Berry Global Group Q3 2024 Earnings Report

Nova EPS Results

• Actual EPS: $2.18
• Consensus EPS: $2.02
• Beat/Miss: Beat by +$0.16
• One Year Ago EPS: $1.90

Nova Revenue Results

• Actual Revenue: $3.16 billion
• Expected Revenue: $3.26 billion
• Beat/Miss: Missed by -$94.26 million
• YoY Revenue Growth: -2.10%

Nova Announcement Details

• Quarter: Q3 2024
• Date: 8/2/2024
• Time: Before Market Opens
• Conference Call Date: Friday, August 2, 2024
• Conference Call Time: 10:00AM ET

Nova (NASDAQ:NVMI) designs, develops, produces, and sells process control systems used in the manufacture of semiconductors in Israel, Taiwan, the United States, China, Korea, and internationally. Its product portfolio includes a set of metrology platforms for dimensional, films, and materials and chemical metrology measurements for process control for various semiconductor manufacturing process steps, including lithography, etch, chemical mechanical planarization, deposition, electrochemical plating, and advanced packaging. The company serves various sectors of the integrated circuit manufacturing industry, including logic, foundries, and memory manufacturers, as well as process equipment manufacturers. Nova Ltd. was formerly known as Nova Measuring Instruments Ltd. and changed its name to Nova Ltd. in July 2021. Nova Ltd. was incorporated in 1993 and is headquartered in Rehovot, Israel.

Nova Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone, and thank you for standing by. Welcome to the Q3 2020 4 Veri Global Group Inc. 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]

Please be advised that today's conference is being recorded. I will hand the call over to Dustin Stillwell with Berry Group. Please go ahead.

[Dustin Stilwell, Head, IR at Berry Global Group]

Thank you, operator, and thank you to everyone for joining Berry's 3rd fiscal quarter 2024 earnings call. Joining me this morning, I have Berry's Chief Executive Officer, Kevin Kowinski and Berry's Chief Financial Officer, Mark Miles. Following our prepared remarks 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.

[Dustin Stilwell, Head, IR at Berry Global Group]

On our website at barryglobal.com, you can find today's press release and earnings call presentation under our Investor Relations section. As referenced on Slide 23, 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.

[Dustin Stilwell, Head, IR at Berry Global Group]

Some factors that could cause the results or outcomes to differ are in the company's latest 10 ks, other SEC filings and our news release. I will now turn the call over to Berry's CEO, Kevin Kowlinski.

[Kevin Kwilinski, CEO at Berry Global Group]

Thank you, Dustin, and thank you to everyone for joining us today to discuss Berry's 3rd quarter results for fiscal 2024. Our team delivered 2% organic volume growth and strong financial performance during the quarter. Our results were consistent with our expectations, and we made substantial progress toward our long term strategic objectives and delivering on our multiyear cost improvement initiatives.

[Kevin Kwilinski, CEO at Berry Global Group]

We delivered 3rd quarter adjusted EPS and operating EBITDA growth of 16% and 6%, respectively, over the prior year quarter, with volume growth and strong operational performance driving our results as our team remains focused on managing the items that are within our control. Our proactive measures around repositioning our portfolio to higher growth markets and reducing our cost structure have allowed us to outperform in a weaker than normal macro demand environment. We continue to be confident in our outlook, bolstered by our steady sequential improvement and the fact that our customers are communicating their focus on driving growth over price, including increased promotional activity. As a result, we are confirming our fiscal 2024 guidance within our previously announced ranges for adjusted EPS and free cash and expect our 4th fiscal quarter to deliver low single digit volume growth, aligned with our long term targets. As part of our ongoing commitment to maintaining a strong and stable balance sheet, we remain committed to achieving a year end leverage of 3.5x or lower by the end of fiscal 'twenty four.

[Kevin Kwilinski, CEO at Berry Global Group]

Including our September quarter expected cash flow generation of $1,000,000,000 and anticipated portfolio optimization proceeds, we expect to deliver over $3,000,000,000 of cash over the next 4 quarters. Specifically, we believe cash proceeds could exceed $2,000,000,000 from strategic divestitures alone within the next year. This includes approximately $1,000,000,000 from the already announced proposed spin off merger and another $1,000,000,000 from future portfolio optimization opportunities within fiscal 2025. With respect to portfolio optimization, we continue to make progress. Not only will these divestitures accelerate deleveraging, they will push us toward our goal of increasing our consumer products focus from over 70% to over 80% of volume.

[Kevin Kwilinski, CEO at Berry Global Group]

The Berry HHNF and Glatfelter transaction is still expected to close before the end of the calendar year and is subject to approval by Glatfelter shareholders and completion of customary closing conditions. Our teams continue to work on integration activities, and we remain optimistic about substantial upside potential in our base synergy case. We made great progress during the quarter on furthering our continuous improvement focused culture. We stood up our 1st lean transformation site at our healthcare focused facility in Franklin, Indiana. I had the opportunity to visit Franklin again a few days ago, and I'm very excited and encouraged by the level of engagement by our associates and leadership there.

[Kevin Kwilinski, CEO at Berry Global Group]

The focus in this facility has shifted from how do we win the month to how do we win the hour, and this shift brings in a whole new level of urgency for results. We have begun hosting visits from other business units to see what is being built in Franklin so that they can begin replicating our business operating model in other areas of the company. We have also begun to recruit additional lean leaders to support and scale a faster implementation path across the business. We are also seeing substantial improvements in how we deliver quality and service to our customers. Our capability to identify root causes and quickly apply corrective actions has increased and accelerated.

[Kevin Kwilinski, CEO at Berry Global Group]

The result is improved product and service differentiation that is allowing us the opportunity for faster organic growth. Faster organic growth is also being enabled by our efforts to improve the capability of our commercial excellence process. During the quarter, we began the 2nd phase of our pilot in Consumer Products North America, where we are building a world class conversion engine to produce the right innovation, deliver that innovation to the best target pipeline and convert that pipeline at world class rates of conversion. As with lean, this pilot is serving as a center of excellence from which we will replicate the new processes across the other Berry business units. Now I will turn the call over to Mark, who will review Berry's financial results.

[Kevin Kwilinski, CEO at Berry Global Group]

Mark?

[Mark Miles, CFO at Berry Global Group]

Thank you, Kevin. Turning now to our financial results highlights on Slide 8. As Kevin pointed out, our quarterly results for both revenue and earnings aligned with our expectations. Our global teams have persistently worked towards optimizing our manufacturing footprint, enhancing our customer experience and improved product mix across our businesses.

[Mark Miles, CFO at Berry Global Group]

We've made considerable strides in consolidating our higher cost assets and as volumes continue to recover, we anticipate an incremental earnings benefit for more efficient assets. These strategic actions and our focused approach are effectively countering the challenges posed by softer global market demand due to inflation. For the quarter, adjusted earnings per share saw a 16% increase amounting to $2.18 per share. Operating EBITDA also increased to $546,000,000 a 6% increase compared to the previous year. In line with our expectations, volumes increased delivering 2% year over year growth with all 4 operating segments delivering organic volume growth.

[Mark Miles, CFO at Berry Global Group]

I would like to refer everyone to Slide 9 for our quarterly performance by each of our 4 operating segments. The segment review will focus on the year over year changes for fiscal Q3. Starting with our Consumer Packaging International division, revenue was down 5% from the pass through of polymer costs, partially offset by organic volume growth of 1%. Our industrial and personal care markets improved compared to the prior year, while foodservice markets were weaker. We continue to execute our strategy to drive improved product mix to higher value products.

[Mark Miles, CFO at Berry Global Group]

Operating EBITDA was up 5% compared to the prior year quarter, driven by our structural cost reduction initiatives, lower energy costs in certain European regions and positive organic volume growth. We also continue to invest and expect improved product mix by utilizing our sustainability leadership and increasing our presence in healthcare packaging, pharmaceutical devices and dispensing systems. On Slide 10, revenue in our Consumer Packaging North America division increased by 3%, primarily driven by 2% organic volume growth. This growth was broad based across many markets including food, beverage, personal care, home care and industrial. Our foodservice business saw a modest decline against a strong prior year quarter.

[Mark Miles, CFO at Berry Global Group]

Our teams have successfully mitigated a weaker demand environment driven by inflation through share gains. Notably, we've witnessed numerous substrate conversions from paper, foam, glass and metal to plastics. Our ongoing efforts include integrating more circular materials, offering sustainable solutions and enhancing the end consumer experience. Operating EBITDA showed strong performance increasing by 10% compared to the prior year quarter. This growth was primarily attributed to our cost reduction efforts, focus on higher value products, timing of polymer pass throughs and a 2% organic volume increase.

[Mark Miles, CFO at Berry Global Group]

And on Slide 11, revenue in our flexibles division declined 2% due to lower selling prices, partially offset by a 2% organic volume increase, primarily in our consumer categories and European film products. While our industrial markets experienced modest headwinds when compared to the prior year, we continue to see recovery as overall volumes increased over Q2. Operating EBITDA for the quarter increased by 2% compared to the prior year quarter, driven by positive volume growth and structural cost reduction initiatives, partially offset by unfavorable mix. On Slide 12, revenue in our Health, Hygiene and Specialties division remained flat compared to the prior year. This result was driven by a 2% organic volume increase, which was offset by lower selling prices from polymer pass throughs.

[Mark Miles, CFO at Berry Global Group]

Notably, we observed strong volume growth in our surgical suite, hard surface disinfecting wipes and adult incontinence markets. Encouragingly, overall volumes have shown sequential improvement over the past 4 quarters. Additionally, operating EBITDA for the quarter increased by 5% compared to the prior year quarter, fueled by volume growth and our ongoing structural cost reduction initiatives. The HHS segment delivered solid volume and earnings growth during the quarter, while at the same time continuing integration activities of the previously announced Spin Merge transaction, including the creation of the Magnera brand. Magnera will be a global leader in the specialties materials industry with the broadest global product offering in high growth markets for both polymer and fiber based product applications.

[Mark Miles, CFO at Berry Global Group]

Our consistent cash flows have allowed us the ability to deliver substantial returns to our shareholders, a testament to our company's core strength and value. This financial fiscal strength and stability enables us to channel investments into our businesses to drive organic volume growth, boost efficiency and concurrently distribute capital to our shareholders. As shown on Slide 13, our unwavering capital allocation strategy is rooted in returns and captures ongoing investments in growing markets, strategic portfolio management, debt repayment, share buybacks and a growing quarterly cash dividend. As Kevin mentioned, we expect to deliver over $1,000,000,000 in free cash flow in our fiscal Q4. Additionally, we foresee generating proceeds exceeding $2,000,000,000 within the next year, inclusive of our proposed spin merger transaction with Cloudfilter that we previously announced.

[Mark Miles, CFO at Berry Global Group]

These divestitures align seamlessly with our long term strategy, which aims to streamline the portfolio, bolster earnings stability and augment long term growth. Capitalizing on our robust and reliable cash flows, we have strengthened our solid balance sheet with a focus on driving long term value for our shareholders. We project to be within our targeted leverage range by the close of fiscal 2024. We believe we are well positioned for continued value creation. Our strong cash flows have allowed us the flexibility to drive returns for our shareholders.

[Mark Miles, CFO at Berry Global Group]

As demonstrated on Slide 14, Berry has reduced net debt by more than $3,000,000,000 since mid-twenty 19 along with more than $1,500,000,000 returned to shareholders through both share repurchases and dividends in fiscal 2022 and 2023. By the end of fiscal 2024, we expect that we will have returned an impressive $5,400,000,000 of cumulative net debt reduction and capital returns since fiscal 2020. As you can see on Slide 15, Berry's track record of delivering top tier results across various key financial metrics including revenue, earnings and free cash flow underscores our consistent growth, a testament to the effective implementation of our strategies. We remain committed to enhancing long term value for our stakeholders by maintaining a reliable and balanced portfolio. This consistency has withstood numerous economic cycles and since our last notable acquisition of RPC in 2019, we have generated free cash flow annually ranging from $850,000,000 to $1,000,000,000 Furthermore, from an earnings standpoint, our annual adjusted EPS CAGR of over 20% from 2015 to 2023 significantly surpasses the peer adjusted EPS our leading position in the industry.

[Mark Miles, CFO at Berry Global Group]

This concludes my financial review and now I'll turn it back to Kevin.

[Kevin Kwilinski, CEO at Berry Global Group]

Thank you, Mark. Our fiscal 'twenty four guidance and assumptions outlined on Slide 16 reflect a solid 3 quarter performance. We are now targeting $7.60 earnings per share for fiscal 2024. This EPS target assumes operating EBITDA of nearly $2,100,000,000 Specifically, fiscal Q4 assumes EBITDA of $560,000,000 or a 2.5% increase over the prior year quarter and low single digit volume growth.

[Kevin Kwilinski, CEO at Berry Global Group]

We continue to expect free cash flow in the range of $800,000,000 to $900,000,000 Furthermore, and in line with our focus on driving long term shareholder value, we expect to prioritize repayment of debt to meet our leverage 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. As you can see on Slide 17, you will observe that Berry has a track record of meeting and often surpassing our objectives. Our long term objectives underscore the reliability and steadiness of our model, targeting an EBITDA growth of 4% to 6%, an adjusted EPS growth of 7% to 12% and a total shareholder return of 10% to 15%. We foresee our dividend growing year on year, and we're on track to reach our recently reduced long term leverage target by the close of fiscal 2024.

[Kevin Kwilinski, CEO at Berry Global Group]

To summarize, our strategic objectives are unchanged: optimize the portfolio, apply lean transformation and expedite growth through top tier commercial excellence. With a clear trajectory to attain a low-3s leverage in the next 12 to 15 months, a lean transformation pipeline that enables a 2% to 3% annual reduction in conversion costs and the capacity to achieve organic growth of 2% to 3% per year, we anticipate delivering performance above that of our peers. Our positive outlook for the next several quarters is fueled by several elements, including the ongoing mitigation of inflation and a resurgence of more standard levels of customer promotional activity. Lastly, we have acted on areas to enhance our valuation multiple. We have fortified our robust balance sheet, reduced our targeted leverage range, and returned significant cash to shareholders.

[Kevin Kwilinski, CEO at Berry Global Group]

And as we persist in showcasing sales volumes atorabovethepeeraverage, we are confident that we will persistently narrow the valuation gap to our peer group, thereby offering a compelling investment opportunity. Thank you for your time and interest in Berry. And with that, Mark and I are happy to address any questions which you may have. Operator?

[Operator]

Thank you so much. And it comes from the line of Josh Spector with UBS. Please proceed.

[Analyst]

Hi, good morning. Actually, this is Sean speaking on behalf of Josh. Thank you for taking my question. So, well, in terms of our interest expense, and the guidance in the Q4, it looks much higher than the average positive 3 quarters. So any color on that?

[Analyst]

Thank you.

[Mark Miles, CFO at Berry Global Group]

Yes, sure. Good morning. This is Mark. The incremental increase in interest expense is primarily driven by some non cash interest income if you will that falls off or did fall off in Q3. And that was always projected in our outlook for fiscal 'twenty four.

[Analyst]

Okay. Got it. Thank you. And in terms of our I mean, so the take out carbon market share trends and we mentioned before that we are gaining market share. So any color on the current trend?

[Analyst]

Thank you.

[Mark Miles, CFO at Berry Global Group]

The question was about volume trends in general or anything specific?

[Analyst]

Sorry, for the take out of the cup?

[Mark Miles, CFO at Berry Global Group]

Sorry, you broke up a little bit.

[Analyst]

Sorry, for the take out cup?

[Mark Miles, CFO at Berry Global Group]

Takeout cups? Yes. So there were some, as you probably saw in many of our customer reports, foot traffic has been a little weaker than expected, driven by predominantly inflation. So as a result of that, you've seen many of our customers increase promotional activity here recently and we are starting to see the benefit of that in our volumes here in the short term. And we expect those customers to continue to focus on growing their business.

[Mark Miles, CFO at Berry Global Group]

So we're optimistic about the outlook going forward. Yes, I would say we've in the last few weeks seen a notable improvement.

[Analyst]

Thank you a lot. I will turn it over.

[Operator]

Thank you. Our next question comes from the line of Philip Ng with Jefferies. Please proceed.

[Philip Ng, Managing Director at Jefferies Financial Group]

Hey, guys. I guess on that note, a lot of the QSRs and even the CPG guys have talked about consumer being weaker, inflation and all that. So my question is, have you already felt the pain and seen it in your numbers? Pretty encouraging to hear that you're seeing some uptick here. So I guess, predicated in your guidance for the Q4 that low single digit volume growth, are you assuming things kind of pick up from here because of the promos already?

[Philip Ng, Managing Director at Jefferies Financial Group]

And what do you have kind of supporting that low single digit growth? Is this easier comp? Just give us a little more context on what you're seeing.

[Kevin Kwilinski, CEO at Berry Global Group]

Yes, that is really and has been all year, our view is that we would just have improved comps. We expected the second half to not continue to see any deterioration, but to show some very modest improvement, but still to be kind of down from where they historically would have been. And that's really what we're seeing. So our 4th quarter projection is it's not dependent on any market improvement. If there is market improvement, I would say that would give us some upside.

[Kevin Kwilinski, CEO at Berry Global Group]

But it's really just what we see happening now translating versus what we saw in the Q4 of last year.

[Philip Ng, Managing Director at Jefferies Financial Group]

And what have you seen Kevin, I guess, in the month of July so far?

[Kevin Kwilinski, CEO at Berry Global Group]

We're having a good month. Okay. It's positive and encouraging.

[Philip Ng, Managing Director at Jefferies Financial Group]

Okay. And then can you give us

[Philip Ng, Managing Director at Jefferies Financial Group]

an update on the process of the potential divestitures, just given the $3,000,000,000 of cash you highlighted coming in? And then just help us contextualize just given the EBITDA profile might be will be different post the spin. How do you kind of see leverage shaping up by the end of 2025? Could you kind of actually get below 3x? Just give us some color there.

[Philip Ng, Managing Director at Jefferies Financial Group]

And with your balance sheet in that leverage target ratio by the end of 2020 4, how are you prioritizing capital deployment? You talked about maybe buying back more stock. Give us a little more context in terms of capital deployment, M and A, buybacks and debt pay down from here?

[Kevin Kwilinski, CEO at Berry Global Group]

Sure. Yes, we're committed to getting to that 3.5 or lower this year. I would expect in 'twenty five percent with our divestiture plan and the cash flows that we see coming, we should be in the very low 3s. I mean, possibly you could hit the high 2s, but I would say safely in the very low 3s. And I think we're very focused on the value of our stock being below what it should be.

[Kevin Kwilinski, CEO at Berry Global Group]

So we continue to see share buyback as meaningful value for our shareholders. Of course, we're always looking at bolt on acquisitions that are highly accretive. So we would balance that with what opportunities we see transpire in the market.

[Philip Ng, Managing Director at Jefferies Financial Group]

Okay. Appreciate the color, Kevin.

[Operator]

Thank you. Our next question comes from the line of George Staphos with Bank of America Securities. Please proceed.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Hi, everyone. Good morning. How are you doing, Kevin, Mark, Dustin? Thanks for the details. My two questions.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

I want to talk about the 2 pipelines that you talked about. First of all, can you talk about how the pilot at Franklin has evolved and what you've learned? You gave us a little bit of detail. Would like to get maybe some quantification there relative to what it can mean for the broader business over time in terms of improved efficiency and margin and the like. 2nd question, you talked about the innovation pipeline that you're developing.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

We'd like a little bit of color, a little bit more on that. And in particular, with customers now beginning to promote more, especially at the foodservice side, what are they asking from you now in terms of promotion, excuse me, in terms of innovation, right? So if they're dropping price and trying to come to the customer with a reason for them to show up through their doors, how is the packaging, how is your product helping that occur and what's new beyond kind of the clear cup from a couple of years ago? Thanks and good luck in the quarter.

[Kevin Kwilinski, CEO at Berry Global Group]

Sure. Yes, I'll start with the second one first, the innovation and growth. I'm extremely encouraged by the progress that we've seen in a very short period of time. In our CPNA business, we are tracking $75,000,000 of wins ahead of where we were at the same point last year. And we see really strong momentum developing there.

[Kevin Kwilinski, CEO at Berry Global Group]

Of course, a piece of that business is in fact foodservice. And where we really differentiate and help drive success in these promotions is in 2 ways. We have an excellent sustainable solution in a very clear product that the consumer has shown in multiple tests to have a high preference for, which is why we continue to win share in that space. And we have the ability to service customers with rapidly changing demand requirements in a very consistent way. And they rely on us to be able to move with them when they start to promote and they want to go quickly, we have the ability to go quickly in a way that our most of our competitors just can't match.

[Kevin Kwilinski, CEO at Berry Global Group]

And then in the first area, lean, we focused on Franklin because it was a ripe environment in a very meaningful growth area for our business in healthcare and one where we knew by driving productivity, we could immediately impact sales. Since we began the effort, we have seen north of 20% improvement in throughput, and it's really coming from a couple of key areas. One is the daily management processes that have gone out to really drive hour by hour focus at the shop floor level to quickly raise areas of opportunity to drive improvement, fix issues with machines, with how we schedule with the supply chain side of the business and quickly respond and remove those bottlenecks. We think that that process will have dramatic impact across all of our facilities, which we have around 200 facilities post HHS divestiture and very few of them have that sort of daily management process in place today. The second big lever we're finding is in the area of total predictive maintenance, preventive maintenance and predictive maintenance in general.

[Kevin Kwilinski, CEO at Berry Global Group]

We have we're asset intensive in terms of conversion, and we need to make sure that those assets are running at a very high uptime. Our OEEs have room to improve and we seen substantial improvement in those OEEs through a focus on that predictive maintenance and being ahead of the game and avoiding breakdowns. That is another area we are building out as part of this lean transformation, which will ultimately help us to be more capital efficient to achieve the same growth levels. And as we grow faster than we have historically, we should be able to do that without having to raise our overall capital requirements.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Kevin, is it too soon to say what the raising of the OE could mean in terms of your earnings? Thanks. Sorry to come back, but it was kind of a hanging question.

[Kevin Kwilinski, CEO at Berry Global Group]

Yes. I mean, we're building into our 'twenty five outlook, what we think it can mean in 'twenty five, but we are definitely targeting this 2% to 3% continual conversion cost improvement. And we see no reason why we can't continue to focus on that as the goal.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thank you very much.

[Kevin Kwilinski, CEO at Berry Global Group]

Sure. Thank you, George.

[Operator]

Thank you. Our next question comes from the line of Mike Roxanne with Truett Securities. Please proceed.

[Michael Roxland, MD - Equity Research at Truist Securities]

Thank you, Kevin, Mark and Dustin for taking my questions. Just one quickly on the EBITDA guidance. It seems like you lowered EBITDA to $2,060,000,000 from a prior range of $2,050,000,000 to $2,150,000,000 despite better volumes and positive price costs. So just want to get a sense for you of what's driving this lower EBITDA outlook? And also can you just give us some color on how you expect to generate $1,000,000,000 in free cash flow in fiscal 4Q as you're negative about $176,000,000 on a year to date basis?

[Kevin Kwilinski, CEO at Berry Global Group]

Yes. So the first part on EBITDA, we did not lower our EBITDA guidance. We are coming in, in the range that we've talked about. We just are reporting the Q3. We have 1 quarter left.

[Kevin Kwilinski, CEO at Berry Global Group]

So we're being more specific in where we see the final number for the year. What really drives the range for us is how much resin inflation we see and our timing on recovery of that, and that is by far and away the biggest impact in bringing us to the outcome of the range where we are. We have seen supply side constraints in around the world with areas that you will know in terms of transportation, getting through the Suez sorry, yes, the Suez and the Red Sea. We also have outages in North America that have affected the markets to move price higher. So that just puts us a bit behind in terms of the timing of recovery of that.

[Kevin Kwilinski, CEO at Berry Global Group]

It's not a long term issue. When we look at the actual results of the business, our margins are better than we would have expected and we see really strong momentum and performance on cost. So when I look at our EBITDA performance, I'm actually very encouraged by it and very happy with the results. I would say the other the final thing I would focus on is I've come in as a new CEO and I have certainly caused a level of disruption. And I'm doing that with a focus on driving the ultimate long term rate of improvement in EBITDA, even though there are some short term impacts from that activity.

[Kevin Kwilinski, CEO at Berry Global Group]

So I think all in all, I am very positive about where our EBITDA has developed and what it means momentum going into 'twenty five and beyond. And then on the cash side, we just have so many moving parts with divestitures. We still see the opportunity to manage our cash, short term working capital and still come in within our range.

[Mark Miles, CFO at Berry Global Group]

Yes, just to add on the cash point, our outlook for Q4 is actually below what we've achieved the last 2 years on average, so very achievable and this is normal in terms of the cash flows on a quarterly basis.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. And I appreciate the color. Very helpful. And then just one quick question on Flexibles. You mentioned persistent weakness in North American transportation and shrink from, I believe.

[Michael Roxland, MD - Equity Research at Truist Securities]

Previously, I think you said the same thing this quarter. Any initiatives underway to drive better performance from that sector? And if you could just share some provide some color around what you're doing to try to improve that? Or if not, what are your considerations for possible divestiture or something else? Any color you can provide would be helpful.

[Michael Roxland, MD - Equity Research at Truist Securities]

Thank you.

[Mark Miles, CFO at Berry Global Group]

Yes, I mean, really our North American business in those areas has been really strong. I would say we're outperforming the market. We have shifted such a large portion of our volume to value added higher level of engineered product that allows customers to use less product because the performance is there through lightweighting and material science. And we are continuing to win share in that area at margins that we really like. I would say what you mentioned, I think, is really more limited some of what we've seen in Europe, and it's just a slower recovery in Europe.

[Mark Miles, CFO at Berry Global Group]

But ultimately, we do see recovery happening in Europe. It's just happening at a slower rate.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Hey, guys. Good morning. Your volumes are obviously up a little bit year over year, but are still at a very low threshold as are most of your peers in the industry, just given the challenges with consumer affordability that seems to be spreading, etcetera. How is that dynamic starting to impact competitive activity as you see it at this point in context of some of your peers calling out price competition in areas such as foodservice, for example?

[Kevin Kwilinski, CEO at Berry Global Group]

Yes. I mean, we have we certainly are seeing higher levels of competition. We are offering a product offering specifically in foodservice that is quite superior. And we see really the ability to maintain margins there. We are continuing to win share in that space without sacrificing our margins in this space.

[Kevin Kwilinski, CEO at Berry Global Group]

And I think we will continue to be able to do that going forward.

[Mark Miles, CFO at Berry Global Group]

In general, I think our growth was good to see. It was what we expected, but seeing that validated was positive. I think when we look at the negatives that some of our peers experienced in prior years and periods, We didn't go to the same level of negative. So what we're seeing, they're flashing maybe a couple of numbers that are a little higher, but they're coming off of a much worse performance and we were much more consistent through this cycle.

[Mark Miles, CFO at Berry Global Group]

And I think we've really set up the business well for consistency. And as we continue to refine this portfolio, we will just become more consistent going forward.

[Kevin Kwilinski, CEO at Berry Global Group]

Yes, I think as you may recall Ghansham, we moved pretty early in fiscal 'twenty three to right size our footprint and remove our higher cost assets. Our peers did the same. I think many of them were a little slower to respond, but I think much of that higher cost capacity has been taken out of the network across many of our product categories.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Okay, got it. And then in terms of Europe, any update you can share in terms of the obvious questions on substrate shifts to wafer plastics into paper, etcetera? Have you seen any shift in that dynamic? And how does the European consumer just more broadly feel at this point in terms of core spending, etcetera?

[Kevin Kwilinski, CEO at Berry Global Group]

Sure. The number one metric in Europe that is extremely encouraging to me is our growth has moved from 5% to 7%, So kind of our growth top line wins rate, and we seem to be picking up momentum with products that are really differentiated, especially multi component products in dispensing, in deodorant, in these sorts of categories, we are having a lot of success and we see momentum building. And that's really from very sustainable mono material lightweighted products that are better than the competitive offering. I would say the one area where there has been shift in terms of substrate is in drink cups. And in Europe, drink cups are really paper based.

[Kevin Kwilinski, CEO at Berry Global Group]

And we see because of the regulation a shift to reusable plastic cups, and we are participating in that plastic cup space. So for us, it's a net positive driver of growth on a forward basis. The other thing that is causing us to have some superior growth in Europe is also related to regulation, it's the tethered cap. So on bottles, there's regulation that requires the cap to be fixed to the bottle for better recycling. And we have a superior product and we are winning with the big players there.

[Kevin Kwilinski, CEO at Berry Global Group]

And that is a net positive and increasing driver of growth for us in Europe. The consumer obviously is, I would say, behind what we see in terms of the U. S. In terms of recovery, but we are seeing recovery and we've seen stabilization and really in the quarter we saw our first positive growth.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Okay. Thanks so much.

[Operator]

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Great. Thanks for taking my question. Hope you guys are well. I guess, it's encouraging to see the 1% to 2% or low single digit volume growth in fiscal Q3. I guess, how do you see that kind of evolving as you move into fiscal Q4 and 2025 for each of the different segments?

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

I guess, you do would you maintain that rate? And maybe if you can discuss if there's any specific drivers as far as new business wins or if it's merely just market based recovery?

[Kevin Kwilinski, CEO at Berry Global Group]

Sure. I think we would we expect similar low single digit growth in the Q4, and we would expect to have accelerating growth in 2025 based on our performance in those markets, not due to recovery of the markets. If we see recovery of the markets really happening in 2025, that should be additional upside to our current outlook.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

And then when we think about that in the context of maybe some of the planned divestitures, do you expect EBITDA growth next year? Or how should we think about the earnings power of the business? Is there any other cost reductions and operating leverage kind of drivers that you would have to lever that low single digit growth maybe to mid singles or how should we think about that? Thanks.

[Kevin Kwilinski, CEO at Berry Global Group]

Yes. I mean, we're not giving guidance today on 25, but I expect that we will see EBITDA growth in roughly the way you characterized it.

[Mark Miles, CFO at Berry Global Group]

Yes. And I would just add to that. Sorry,

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

I was just going to ask similarly on free cash flow and also in light of some of the divestitures, would you be seeing lower CapEx and maybe some increased free cash flow growth or how should we think about that? Thanks.

[Mark Miles, CFO at Berry Global Group]

Yes, it's Mark. Yes, I would say, we've again consistently delivered between $850,000,000 to $1,000,000,000 of free cash since the RPC acquisition. Obviously, that would have to be adjusted for the spin merge, but there's nothing that free cash flow is an important metric for us and there's nothing that of substance that would change our outlook other than again the obvious adjustment you have to make for that spin merge.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Great.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Thanks.

[Mark Miles, CFO at Berry Global Group]

Great. Thanks.

[Operator]

Thank you. Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed.

[Adam Samuelson, Analyst at Goldman Sachs]

Yes, thank you. Good morning, everyone. I guess, first question is, again, thinking about 2025 at a high level. One, how much of the price cost kind of catch up from the second half of this fiscal year that you haven't fully that lag. How much can you quantify that just in terms of what's carrying into 2025 that we should think about normalizing all else equal?

[Mark Miles, CFO at Berry Global Group]

Yes, this is Mark. There's kind of 2 items to that, I guess. 1, on polymer lag, which again is just a timing lag that Kevin referenced earlier that is about a headwind of $20,000,000 this year. Again, depending on what Polymer does next year, we would typically assume a flat environment, but we'll see as we approach our November call with the what happens with polymer and what the outlook is, but our typical assumption would be flat. So that would be a tailwind eliminating that negative lag.

[Mark Miles, CFO at Berry Global Group]

And then I would add our cost reduction program that we increased last quarter does have some incremental benefits that are going to help 25, about 35,000,000

[Mark Miles, CFO at Berry Global Group]

dollars is the

[Mark Miles, CFO at Berry Global Group]

number for fiscal 'twenty five incremental benefit from that program.

[Adam Samuelson, Analyst at Goldman Sachs]

Okay. That's very helpful, Mark. And so and then maybe Kevin, just in response to kind of the prior question, you kind of alluded to accelerating organic volume growth kind of absent any market recovery, so we're assuming kind of similar market conditions to where we are today. Between those two cost items, kind of incremental productivity and cost actions that you'd be looking at as you continue to push lean principles through the organization and better volumes. I guess it'd be reasonable to say that as you would look right now, you'd be tracking comfortably ahead of that kind of longer term 4% to 6% EBITDA growth target.

[Adam Samuelson, Analyst at Goldman Sachs]

Is that fair?

[Mark Miles, CFO at Berry Global Group]

I mean, I think that's the long term trajectory if we continue to execute at that level. It's really a matter of timing of wins and progress on the pipeline and when that manifests throughout 2025. But we have good momentum going into the year and I feel positive about us delivering meaningful EBITDA growth.

[Adam Samuelson, Analyst at Goldman Sachs]

Okay. All right. That's maybe just one more quick one. The change in tax rate for the year, which is really what drove EPS to the midpoint of the range for the full year, is there anything notable about that? Or should we be thinking about that tax rate reverting back to the historical low 20s rate next year?

[Mark Miles, CFO at Berry Global Group]

Yes, we've consistently done a good job in that area of beating our target and fiscal 'twenty four is no different. So just really happy with the progress we've made on tax and really there's nothing more to say other than it's a consistent beat that our tax group has been able to achieve. Okay.

[Adam Samuelson, Analyst at Goldman Sachs]

All right. That's helpful.

[Adam Samuelson, Analyst at Goldman Sachs]

I'll pass it on. Thank you.

[Operator]

Thank you. Our next question comes from the line of Matt Roberts with Raymond James. Please proceed.

[Matthew Roberts, Equity Research Analyst at Raymond James Financial]

Kevin, Mark, good morning. Thanks for taking the questions. Kevin, on the resin increase you touched on earlier, maybe explicitly what is the price cost that you're embedding in that 4Q guide and your underlying resin cost assumptions are said differently. If resins move up in the next month, is that incrementally worse versus the current guide or are you baking in some further increases from here?

[Mark Miles, CFO at Berry Global Group]

Yes, we have a modest headwind built in for Q4 and that's based on it's not yet settled for the month of July, but the market is projecting potentially an increase. So we've taken a conservative view on that to the extent it doesn't happen. That would be a tailwind. Anything that happens beyond July is really more a fiscal 'twenty five matter than 'twenty four, just because of the lag and it passing through our inventory. Yes, that's what I was going to say.

[Matthew Roberts, Equity Research Analyst at Raymond James Financial]

Perfect. Thank you for the color, Mark. And then maybe on the price side of that equation, what are you embedding there? Is that going to be a drag in 4Q from incremental competitive pressures? Or do you think you're able to pay pass through price and be positive in 4Q?

[Matthew Roberts, Equity Research Analyst at Raymond James Financial]

Thanks again for taking the questions.

[Mark Miles, CFO at Berry Global Group]

Yes, I think we're offsetting that lag with the cost reduction initiatives that we continue to deploy. And so net net, there's a modest favorability as the cost reductions are able to more than offset that lag that I referred to on timing of polymer pass through.

[Matthew Roberts, Equity Research Analyst at Raymond James Financial]

Thanks again.

[Mark Miles, CFO at Berry Global Group]

Thank you.

[Operator]

Our next question comes from the line of Christopher Parkinson with Wolfe Research. Please proceed. Great.

[Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC]

Thank you so much for taking my question. The first question is, in terms of the volume growth that you're seeing in the back half of the fiscal year, it does appear things are getting better on the margin in a lot of different areas, personal care and obviously some quick service stuff and obviously, promo activity seems to be picking up. So when I think about that, it seems that user demand is pretty good. You're also coming off of some destocking of various areas over the last couple of years. Is it possible to parse out how you're thinking about volume growth for not only for the 4th fiscal quarter, but into the next fiscal year in terms of what those key drivers are and what where there could actually be potential areas of upside?

[Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC]

I just wanted to dig into the details there a little bit more. Thank you.

[Mark Miles, CFO at Berry Global Group]

I mean, we're doing that work as we finalize our view for 2025. I would say we see those pluses and minuses playing out around all the end segments we participate in, which are extremely broad and very broad geographies also. Net net, I would say we see slightly positive market growth for 2025 developing. And that's probably the best I would be able to do at this point in time.

[Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC]

Got it. And just a quick follow-up, in terms of the implied fiscal Q4 EBITDA versus your prior expectations, given the fact that volumes do appear to be, let's say, getting sequentially better, especially in QSRs, is there anything else going on that we should be considering? Is that just conservatism on behalf of management that we should be factoring in terms of kind of the trajectory here? Is that are there any competitive pressures you're considering? Just price cost you already mentioned earlier in the call, but can you just kind of break that out and how we should really be thinking about that as we progress towards the end of the fiscal year?

[Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC]

Thank you.

[Mark Miles, CFO at Berry Global Group]

Yes, I would say, our outlook was dependent on low single digit growth in the second half. And we delivered what we expected, what our outlook was based on, and we don't really see that changing a whole lot between now and the end of our fiscal, which is not a month and a half off. What I would say is the change or what really within the range that we talked about has driven us to the lower side, is the resin we discussed and then we've also done some divestitures. And if you Pareto this out, you've got the resin lag as the number one driver and the second driver, which would be at roughly half the level of impact if I just round it off is from divestiture. But again, the core business and the strategic business going forward is performing extremely well.

[Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC]

Got it. That's very helpful color. Thank you.

[Operator]

Thank you. Our next question comes from the line of Edlain Rodriguez with Mizuho. Please proceed.

[Edlain Rodriguez, Equity Analyst at Mizuho Securities]

Thank you. Good morning, everyone. Kevin, just a follow-up to the volume question. What are you seeing right now? Like how would you characterize it?

[Edlain Rodriguez, Equity Analyst at Mizuho Securities]

Like is it real fundamental improvement in demand or is it like purely inventory destocking that you see in? I mean restocking, sorry.

[Kevin Kwilinski, CEO at Berry Global Group]

Well, I would say that the destocking has run its course in all meaningful categories for us. And so there's certainly been some strengthening, but that is really what we anticipated would be the case to drive us to kind of low single digit second half of the year comps versus negative low single digit in the first half. That what that suggests is that the actual demand overall is not greatly improved. And we don't anticipate in the next month and a half, it's going to dramatically change either. I do think there is reason to be optimistic that 'twenty five could see demand actually beginning to improve in some of these core non discretionary consumer goods categories that make up a big piece of our business and an ever growing portion of our business.

[Edlain Rodriguez, Equity Analyst at Mizuho Securities]

Okay. And another one in terms of that $1,000,000,000 of potential divestitures you have for next year, Like how far along are you in that process? And also like how are those businesses that you plan on divesting different from the other businesses in the portfolio? Yes,

[Kevin Kwilinski, CEO at Berry Global Group]

we're in various stages of discussions with a handful of businesses that kind of add up to actually if all were executed would be more than the $1,000,000,000 We expect them to be deleveraging and they in general would trade at a similar multiple perform at a similar multiple to the overall average of the business. What they do have characteristics of is more industrial exposure and lower overall growth rates than the core business that we're focused on moving forward.

[Operator]

And our last question is from the line of George Staphos with Bank of America Securities. Please proceed. Hi.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thanks for taking the follow on guys. More of a strategic question and recognizing it's going to be hard to talk live Mike on something like this. As you think out the next four quarters, on the one hand, Barry is working rather diligently to improve its already good cost efficiently, so you would see it through lean and the like and you're getting some benefits from that and you're also working the pipeline in an environment that maybe is more difficult from a macro standpoint from where your customers are, Do you think your growth on a relative basis versus your peers will come more because you can become more aggressive in terms of where you are in the cost curve versus peers? Or do you think it's, hey, we are finding that we're much more able to drive new products more quickly and that gets you the volume growth. I recognize it's going to be all the above, but as you think about 'twenty five, is it going to be a year where you leverage cost or leverage pipeline to get the growth that you're hoping for?

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thanks and good luck in the quarter.

[Mark Miles, CFO at Berry Global Group]

Thank you, George. Yes, by far and away, innovation, the pace of innovation, our ability to deliver higher levels of sustainability, more circular products is going to be the number one driver of our ability to win in the markets that we're operating in. When we embarked on the lean transformation journey, and I said this several quarters ago when we first began to talk about lean, I wanted to go into lean not as a cost driver, although it very much is a cost driver, but as a way to drive variation out of our business. And the way variation manifests in our business is it ends up causing inconsistencies in how we provide service on time in full, lead times on a day to day basis and the quality of the product to our customers day in and day out. And from 30 years in this industry, I have learned the lesson that if you perform consistently on service and quality, you will gain wallet share and you will have much less pressure on price.

[Mark Miles, CFO at Berry Global Group]

And I think that is exactly what will play out. So the second driver of growth will in fact be better performance, differentiated service to customers from the lean transformation. And the 3rd and it's really more of a distant third is the cost advantage that comes from the process of lean and driving out labor and energy and waste and all those things.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thanks so much. Very clear. Good luck in the quarter guys.

[Operator]

Thank you. And we have time for one more question. And it comes from the line of Rosemarie Morbelli with Gabelli Funds. Please proceed.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thank you. Good morning, everyone. I was wondering if I could follow-up on that €1,000,000,000 of proceeds from upcoming divestitures in 2025. Could you share with us more or less the potential businesses going out?

[Kevin Kwilinski, CEO at Berry Global Group]

Thank you, Rosemarie. I think the revenue of those as a bucket is Yes, I mean I think Half range.

[Mark Miles, CFO at Berry Global Group]

Yes, I think you can do the math that Kevin just mentioned about proceeds divided by about our multiple, we'll get the EBITDA impact. And as Kevin pointed out earlier, the margins are slightly lower, but not meaningful. So I think if you do that math, that will give you the both the EBITDA and revenue impact depending on the level of proceeds you want to assume.

[Mark Miles, CFO at Berry Global Group]

But again, as Kevin said, we've put out a target of $1,000,000,000 but our the target portfolio list would drive a result better than that if we're able to execute all of them.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

And should we assume that all of those potential businesses are small and are split around your different segments?

[Kevin Kwilinski, CEO at Berry Global Group]

Yes. So they are the target list includes businesses from multiple reporting segments.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thank you. That is helpful. And if I may ask one last question, eliminating volatility, you have 200 facilities you pointed out, Do you need 200 facilities? Should we add facility consolidation as part of your improvement program?

[Kevin Kwilinski, CEO at Berry Global Group]

Yes, our cost improvement program certainly is contemplating additional rationalization of facilities. We've completed a number of those this year. We will complete a number of those next year. As lean accelerates, it should give us further opportunities to drive a more efficient footprint.

[Rosemarie Morbelli, Portfolio Manager at Gabelli Funds]

Thank you very much. Appreciate the help.

[Kevin Kwilinski, CEO at Berry Global Group]

Thank you.

[Operator]

Thank you. And this ends the Q and A session for today. I will turn it back to management for closing remarks.

[Dustin Stilwell, Head, IR at Berry Global Group]

Just thank you to everyone for your interest and participation today. We're very excited about the future of Berry as we close out our fiscal year this quarter that we're in, and we're really encouraged with what we see developing for 'twenty five. So thank you very much.

[Operator]

And with that, we thank you all for participating in today's conference. You may now disconnect.

Participants

Analysts

• Dustin Stilwell, Head, IR at Berry Global Group
• Kevin Kwilinski, CEO at Berry Global Group
• Mark Miles, CFO at Berry Global Group
• Analyst
• Philip Ng, Managing Director at Jefferies Financial Group
• George Staphos, Managing Director at Bank of America Merrill Lynch
• Michael Roxland, MD - Equity Research at Truist Securities
• Ghansham Panjabi, Senior Research Analyst at Baird
• Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets
• Adam Samuelson, Analyst at Goldman Sachs
• Matthew Roberts, Equity Research Analyst at Raymond James Financial
• Christopher Parkinson, Senior Research Analyst at Wolfe Research, LLC
• Edlain Rodriguez, Equity Analyst at Mizuho Securities
• Rosemarie Morbelli, Portfolio Manager at Gabelli Funds