi with Baird. Your line is open.

Ghansham Panjabi: Hi guys. Good morning. Tom, congrats on your announcement on your retirement. Yes. I guess, first off, on just the volumes down 6% based on your December quarter, it’s very, very similar to volumes being reported by the major CPG companies. Do you have a sense as to where we are on the inventory destocking cycle across your core end markets and maybe split that between consumer and also some of the industrial markets as well.

Tom Salmon: Yes. I think certainly from a consumer side, any time there’s uncertainty, the prudent measure they take is to reduce the inventory count and they frankly have higher expectations that we can deliver in smaller quantities on a more regular basis. I expect that to continue until there’s greater certainty in terms of specific cadence of consumer demand. So, I don’t expect that to change dramatically. We are certainly seeing some green shoots. I would describe it as demand improvement, being €“ in January. And as there’s more certainty, the destocking will become less prevalent in people’s print, if you will. From an industrial basis, we showcased that we expect industrial demand remain relatively sluggish for a better part of fiscal 2023.

Ghansham Panjabi: Okay. Thank you. And then maybe a question for Mark. On the EBITDA bridge for the first quarter, it looks like price cost was about a $55 million benefit. What are you, sort of embedding for that number for fiscal year 2023 relative to your EBITDA guidance? And I’m just asking because it looks like resin will start to be heading higher, sort of correlating with typical earlier seasonality.

Mark Miles: Sure. Thanks, Ghansham. Yes, I’d say on the price cost side, we have gone into the year thinking of 100 million. We’re now feeling better about that number. I think we’re thinking of more like 125 million for fiscal 2023, and that’s driven by the cost reduction activity that the company has taken action on.

Ghansham Panjabi: Perfect. Thanks so much.

Operator: Thank you. One moment for our next question. from the line of Anthony Pettinari with Citi. Your line is open.

Anthony Pettinari: Good morning and Tom, congratulations and best wishes on the next chapter. Just following up on Ghansham’s question. On the last call, you talked about full-year EBITDA guidance, assuming flat volumes with earnings growth coming from cost recovery and cost reductions. So, the accelerated cost reductions, which I think are now 100 million, should we think about that as maybe offsetting volumes a bit weaker than expected or maybe a weaker-than-expected view on volumes for the fiscal year? And if so, where is that €“ maybe where is that concentrated along the four segments?

Tom Salmon: Yes. If you consider the operating plan for 2023 primarily incorporate two areas, one cost reduction, other offset inflation with price. And clearly, any type of deviation we see on the demand front, will leverage €“ will variablize our cost structure to get it done. And I would say, the following. The company is performing on all cylinders right now operationally. We’ve made in the last three years alone over $250 million in capital improvements to remove over 5 million labor hours from our operations through deploying more automation from an energy efficiency and sustainability perspective, which is a huge component of cost. We’ve invested over $100 million to remove over 200 million-kilowatt hours from our operations.