Berry Global Group, Inc. (NYSE:BERY) Q4 2023 Earnings Call Transcript

Berry Global Group, Inc. (NYSE:BERY) Q4 2023 Earnings Call Transcript November 17, 2023

Operator: Good day and thank you for standing by. Welcome to the Q4 2023 Berry Global Group, Inc., — excuse me — Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Dustin Stilwell, Investor Relations. Please go ahead.

Dustin Stilwell: Thank you, operator, and thank you, everyone, for joining Berry’s fourth fiscal quarter 2023 earnings call. Joining me from the company, I have Berry’s new Chief Executive Officer, Kevin Kwilinski; and Chief Financial Officer, Mark Miles. Following Kevin 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 with a brief follow-up, and then fall back into the queue for any additional questions. A few things to note before handing the call over. On our website at berryglobal.com, you can find today’s press release and earnings call presentation under our Investor Relations section. As referenced on Slide 2, during this call, we will be discussing certain non-GAAP financial measures.

These measures are reconciled to the most directly-comparable GAAP financial measures in our earnings press release and presentation, which were made public earlier this morning. Additionally, we will make forward-looking statements that are subject to risks and uncertainties. Actual results or outcomes may differ materially from those that may be expressed or implied in our forward-looking statements. Some factors that could cause the results or outcomes to differ are in the company’s latest 10-K, other SEC filings and our news release. And now, I will turn the call over to Berry’s CEO, Kevin Kwilinski.

Kevin Kwilinski: Thank you, Dustin. Welcome, everyone, and thank you for being with us today. I would like to begin this morning by expressing my excitement as I embark in my new role as CEO of Berry. I look forward to working with our customers, suppliers, investors and our employees to build on this great company that has been growing over many years. I want to congratulate Tom on his retirement. Tom had many accomplishments as CEO over the past six years and was an industry leader around sustainability and the pursuit of a net zero economy. Through my first 50 days here at Berry, I’ve been working diligently with our team and Board to build upon Berry’s value creating opportunities by bringing new approaches and incremental focus to drive organic growth and process improvement-led productivity gains.

I look forward to visiting more of our manufacturing sites around the world to get a better understanding of our vast capabilities, and to accelerate the sharing of best practices across our footprint. With a proud 56-year history and a reputation for excellence in the packaging industry, I believe that the future is extremely bright for Berry. My excitement continues to build as I learn more about our opportunities, and I look forward to communicating our strategy, execution plans and accomplishments with you in the coming weeks and months. This morning, we have several topics to cover with you, including our fourth-quarter and fiscal-year results, our perspective on the overall market conditions around the world, and our outlook and plan for fiscal 2024.

Turning to our key takeaways for the quarter on Slide 4. Berry delivered solid full-year results for fiscal 2023, exceeding the expectations provided on the last call. We set another record for adjusted earnings per share and we beat our free cash flow guidance by over $100 million. Additionally, the company returned $728 million to shareholders through share repurchases and dividends. Our organization demonstrated its agility through both pricing and cost actions to partially offset the challenging and volatile global market dynamics characterized by ongoing inflation, soft consumer demand, and customer destocking. The company’s ability to maintain guidance for the fiscal year and to meet or exceed each metric under these circumstances is a strong example of why I am excited to lead Berry.

The teams did an excellent job implementing proactive and decisive actions, while pricing to recover inflation and stepping up their intensity and focus on our cost-reduction efforts to drive productivity benefits, including structural plant closures, labor management and asset optimization, all the while making strategic investments in high-growth markets such as food service, health and beauty, dispensing and pharmaceuticals with a strong focus on sustainability-linked customer projects. As you are aware, in September, we announced that we have initiated a formal process to evaluate strategic alternatives for our Health, Hygiene & Specialties segment to provide ways to drive long-term value to shareholders, which includes continuously evaluating our portfolio to ensure the company is best positioned to execute our strategic objectives.

We will remain a trusted supplier and partner to our customers and colleagues around the world in this segment. While there is no certainty on any formal decision or definitive timetable, we will provide updates if and when appropriate. Next on Slide 5. I want to emphasize our substantial levers to drive consistent, dependable and sustainable organic growth. Berry’s combined efforts include our ability to deliver continual cost improvements through scale advantages and innovation capabilities and provide confidence that we will consistently deliver solid earnings growth from our stable portfolio of businesses. Our strategic investments particularly in key end-markets like healthcare, personal care/beauty and for foodservice allow Berry greater differentiation leading to long-term sustainable growth.

These markets also offer higher growth and higher margins providing positive mix benefits for our overall portfolio. Our emerging market presence is also expanding supporting our commitment to global growth. Moreover, we are passionate about innovation and sustainability utilizing our product design leadership to continuously develop products that meet our customers’ needs and expectations. Our European leadership around sustainability gives us a global growth platform for innovative sustainable-focused products. The summation of these targeted investment areas will support growth in our stable, non-cyclical consumer-focused markets from 70% of our portfolio to our goal of over 80% long-term. And before handing over to Mark, I want to discuss Slide 6, and some of our specific focus investments for growth.

Berry remains deeply invested in both innovation and sustainability, which provides us with a strong competitive advantage. This product differentiation in these specific areas will drive our ability to take share from other substrates. We are investing in several markets and product categories that we expect to drive long-term organic growth, which complements our ongoing efforts of building an increasingly resilient portfolio of products, including a few of those, which we have highlighted on the slide. The increasing demand for sustainable packaging solutions aligns with our design capabilities in producing and sourcing recycled resins globally. Our leadership in these areas position us for higher-growth opportunities, supporting long-term value-creation for our customers and shareholders.

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

Mark Miles: Thank you, Kevin. Turning now to financial results highlights on Slide 7. We saw both volumes and earnings modestly surpass our expectations communicated in the previous quarterly call, while cash flow came in much stronger. Our dedicated teams have executed exceptionally well, achieving a positive price-cost spread by implementing robust cost reductions and optimizing our product mix across our businesses. This strategic focus helped counter the challenges of soft market demand caused by inflation and destocking initiatives. As volumes recover, we would expect an incremental benefit to earnings on more efficient assets. For both the quarter and the year adjusted earnings per share increased by 1% versus the prior comparable period with operating EBITDA essentially flat.

It’s worth mentioning that fiscal year ’23 marked Berry’s 11th year as a public company. And I’m proud to say, we have increased adjusted earnings per share every single year. Free cash flow increased 6%, finishing at $926 million for fiscal ’23. Our global teams delivered significant working capital savings to fund additional capital investment and restructuring costs that will generate future earnings. Over the course of the year, we returned $728 million to our shareholders through a combination of share repurchases and dividends. Including both our fiscal ’23 and ’22 share repurchases, we have reduced our total shares outstanding by more than $22 million shares, or 17% of our total shares outstanding. Simultaneously, we remained committed to strengthening our balance sheet and our substantial cash flow and earnings stability allowed us to reduce our debt leverage ratio by four-tenths in the fourth quarter.

In fiscal ’23, we lowered our long-term leverage target to 2.5 to 3.5 times, and end of the year, as expected, at 3.7 times, setting us on course to be within our targeted range by the end of fiscal ’24. I would like to refer everyone to Slide 8 for our quarterly performance by each of our four operating segments. The segment we review will focus on the year-over-year changes for fiscal Q4. Starting with our Consumer Packaging International division, revenue was down 6%, primarily from softer consumer and industrial market demand, partially offset by improved product mix to higher-value products. EBITDA was up 3% versus the prior-year quarter, driven by our cost-reduction efforts along with improved 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 9, revenue in our Consumer Packaging North American division was down 13%, primarily from lower selling prices due to the pass-through of lower resin costs in the United States along with softer overall demand, mainly in our industrial markets, partially offset by growth in our foodservice and consumer-container markets. For the full year, we delivered strong results in our foodservice product line, including double-digit growth as we continue to see conversion from paper and foam to our fully recyclable clear polypropylene cup. EBITDA was flat compared to the prior year quarter, primarily driven by our cost reduction efforts and our focus on higher-value products such as foodservice, offset by softer market demand.

And on Slide 10, revenue in our Engineered Materials division was down 16% due primarily to lower selling prices from the pass-through of lower resin costs in the United States and volume softness, primarily in European industrial markets, partially offset by growth in our consumer and custom film markets in North America. Volumes were also impacted by our focused effort to mix up in certain categories like consumer and transportation films. Consequently, our sales and advantaged higher-value products has moved from around 25% of Engineered Materials’ portfolio in 2018 to now over 40%. EBITDA for the quarter was modestly lower, primarily related to softer overall customer demand, which was offset by our continued and focused effort on improving sales mix to higher-value product categories and along with the growth in our North America consumer and custom films.

On Slide 11, revenue in our Health, Hygiene & Specialties division was down 17%, primarily due to reduced selling prices from the pass-through of lower resin costs along with softer demand in several of our specialties markets such as building and construction and air and liquid filtration, partially offset by improved demand in our wipes and adult incontinence markets. Throughout much of the fiscal year, the business saw ongoing inventory destocking in the healthcare sector along with softer demand in many of our specialty markets. EBITDA was essentially flat versus the prior year quarter as structural cost-reduction initiatives and improved demand in our wipes and adult incontinence markets were offset by weaker demand in some of our higher-value, healthcare and specialty markets.

Our consistent cash flows have afforded us the flexibility to deliver robust returns to our shareholders and as a 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 12, our capital allocation strategy is return-based and includes continued investment in growth markets, debt repayment, share repurchases, and recently increased quarterly cash dividend. During the year, we generated $926 million of free cash flow, 16% higher than our guidance and 6% above the prior fiscal year. This free cash flow was utilized to repurchase over $600 million of shares or 8% of shares outstanding, pay a $127 million in dividends, and reduce our outstanding debt by $400 million.

As I mentioned earlier, given our strong dependable cash flow and earnings, we lowered our leverage target to 2.5 to 3.5 times earlier in the year as we continue to focus on driving long-term value for our shareholders. And we expect to be within our reduced range by the end of fiscal ’24. In support of our ongoing commitment to further strengthen our strong balance sheet, already in fiscal 2024, we’ve extended $1.5 billion of our term loans to 2029, and have made voluntary prepayments of $200 million on our outstanding debt. We believe we’re well-positioned for continued value creation. Our strong cash flows have allowed us the flexibility to drive robust returns for our shareholders. As demonstrated on Slide 13, Berry has reduced net debt by more than $3 billion since mid-2019, along with more than $1.5 billion returned to shareholders through both share repurchases and dividends in fiscal ’22 and ’23.

In fiscal ’24, we anticipate a balanced capital allocation utilizing our free cash flow for debt repayment, share repurchases and regularly quarterly dividends. By the end of fiscal ’24, we expect that we will have returned an impressive $5.4 billion of cumulative net debt reduction and capital returns since fiscal ’20. As you can see on Slide 14, Berry’s history of driving top-tier results across various key financial metrics such as revenue, earnings and free cash flow highlights our consistent growth from the solid execution of our strategies. We remain committed to enhancing long-term value for all stakeholders by maintaining a stable and dependable portfolio. Our annual adjusted EPS CAGR of over 20% from 2015 to 2023 holds a leading position amongst our peer set and is well above the peer average adjusted EPS CAGR of 8%.

This concludes my financial review. And now, I’ll turn it back to Kevin.

Kevin Kwilinski: Thank you, Mark. Our fiscal ’24 guidance and assumptions are shown on Slide 15. We expect to generate between $7.35 to $7.85 of adjusted earnings per share, which at the midpoint, would be another fiscal year record and our 12th consecutive year of delivering adjusted earnings per share growth. Given the modest seasonality in the business, we expect earnings to be modestly stronger in the second half of the fiscal year, similar to fiscal 2023. In our fiscal first quarter, we expect adjusted EPS to be similar to the prior year, driven by a modest impact from the timing of inflation pass-through and volumes flat to slightly down, partially offset by the benefits of our cost-reduction efforts. As Mark stated, as volumes recover throughout the year, we would expect an incremental benefit to earnings on more efficient assets.

Given the easing of inflation and easier comparisons year-over-year, we expect volumes to improve as we progress through fiscal 2024. Additionally, we expect free cash flow to be in the range of $800 million to $900 million assuming cash from operations of $1.35 billion to $1.45 billion less capital expenditures of $550 million. Furthermore, and in line with our focus on driving long-term shareholder value, in fiscal 2024, we expect to prioritize repayment of debt to meet our leveraged target commitment, along with further share repurchases. We continue to believe our shares are undervalued and our repurchases reflect our confidence in the outlook of our business and long-term strategy. Lastly, it’s worth noting that our Board of Directors in recognition of our business’s resiliency, strong financial health and confidence in very future, has approved a 10% increase in our quarterly cash dividend, resulting in a new annualized rate of $1.10 per share.

As you can see on Slide 16, our long-term targets emphasize the consistency and dependability of our model with EBITDA growth of 46%, adjusted EPS growth of 7% to 12%, and total shareholder returns of 10% to 15%. Berry has consistently met or exceeded its targets over the past several years, and we expect to continue doing so in the future. Additionally, our dividend is expected to grow annually and we aim to achieve our updated long-term leverage target by the end of fiscal 2024. 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. As you can see on Slide 17, we will continue to operate with agility as we navigate current market dynamics to deliver long-term sustainable growth.

With a concentrated focus on driving more revenue through our sales and innovation pipelines, our commercial excellence approach is focused on increasing share of wallet with our customers. Additionally, we will drive non-CapEx productivity through world-class operational excellence to deliver conversion cost reductions over the long term of 2% to 3% per year, which will help to mitigate the impact of inflation and to expand margins. These initiatives, along with our strong cash generation, support our ability to ultimately drive strong returns for shareholders. And finally, we are optimistic about our outlook for fiscal 2024 as we anticipate positive impacts from the continued easing of inflation and the return of more normalized levels of customer promotional activity.

In my short time here at Berry, I want to underline how grateful I myself, and the entire executive leadership team are for the hard work of our employees. And I want to commit to all of our stakeholders that we remain dedicated to building on our progress and delivering greater value in the years ahead. As you can see on Slide 18, we have delivered volumes at or above peer average from our strategies. Also by maintaining a lower leverage range and returning cash to shareholders together with our inclusion into the S&P 400 MidCap, we believe we’ll continue to close the valuation gap presenting an attractive investment opportunity. Thank you for your support and interest in Berry. And with that, Mark and I are happy to address any questions, which you may have.

Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will be coming from George Staphos of Bank of America. Your line is open.

George Staphos: Thanks very much. Good morning everybody. Kevin, we look forward to working with you. Thanks for all the details. The question that I had to start — you talked about going out to visiting your facilities, which you’ve already been doing, improving productivity, sharing best practices, you talked about a 2% to 3%, I think, kind of annual productivity goal within the organization to offset inflation and ultimately grow earnings. Berry has always done productivity well. What will you be doing differently? What enhancements do you expect to have occurred under your leadership, partnering with Mark, in terms of that overall cost-out productivity effort? And then, I had a follow-on. And how should it materialize? And I had a follow-on.

Kevin Kwilinski: Good morning, George. Thank you. I look forward to meeting you in person soon. As I’ve been out to the facilities, and I’ve been to I think about eight facilities now. I always like to ask the facilities about productivity and how they measure their productivity, what their pipeline of opportunities looks like? And what I noticed very quickly at Berry is when I asked about productivity, what I was told about was the return on capital projects that were designed to drive cost improvement. And to the credit of Berry, they have done incredibly well. This company is very rich with engineering talent, material science talent, and it’s a credit to them what they’ve been able to drive. But what became clear to me was missing was a more fundamental process-oriented improvement opportunity using Lean tools, Six Sigma tools more thoroughly, and in a more comprehensive program that goes across all of the areas of the business.

And I think, from my history and these material-intensive converting businesses that type of program on its own has an ability to drive significant conversion cost-reduction. And that’s what I have in mind with that comment.

George Staphos: Thanks for that. That’s really enlightening and, certainly, I think you did a lot of that multicolor from what I understand. So segueing, we look at Health, Hygiene & Specialties, obviously, it’s been going through a tough couple of quarters. It was the one segment this year that had a negative price cost — the other segments saw a positive price cost. Does that suggest that there is an enhanced opportunity to drive what you just mentioned to improve price cost and margin within the segment or no, you would expect that the price — the productivity efforts will be largely centered in the three segments that are not under strategic review. Thanks and good luck in the quarter.

Kevin Kwilinski: Actually, the facilities I’ve visited so far have better cross-section of all the segments that we operate in. So I wasn’t — three — I’ve been in three HHS sites out of the eight, large sites. And I would say what I previously said is applicable in all of the areas of the business.

George Staphos: Okay. Thanks very much.

Operator: Thank you. One moment for next question. And our next question will be coming from John Roberts of Mizuho. Your line is open.

John Roberts: Thanks very much. Nice quarter. Could you give us some color on volumes outside of North America? And you’re going to be down in volume in the first quarter slightly. What do you think your exit rate and volume growth will be at the end of the year in 2024? What are you assuming in your guidance?

Kevin Kwilinski: Yeah. Our guidance is essentially flat year-over-year. We have some capital investments coming online that will hit more heavily in the second half, which allows some new growth from wallet share gain. So that’s somewhat advantage in the second half. But in general, the outlook we took in building our guidance and our plan was a flat year-over-year performance. Now there are certain segments that are a little bit higher and some lower in that, but on average, it’s basically flat year-over-year.

John Roberts: And volume outside the U.S.?

Kevin Kwilinski: I don’t know Mark, we — well, we’ve been a little bit tighter in Europe. I think we probably see more signs of stabilizing there may be compared to — because it was further off, it’s stabilized, we see signs of stabilizing, whereas North America, we probably felt was already stabilizing more earlier.

John Roberts: Okay. Thank you.

Operator: Thank you. One moment for our next question. Our next question will be coming from Phil Ng of Jefferies. Your line is open.

Phil Ng: Hey, Kevin. Looking forward to working with you going forward as well. Before you joined the firm, there were certain initiatives — longer-term initiatives that have taken flight like returning cash back to shareholders, cost-out and potentially accelerating debt pay-down. That seems to be largely intact along with the strat review on HHS. So just wanted to know where you stand on these initiatives. And where do you see the best opportunities to unlock value for shareholders in the medium term?