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Berry Global Group, Inc. (BERY) Q1 2024 Earnings Call Transcript

Berry Global Group, Inc. (BERY)

Q1 2024 Earnings Conference Call

Company Participants

Dustin Stilwell - Investor Relations

Kevin Kwilinski - Chief Executive Officer

Mark Miles - Chief Financial Officer

Curt Begle - HH&S President

Conference Call Participants

George Staphos - Bank of America Securities

Ghansham Panjabi - Baird

Arun Viswanathan - RBC Capital Markets

Adam Samuelson - Goldman Sachs

Matt Roberts - Raymond James

Phil Ng - Jefferies

Edlain Rodriguez - Mizuho

Nico Piccini - Truist Securities

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Berry Global Group Q1 2024 Earnings Conference Call. At this time, all participants 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.

I would now like to hand the conference over to your speaker today, Dustin Stilwell, Investor Relations. Please go ahead.

Dustin Stilwell

Thank you, operator, and thank you to everyone for joining Berry's first fiscal quarter 2024 earnings call.

As you can see on Slide 2, joining me this morning, I have Berry's Chief Executive Officer, Kevin Kwilinski; Berry's Chief Financial Officer, Mark Miles; and Berry's HH&S President, Curt Begle.

Following our 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 3, 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, our other SEC filings, and our news releases.

I will now turn the call over to Berry's CEO, Kevin Kwilinski.

Kevin Kwilinski

Thank you, Dustin, and thank you to everyone for joining us today to discuss Berry's first quarter results for fiscal 2024 and our recent announcement regarding the combination of our Health, Hygiene and Specialties global nonwovens and films business with Glatfelter.

Reflecting on my first quarter as the CEO of Berry, I'm even more excited about the opportunity to create value for all stakeholders. Having visited many of our global operations and engaged with strategic partners, including customers, suppliers and investors, I am confident in our ability to meet our objectives. Our dedicated team will continue working diligently to enhance our execution on organic growth, productivity, and portfolio enhancements.

Moving to our key takeaways for the quarter on Slide 6. Despite a challenging macro demand environment and soft consumer demand, we delivered solid first quarter result in line with our expectations. Additionally, we are reaffirming our guidance today for fiscal 2024. Our expectations of a stronger second half of the fiscal year have not changed, and we continue to expect to be within our adjusted EPS and free cash flow ranges. As a reminder, there are several reasons why we expect a stronger second half, including ongoing price and cost actions, continued benefits from structural cost initiatives, capital investment scale-ups, and favorable comparisons to the prior year's volume performance.

Moreover, our focus remains on debt repayment, opportunistic share repurchases, and quarterly dividend payments in fiscal '24. We expect our year-end leverage to be 3.5 times or lower, aligning with our target. We believe our long-term growth and value creation strategy, our market positions, stable portfolio of businesses, and capital allocation form a compelling investment thesis for Berry.

Our teams have proactively taken actions to address inflation, increasing pricing, and driving productivity benefits through structural plant closures, labor management, and asset optimization. Simultaneously, strategic investments in high-growth markets like foodservice, health and beauty, dispensing, and pharmaceuticals with a strong sustainability focus will contribute to our success.

Building upon a solid core, we have made substantial progress in this first 100 days on two key areas of priority: customer-focused organic growth through superior service and product performance, and world-class continuous improvement delivered through lean transformation.

To this end, we pivoted our service and quality review process to be less internal focused, and more driven by the voice of our customers, and we began adding a Net Promoter Score integrated process to ensure closed-loop feedback that our customers are seeing real improvement. We also extended the duration of these reviews and increased the scrutiny to ensure we are seeing improvement in the identification of true root causes and their subsequent elimination.

Closing out calendar year 2023, I hosted a meeting of who my team identified as the Top 20 lean continuous improvement experts in the company, regardless of what current role they happen to be tasked with. It was fantastic interaction and it became clear to me that with the right vision, organizational structure, vision, and executive oversight, we have the beginnings of a true world-class lean operating system. I've launched the search process to include both internal and external candidates to take the role of lean transformation leader. Lean transformation is a key priority for 2024 and will become a core component of our culture going forward.

And lastly, we were pleased to report that we identified an exciting value-creation opportunity as part of our strategic review of our Health, Hygiene and Specialties segment announced in September. We have entered into an agreement to spin-off our global nonwovens and films businesses and merge with Glatfelter Corporation, creating a scaled, global franchise with an industry-leading solution set serving attractive, growing, specialty materials markets. We will discuss more detail on the new announcement later in our prepared remarks.

Furthermore, in conjunction with today's announcement, Berry will change the name of its Engineered Materials segment to Flexibles, to showcase the continued evolution of this segment towards high-value products and solutions. We will continue to prioritize our focus on increasing our presence in stable, non-cyclical, fast-moving consumer goods.

Next on Slide 7, I want to continue to emphasize our substantial levers to drive consistent, dependable, and sustainable organic growth. Berry's scale advantages drive cost leadership and innovation capabilities that provide us 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 and beauty, and 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. These drivers have not changed, and collectively give us confidence in our ability to deliver future growth and support our long-term target of increasing our presence in stable, non-cyclical fast-moving consumer goods from 70% of our portfolio to our goal of over 80%.

And before handing over to Mark, I want to discuss Slide 8 and some of our specific focus investments for growth, emphasizing our commitment to innovation and sustainability. Investing in markets and product categories that drive long-term organic growth complements our efforts to build a resilient product portfolio. With a focus on sustainable packaging solutions, and a strong competitive advantage in recycled resins, Berry is positioned for higher-growth opportunities and long-term value creation.

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 9. As Kevin mentioned, our quarterly results for both revenue and earnings were in line with our expectations, while cash flow came in higher. Our global teams have executed exceptionally well, implementing robust cost reductions without disruption to our customers, and optimizing our product mix across our businesses. This strategic focus is helping to counter the challenges of soft market demand caused by inflation. We have made significant progress in consolidating our higher-cost assets, and as volumes recover, we expect an incremental benefit to earnings on more efficient assets.

For the quarter, adjusted earnings per share decreased by 9% versus the prior comparable year, while operating EBITDA was down 6%, primarily due to a $30 million impact from the timing of passing through polymer costs as the prior-year quarter had a timing benefit against a headwind in the current quarter. This timing difference was anticipated, and was partially offset by our cost actions and benefits from recent capital expenditures. Free cash flow for the last four quarters totaled nearly $1 billion, and is up over 10% versus the prior comparable period.

I would like to refer everyone to Slide 10 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 Q1.

Starting with our Consumer Packaging International division, revenue was down 6%, primarily from the pass-through of polymer costs and softer consumer and industrial market demand. Consumer categories across Europe performed marginally better than industrial markets, and we continue to execute our strategy to drive improved product mix to higher-value products.

EBITDA was down 10% versus the prior-year quarter, primarily driven by the timing of resin pass-through and softer overall customer demand, partially offset 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 in areas such as high-value dispensing systems and closures....

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