Berry Global Group, Inc. (NYSE:BERY) Q4 2022 Earnings Call Transcript

Berry Global Group, Inc. (NYSE:BERY) Q4 2022 Earnings Call Transcript November 15, 2022

Berry Global Group, Inc. beats earnings expectations. Reported EPS is $2.19, expectations were $2.13.

Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Berry Global Group 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 today Dustin Stilwell Investor Relations. Please go ahead.

Photo by Jonathan Chng on Unsplash

Dustin Stilwell: Thank you and good morning, everyone. Welcome to Berry’s fourth fiscal quarter 2022 earnings call. Throughout this call we will refer to the fourth fiscal quarter as of September 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 in the 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 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 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 and fiscal year on Slide 4. First, our business delivered solid full year fiscal results including record results for both revenue and earnings per share growing 10% and 7% respectively, coming off another record year in fiscal 2021. Secondly, throughout the last two years, we’ve seen significant cost inflation and have taken proactive pricing actions and invested in cost-reduction projects across our businesses. Our team has done an exceptional job and continue to make progress on both fronts. Third, during the year, we generated a substantial $876 million of free cash flow and returned $709 million to shareholders via share repurchases or approximately 90% of our total shares outstanding.

We continue to invest for long-term growth while making great strides towards our sustainability goals and we’ll continue to be ambitious with our commitments, which are leading to consistent opportunities to expand our relationships with our global customer base. Additionally, as you saw in our press release issued this morning, Berry has decided to initiate a quarterly cash dividend, which is a significant milestone for the company, while also increasing our capacity under our stock repurchase program to over $1 billion. And finally on today’s call, we will review our fiscal year 2023 goals and commitments, which include a continued focus on organic growth inflation recovery and reducing our costs along with the opportunity to deliver strong returns on cash to shareholders through further share repurchases taking advantages of our significantly undervalued share price.

Turning now to the financial highlights on slide 5. Our September quarterly performance was modestly below our expectations on revenue and EBITDA, which was primarily impacted by continued inflationary pressures and pockets of supply chain challenges which resulted in softer customer demand along with the strengthening of the US dollar. The company again demonstrated its ability to generate substantial cash delivering record free cash flow in the quarter. From an earnings perspective, EBITDA was up over 9% and adjusted EPS increased an impressive 18% from the prior year quarter including an improvement in price/cost spread of $58 million. As we’ve demonstrated historically and during the most recent quarter, we remain committed to passing through inflation and believe we are well-positioned given our scale along with our ability to service our customers from our facilities in close proximity locations which provides both cost and sustainability advantages.

For the full year we delivered revenues of $14.5 billion, a 10% increase and fiscal year record and we met our adjusted earnings per share target of $7.40. And finally we exceeded our most recent annual free cash flow guidance by $125 million driven by strong working capital management. Also we were able to delever for the third consecutive year ending the fiscal year at 3.7 net debt to EBITDA, which is our lowest leverage ratio as a publicly traded company. Additionally, as you saw in this morning’s announcement, our Board of Directors has authorized an additional $700 million for share repurchases in addition to our current program which has approximately $340 million remaining putting the new total authorization over $1 billion. We believe our shares are significantly undervalued and this increased authorization reflects our confidence in the outlook of our business our long-term strategy and the strength of our operating model and cash flows.

Before I hand over to Mark, I want to cover a couple of slides, specifically, slide 6 detailed our original fiscal 2022 guidance to where we ended the year. Fiscal 2022 provided some unique hurdles from an operations and demand perspective not to mention forecasting challenges throughout the year. We are very fortunate to have such a dependable and diversified portfolio which only saw modest headwinds on demand and enabled us to meet or exceed our guidance for cash flow and earnings per share. On slide 6, we have provided a comparison of our original guidance to actual fiscal 2022 results. As you can see the majority of the headwind was a result of foreign currency due to the strengthening of the US dollar along with softer customer demand which despite our very stable and diversified portfolio we weren’t entirely immune to.

In our consumer businesses, which represents 70% of our portfolio, demand remained steady. Our scale global end markets and product diversity provide a rather insulated demand profile for Berry. Both distribution and industrial markets did see some modest headwinds throughout the year in areas such as automotive, and building and construction. We anticipate these to recover as overall global markets improve. And lastly I’m proud of the agility of our teams working with customers as costs were consistently increasing throughout the fiscal year as a result of inflation. To put it into perspective costs increased over $1.6 billion during the fiscal year and we were able to offset these inflationary pressures. While we did end the year improved in price/cost spread, we have more inflation to recover and expect additional improvement in cost reduction benefits in fiscal 2023.

On slide seven, in both the near and long-term, we remain focused on driving consistent, dependable, and sustainable organic growth. 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, such as health care and pharmaceutical. 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 markets 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 more than 25% 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 that I’ll discuss in our later prepared remarks. Now, I’ll turn the call over to Mark who will review Berry’s financial results. Mark?

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Mark Miles: Thank you, Tom. I would like to refer everyone to slide eight for our quarterly and fiscal year 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 organic growth. Our Consumer Packaging International division increased revenue by 8% over the prior year quarter and 11% for the year, primarily from the pass-through of inflation and improved product mix. In the quarter, we saw relatively flat demand across our consumer-facing categories such as food and beverage, while demand in more discretionary markets such as automotive and surface coatings experienced some softness, along with the lockdown in China having a modest negative impact on our volumes.

On a two-year basis organic volume growth was 2%, driven by capital investments in growth categories such as closures dispensing systems and health care. EBITDA improved 10% in the quarter over the prior year driven by product mix improvements, inflation recovery, and cost productivity. Next on slide nine our Consumer Packaging North America division delivered growth in the quarter and a 14% increase in revenue over the prior fiscal year, which included pass-through of inflation and flat volumes coming off a strong 4% organic volume growth delivered in the prior fiscal year. We were able to offset softer customer demand with organic volume growth from recent capital investments. On a two-year basis organic volume growth was 3% as we continue to see strong demand from food and beverage markets including strong demand for our clear polypropylene fully recyclable drink cups used by quick-service restaurants and convenience stores.

EBITDA increased by an impressive 27% and 13% over the prior year quarter and fiscal year respectively as we made continued progress on inflation recovery improving our product mix and generating cost productivity. On slide nine, our Health Hygiene & Specialties division had a modest reduction in revenue for the quarter from the pass-through of lower polymer prices on flat volumes. For the year revenue increased 3% over the prior fiscal year primarily from the pass through inflation, partially offset by the moderation of advantaged products related to COVID. On a two-year basis organic volume growth was 2% with continued market growth in nonwovens. EBITDA was down around 25% for the quarter and fiscal year, as expected, due to the benefit from the pandemic-related mix a year ago and a 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 and will be back to positive price/cost spread on a year-over-year basis in the third quarter. And on slide 9, revenue in our Engineered Materials division was down 7% for the quarter due to lower volumes and 10% higher for the fiscal year primarily from the pass through inflation. The volume decline as anticipated versus the prior year was primarily related to our focused effort to mix up in certain categories along with softer demand from the distribution market which we believe included some de-stocking in anticipation of lower polymer costs. EBITDA was up an impressive 28% over the prior year quarter and 13% over the prior year from our focused effort on improving sales mix, of higher value, product categories along with cost inflation recovery.

Next, our fiscal 2023 guidance and assumptions are shown on slide 12. We are expecting to generate between $7.30 to $7.80 of adjusted earnings per share, which at the midpoint would be another fiscal year record and our 10th consecutive year of delivering EPS growth which I’m proud to report that we have done every single year as a public company. For comparison purposes fiscal 2022 adjusted for divestitures and recent currency rates was $7 per share. In our 2023 midpoint we would deliver another strong year year-over-year growth of 8%. Given the timing lag of inflation recovery, seasonality and timing of cost reduction actions we expect earnings to be stronger in the second half of fiscal 2023 similar to 2022. Our comparable EBITDA at the midpoint is expected to grow approximately 5%, which includes continued inflation recovery along with continued cost reduction benefits.

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, less capital expenditures of $600 million. Our cash flow outlook includes, headwinds from foreign currency and higher interest rates than fiscal 2022 and some incremental non-recurring costs from cost reduction initiatives. Our cash flow year in and year out has been a dependable, key strength and core value of our company. It provides us the opportunity to invest in our businesses to grow and become more efficient while returning capital to shareholders. As you can see on slide 13, our capital allocation strategy remains consistent and return-based and includes continued investment in organic growth and cost reduction projects, share repurchases debt repayment and the new quarterly cash dividend.

In fiscal 2023 we expect to return $700 million or more to shareholders via share repurchases and dividends, including an approximate 2% dividend yield while further reducing our shares outstanding by nearly 10% at current valuation levels. We believe we are well positioned for continued value creation through both our dependable and consistent free cash generation and strategic portfolio management opportunities which provide us additional capital for opportunistic share repurchases and further debt repayment. This concludes my financial review and now I’ll turn it back to Tom.

Tom Salmon: Thank you, Mark. Our fiscal 2022 results are yet another example of our proven operating performance over many different and sometimes challenging economic cycles. As you can see on slide 14, 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, including growing our adjusted earnings per share every year as a publicly traded company. This year we grew adjusted EPS by 7% and we expect fiscal 2023 to grow by approximately 8%. Our business model has proven resilient, including a broad portfolio of plastics packaging solutions with strong dependable and stable cash flows, to allow us the flexibility to drive strong returns for our shareholders.

From our current viewpoint, global market demand for our industrial markets will create a choppy demand environment. We will continue our focus on inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint to offset any demand challenges. Next on slide 15. Since the RPC acquisition in mid-2019, over the past three years we have reduced our net debt by nearly $3 billion, including over $1 billion this past quarter. Furthermore, in fiscal 2022, we returned an additional $709 million to shareholders via share repurchases, totaling over $3.5 billion of value returned to our shareholders, while growing our adjusted earnings per share more than 70% since the RPC acquisition.

Fiscal 2022 marks the third consecutive year we’ve reduced our leverage end the year at 3.7 net debt to EBITDA. Next, I want to quickly highlight the news we announced earlier today. We are proud to initiate this new quarterly dividend and authorize supplemental buyback program. This announcement is clear evidence of the work that the Berry teams across the globe have completed to position the company to succeed. Today, Berry is stronger than it ever has been and this dividend initiation underscores our commitment to enhancing long-term value for all stakeholders. Another element to our value creation has been the strategic investment choices we’ve made and how we prioritize our investment in our business. We are investing in several markets and product categories that we expect to drive long-term organic growth and complement our ongoing efforts of building and increasing resilient portfolio of products, including a few of those which we’ve highlighted here on slide 16.

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 health care, personal care and pharmaceutical. As you can see, we expect these strategic investments to contribute over $300 million in revenue over the next few years. We believe we are well positioned to continue to deliver significant value for our customers and shareholders through these investments, like those presented with an unmatched global footprint and design capabilities to support circularity. Our second dedicated mechanical recycling facility located in Europe and pictured in some of the slides, will be operational in Q1.

As the top five polymer recycler in Europe, this new facility will enhance our capacity for post-consumer recycled products that are demanded more and more by our customers globally. This site is the world’s first closed-loop system to mechanically process domestically recovered household waste polypropylene back into food-grade packaging, with the ability to handle 200,000 tons of material annually. Our investments in both innovation and sustainability provide us a competitive advantage and are increasingly embedded in everything we do. Innovating circular and sustainable solutions remain a key aspect of our long-term decarbonization and global growth strategy. We see increasing demand for these products, which include attractive design and sustainability advantages that we believe will support longer-term higher-growth opportunities.

Our advantages include the ability to both produce and source recycled resin globally along with our manufacturing footprint and capabilities to innovate and design the necessary product protection from a more sustainable packaging solution desired by our customers. We will continue to invest in globalization capabilities and centers of excellence to capitalize on what we believe is one of our strongest growth opportunities that being the overwhelming demand for sustainable packaging solutions. Moreover as you can see on Slide 17, we continue to make great progress on our sustainability targets and have committed to minimizing product impact by enabling 100% of our fast-moving consumer packaging products to be reusable recyclable or compostable by 2025.

We are continuously innovating and investing to work towards the global goal of a net zero economy. Next, we are proud to highlight that Berry has received the 2022 Energy Project of the Year from the Association of Energy Engineers for our milestone goal to eliminate 100 million-kilowatt hours of electricity from global operations. The emissions saved from this remarkable reduction in energy use are equal to CO2 emissions required to power over 16,000 homes for one year. Further from a collaboration standpoint, we partnered with Ingreendients to launch a bottle of its haircare product line made from 100% post-consumer resin. We also recently announced our launch of a new Mars jar for the well-known products such as M&Ms, SKITTLES and STARBURTS which will be lighter in weight and include 15% post-consumer resin.

And lastly, announced recently at PACK Expo Berry received the prestigious Sustainability Technology Excellence Award for our tethered closure with a tamper-evident band. This innovative packaging solution cuts down on waste by securing the closure to the bottle and improving recyclability. In summary, our strategic priorities remain unchanged. Our entire global team’s emphasis on working safely and servicing our customers remains our number one 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. I thank you for your continued interest in Berry and at this time, Mark and I will be glad to answer any of your questions.

Q&A Session

Operator: Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open. Ghansham your line is now open.

Ghansham Panjabi: Thank you. Sorry about that. Good morning, everybody. Hey, Tom, just on your comments on driving cost benefits through automation and asset optimization, can you just give us a better sense of — just expand on those comments. Is it targeted towards any specific segment across your portfolio? And then just a follow-up question for Mark in terms of the variances on price cost for fiscal year 2023 versus 2022. Anything you could share there?

Tom Salmon : Ghansham automation is a priority across the entire portfolio. Throughout the company, we’ve got over 125 dedicated technicians supporting automation projects as well as our internally proprietary fabrication capability. We’re partnering as well with third-parties to help us similarly execute those programs at a faster pace. We’re making capital investments to support lower-cost assets. For example, electric machines in Europe to ultimately reduce our energy costs and increase throughput yield as a result. So it’s all part of that up to and including what we’ve been doing around global asset optimization. That meaning, moving more and more business to more higher productivity assets that we have throughout the chain to lower our conversion costs, reduce energy dependence, while at the same time being able to successfully serve our customers.

Mark Miles : Yes, good morning Ghansham. With respect to price cost, as you probably noted, we have about $100 million of growth embedded in our EBITDA guide for 2023 on a constant currency and adjusted for divestitures assumed for the year. That growth is coming from price cost, a little more weighted towards the cost side. As Tom mentioned, we’ve got a lot of capital-driven cost reductions that are coming through. And then we’ve got some price recovery from inflation that we haven’t yet recovered from customers making up the rest of that $100 million.

Ghansham Panjabi : Okay. And then just last quarter you talked about perhaps carrying higher inventory levels just based on issues with rail freight movement and so on and so forth. Are things normalized? I’m just trying to understand how you outperform from a working capital standpoint.

Tom Salmon : Things have clearly normalized. We’re keeping an eye on the rail negotiations that are underway right now. We’ve got to backstop should anything materialize in that regard as well pivoting from rail to more traditional means over-the-road hauling. But nonetheless, not a concern it’s certainly normalized for us and we were happy to make it through the hurricane season relatively basis.

Mark Miles : And I would say Ghansham with respect to your question on working capital volumes as we mentioned came in slightly lower than we expected. And then obviously not the way we want to get there, but certainly that helped working capital as the year closed out. And I’d say our team has done a nice job of adjusting both purchases on materials as well as our finished good quantities as the year closed out in spite of these challenges we’ve had on the supply chain.

Ghansham Panjabi : Okay. Very good. Thank you.

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