Berry Plastics Group (BERY) Jonathan D. Rich, PhD on Q3 2016 Results - Earnings Call Transcript

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Berry Plastics Group, Inc. (NYSE:BERY)

Q3 2016 Earnings Call

August 09, 2016 10:00 am ET

Executives

Dustin Stilwell - Head-Investor Relations

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Mark W. Miles - Chief Financial Officer

Analysts

Brian Maguire - Goldman Sachs & Co.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Tom Narayan - RBC Capital Markets LLC

Gabe S. Hajde - Wells Fargo Securities LLC

George Leon Staphos - Bank of America Merrill Lynch

Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Mark William Wilde - BMO Capital Markets (United States)

Bill Hoffmann - RBC Capital Markets LLC

Debbie A. Jones - Deutsche Bank Securities, Inc.

Chris D. Manuel - Wells Fargo Securities LLC

Operator

Good day, ladies and gentlemen. Welcome to the Berry Plastics Earnings Conference Call. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Dustin Stilwell, Head of Investor Relations. Please go ahead.

Dustin Stilwell - Head-Investor Relations

Good morning, everyone. Thank you for joining us, and welcome to Berry's third fiscal quarter 2016 earnings call. Throughout this call, we will refer to the third fiscal quarter as the June 2016 quarter.

Before we begin our call, I would like to note that, on our website at berryplastics.com, we have provided a slide presentation to help you guide our discussion today. This presentation can be found by clicking the Investors tab to the Upcoming Events section at the bottom of our page and selecting the webcast presentation.

Joining me from the company, I have Berry's Chairman and Chief Executive Officer, Jon Rich; and Chief Financial Officer, Mark Miles.

As referenced on slide two, during this call, we will be discussing some non-GAAP financial measures, including operating EBITDA, adjusted EBITDA, adjusted net income and adjusted free cash flow. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and the Investor Presentation on our website. Additionally, all data referenced today has been conformed to match our new organizational segment structure.

An archived audio replay of this conference will also be available on the company's website. We would like to make it clear that certain statements made today may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release and in our Annual Report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in those forward-looking statements.

And now, I would like to turn the call over to Berry's Chairman and CEO, Jon Rich.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Thank you, Dustin. Good morning, everyone, and thank you for joining us. This morning, we will review our overall June quarterly financial performance, including the results of our three operating segments, review our outlook for the rest of the year and provide an update on the integration of Avintiv.

First, I want to start this morning by welcoming Scott Ullem to our Board of Directors. Scott is the Chief Financial Officer of Edwards Lifesciences. With his past experience in packaging and investment banking, he brings a perspective to our company and the Board of Directors that will be very beneficial to Berry.

The third fiscal quarter was another strong performance period for Berry, during which we achieved record sales for any quarter in the company's history. Our operating EBITDA was the best for any June-ending quarter, and operating EBITDA margins were well above last year.

The strong quarter and year-to-date results for Berry are a demonstration that our four-point strategic plan is working, our perspective on the transformative acquisition of Avintiv was correct and that the power of Berry's scale and the diversity of our businesses provides a clear competitive advantage.

Now, turning to some specific results for the third fiscal quarter. As Dustin highlighted, we've provided a short slide presentation on our website that you can reference as we go through the call this morning. First, starting on slide three. For the June 2016 ending quarter, revenues grew by 33% over the prior-year quarter to $1.645 billion, which is a sales record for any quarterly period in the company's history.

Operating EBITDA increased 44% and was $97 million higher than the prior year, coming in at $316 million. Overall operating EBITDA margins increased 160 basis points to 19.2% compared to 17.6% in the prior year. Adjusted net income per diluted share was $0.82 compared to $0.51 in the third fiscal quarter of 2015.

Additionally, we reported strong adjusted free cash flow of $151 million in the quarter, bringing our adjusted free cash flow for the last 12 months to $475 million. Our free cash flow generation remains robust, providing a yield of 10% on our June 30 market capitalization. These overall strong results have and will continue to allow us to meet our balance sheet deleveraging goals of at least a half a turn per year.

The integration of Avintiv into Berry continues to exceed our initial expectations. To-date, we have accomplished the initial synergy objectives of reducing our material and SG&A costs. When we announced the Avintiv transaction, we initially estimated $50 million of cost synergies, and we have raised that estimate to $65 million and then $80 million subsequently in our first and second quarter earnings calls. We expect further future synergies that will be achieved from information technology integration and new commercial revenue opportunities. As these additional synergies become realized, we'll communicate the details in future conference calls.

In general, volume demand in the quarter was softer than the June ending quarter of 2015. But the drivers were different for each of our operating businesses. As a reminder, we measure volumes by resin pounds sold and we typically experience 0.5% to 1% weight reduction per year. This light-weighting provides benefits to us and to our customers.

For our Health, Hygiene, & Specialties division, key underlying health and hygiene global volumes grew 7% during the quarter, driven primarily by strong demand from large customers in North America.

Excluding Europe, overall volumes in the heritage Avintiv business grew about 1% with strong growth coming from Asia. As we have discussed in prior calls, volumes in Europe were lower than last year, primarily as a result of pricing actions and improvements in product mix. These conscious volume decisions in Europe led to a more than 20% increase in operating EBITDA in the quarter over last year.

Our Engineered Materials business continues to perform at a very high level, achieving over 20% operating EBITDA margins for the June ending quarter. Q3 2016 overall volumes were slightly lower than 2015. We believe this is primarily attributable to inventory reductions by our customers on the expectation of lower costs after June. We expect year-over-year volume growth for the Engineered Materials division to return in fiscal Q4.

Turning to our Consumer Packaging business. Volume in the quarter was lower than the prior year, consistent with softer consumer packaged food demand and lower restaurant traffic. Volumes for health and personal care package increased in the quarter. In the face of ongoing soft demand for packaged food products, we have continued to focus our Consumer Packaging division in North America on maximizing profits and cash flow, while managing volumes of our business to optimize those objectives. Utilizing this strategy, the division delivered strong operating EBITDA margins of 19% in Q3 despite the lower demand.

In Consumer Packaging, we continue to take steps to improve our cost productivity and increase fixed asset leverage. And consistent with that strategy, we recently announced the closing of bottle manufacturing facilities in Atlanta, Georgia and Dunkirk, New York.

Outside of North America, we continue to be excited about healthcare, pharmaceuticals, personal care and food packaging growth opportunities, especially in Asia and Latin America, where we expect per capita consumption increases to drive organic growth. As we have said before, with the acquisition of Avintiv, we now have the local leadership and resource capabilities to grow our businesses globally.

We were pleased with the volume growth in Latin America and Asia in the quarter. In South America, we are seeing the initial signs of economic recovery, ex-Venezuela. Consistent with our goals for global growth, both regions achieved operating margins in fiscal Q3 that were above Berry's total company average.

And now, I'll turn the call over to Mark, who will review Berry's financial results in more detail, and then I'll come back to provide our outlook for the balance of fiscal 2016. Mark?

Mark W. Miles - Chief Financial Officer

Thank you, Jon, and good morning, everyone. I would like to refer everyone to slide four now. As Jon previously mentioned, Berry posted record net sales for the June 2016 quarter of $1.645 billion, which was a $404 million or 33% increase over the June 2015 quarter net sales of $1.241 billion. This increase can be primarily attributed to the acquisition of Avintiv that closed on October 1, 2015.

After adding the historical revenue of the acquired business in the June 2015 quarter, net sales on a combined basis were $1.710 billion. When bridging the combined revenue from the prior-year quarter to the current quarter, lower selling prices reduced net sales by 2% and overall organic sales volumes declined by 2%.

I will provide more detail on revenue and volumes by segment in the next few slides. From an earnings perspective, operating EBITDA increased to $316 million for the June 2016 quarter, which was $97 million higher than the prior-year quarter of $219 million. After adding the historical operating EBITDA of the acquired business for the June 2015 quarter, operating EBITDA on a combined basis was $294 million.

Operating EBITDA margins increased to 19.2% in the quarter, which was a 200 basis point improvement over 17.2% in the same prior-year period on a combined basis. The $22 million increase in operating EBITDA from the combined prior-year period was primarily a result of a $32 million improvement in our product mix and price/cost spread, which includes contributions from sourcing synergies. This $32 million improvement was in spite of a $3 million unfavorable timing lag impact from contractual resin costs pass-through arrangements with customers.

Lower SG&A costs provided $1 million to our improved earnings, as the realization of cost synergies more than offset inflation and higher accrued performance based bonus expense. These positive contributions were partially offset by the 2% decrease in organic sales volumes, increased operational costs primarily related to the plant consolidation activities in Consumer Packaging and an unfavorable impact of $1 million for currency translation.

Now, turning to the results of our operating segments, starting with our Consumer Packaging division, I would refer you to slide five. Lower average selling prices decreased our net sales by 1% for the quarter on a year-over-year basis along with a decrease of 2% in organic sales volumes, primarily driven by the market factors Jon just discussed.

Our Consumer Packaging division recorded $133 million of operating EBITDA, representing a margin of approximately 19% compared to operating EBITDA of $140 million in the June 2015 quarter. The year-over-year decrease included a $2 million unfavorable timing lag impact from contractual resin costs pass-through arrangements with customers and $4 million of incremental manufacturing costs primarily associated with plant consolidation activities and the impact of reducing inventories. Excluding these items, operating EBITDA was essentially flat for the quarter, as improvements in product mix and price/cost spread offset the 2% volume softness.

Next, as noted on slide six, our Health, Hygiene, & Specialties division generated net sales of $567 million in the quarter compared to net sales of $122 million in the June 2015 quarter. After adding the historical revenue of the acquired business, net sales for the June 2015 quarter on a combined basis were $591 million. When bridging the combined revenues from the prior-year quarter to the current quarter, lower average selling prices reduced net sales by 2%. Volumes were approximately 1% lower primarily due to lower volumes for specialty products in Europe as a result of pricing actions and improvements in product mix, partially offset by growth in our Health & Hygiene products.

Our HH&S division recorded $108 million of operating EBITDA in the quarter, representing a 20% increase over the prior-year quarter on a combined basis with a margin improvement of over 360 basis points to 19.0% for the quarter. The improvement can be primarily attributed to a $20 million improvement in product mix and price/cost spread, including the impact of sourcing synergies; $1 million of lower SG&A costs on a year-over-year basis resulting from acquisition cost synergies, partially offset by operational cost increases of $2 million, driven by inflation in South America, which was recovered in the $20 million price/cost spread.

Turning to slide seven. Net sales for our Engineered Materials division for the quarter were $373 million. Lower selling prices reduced our net sales by 2% on a year-over-year basis as well as an additional 1% unfavorable impact from currency translation. Base volumes were 2% lower than the prior-year quarter, primarily from the customer inventory destocking Jon mentioned earlier.

Operating EBITDA for our Engineered Materials division was $75 million, representing a 17% improvement over the prior-year quarter. Margins increased nearly 400 basis points to over 20%, primarily as a result of improved price/cost spread along with net productivity improvements in manufacturing and SG&A cost reductions.

Slide eight provides a summary of our quarterly income statement. Overall operating income increased by $58 million or 48% over the June 2015 quarter. This increase can be attributed to the items previously discussed that drove the $97 million operating EBITDA improvement, partially offset by $33 million of additional depreciation and amortization primarily resulting from the acquisition of Avintiv.

As we further review the income statement for the June 2015 quarter, interest expense was $73 million compared to the prior-year expense of $47 million. This $26 million increase is a result of borrowings associated with the purchase of Avintiv at the beginning of fiscal 2016. Looking forward, we successfully completed the refinancing of our term loans in the quarter, which resulted in an annual interest savings of nearly $10 million.

Our effective tax rate was 20% for the quarter, bringing the effective tax rate for fiscal 2016 to 29% through the first three quarters. We continue to drive towards a lower effective tax rate as we implement favorable structural changes and opportunities resulting from the Avintiv acquisition and currently anticipate a full year effective tax rate around 30% for fiscal 2016.

As a reminder, the company has a pre-IPO tax receivable agreement. Under this arrangement, the company remits 85% of its usage of pre-IPO NOLs to shareholders of record immediately prior to our IPO. From a cash flow perspective, the company is essentially a cash taxpayer with a 15% discount. After utilization of the pre-IPO NOLs covered by the tax receivable agreement, we will then be able to utilize the approximate $400 million of federal NOLs included in the Avintiv acquisition.

Net income for the quarter increased to $96 million compared to a loss of $13 million in the prior-year period. The June 2015 quarter included a $94 million debt extinguishment charge related to refinancing activities that reduced ongoing interest expense. Adjusted net income per diluted share increased 61% over the June 2015 quarter of $0.51 to $0.82 in the current quarter.

Finally, as detailed on slide nine, the company generated $206 million of cash flow from operations compared to $180 million in the prior-year period. Our adjusted free cash flow, defined as cash from operations less net spending on property, plant and equipment and payments made under the tax receivable agreement, in the June 2016 quarter was $151 million compared to $140 million in the prior-year period.

As we stated on our last quarterly earnings call, working capital has been negatively impacted in fiscal 2016 by our decision to change certain working capital practices of Avintiv due to Berry's lower cost of capital. These changes have been accretive to our earnings and in spite of this one-time negative impact to cash flow. We have improved cash from operations by 45% to $567 million through the first three quarters of fiscal 2016. We have utilized our free cash flow to reduce our debt and have repaid $390 million of debt through the first three quarters of 2016. Using our June 30 market capitalization, our $475 million of LTM adjusted free cash flow represents a 10% free cash flow yield.

This concludes my financial review. And now, I will turn it back to Jon.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Thank you, Mark. As we've said during prior conference calls, we continue to focus on our top priority of reducing our debt-to-EBITDA leverage ratio through our strong free cash flow and growth in earnings. Our target is to operate in a 3 times to 4 times ratio of net debt to adjusted EBITDA. I am pleased to report that we have again reduced this ratio to a quarter-end level of 4.7 times from the 5.1 times at the close of the Avintiv acquisition just three quarters ago. We currently forecast that we will be in our targeted range of net debt to adjusted EBITDA at the end of fiscal 2017.

As we pursue our other strategic goals of increased organic growth, geographic business expansion and value-accretive acquisitions, our top priority remains achieving the target leverage range by the end of fiscal 2017.

With respect to guidance for the remainder of fiscal 2016, at the last conference call, we increased our fiscal 2016 operating EBITDA target to $1.190 billion and reconfirmed our adjusted free cash flow of $475 million. Given our continued strong performance in the recent quarter, we are again increasing our operating EBITDA guidance for the full 2016 fiscal year an additional $10 million to $1.2 billion, which is an increase of $40 million from our original guidance. We continue to target $475 million of adjusted free cash flow for fiscal 2016 with the forecasted improvement in operating EBITDA being offset by incremental cash taxes, timing of interest payments and the plant consolidations in Consumer Packaging.

The $475 million of adjusted free cash flow includes $817 million of cash flow from operations, less $285 million of capital spending and the $57 million payment under our tax receivable agreement. As a reminder, Berry's fiscal year ends on October 2 this year, and we will provide our full fiscal year 2017 expectations in the November conference call.

Finally, Berry will continue to take the necessary proactive steps to remain competitive and a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages. I am confident that the people at Berry will continue to drive our results and achieve our goals. I thank you for your continued interest in Berry. And now, we're ready to answer your questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Brian Maguire with Goldman Sachs. Your line is open.

Brian Maguire - Goldman Sachs & Co.

Hey. Good morning, guys.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Good morning, Brian.

Brian Maguire - Goldman Sachs & Co.

I'm looking on slide four at the sales bridge. It looks like the volume decline there implied volumes were down about 1.75%. It sounds like there's a lot going on there. I'm trying to disaggregate the different pieces there. It sounds like you had a little bit of customer destocking because of, I would assume, lower polypropylene prices and then you had the actions you've taken in Europe and then you have maybe 0.5% every year from light-weighting.

Just wondering if you could maybe put some numbers around the – each of those? And maybe, would you say, excluding those factors, volumes would have been more like flat or maybe down 0.5% in the quarter?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Look, I think you've correctly assessed the analysis. That's exactly the way we see it. In HH&S, volumes were strong, especially in Health and Hygiene. We had very good acceleration of growth in Latin America and Asia, which we expect to continue into fiscal Q4. And the decisions that we made in Europe were mostly conscious decisions that affected volumes in the Specialties business.

For Engineered Materials, we think it was primarily destocking and we do expect a rebound in volumes in the fourth fiscal quarter. And in Consumer Packaging, I think, there, the marketplace for food packaging continues to remain soft, but we were pleased to see an acceleration in growth in health and personal care products. And so, I think your overall assessment is exactly the way we see it.

Brian Maguire - Goldman Sachs & Co.

Okay. And just kind of related to that, wondering if you have a sense where customer inventory levels are at? And maybe you could kind of give some commentary on, so far in the fourth quarter, if you're seeing some of that restocking happen in the channel.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

I would say, in general, we have the – not always the clearest transparency to that. Within the three divisions, we can see inventories from our customers, the most in our Engineered Materials business. And there, I would say we're – typically they stock 30 days or so of inventory, and we're starting to see a recovery there consistent with our forecast of larger volumes in fiscal Q4.

In our Consumer Packaging division, because of the sheer volume of customers that we have, it's a lot harder to see the transparency. But we also suspect that there was inventory destocking there from some of our large customers in fiscal Q3.

Brian Maguire - Goldman Sachs & Co.

Okay. I'll turn it over now. Thanks.

Operator

Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Your line is open.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Hey, guys. Good morning. Jon, first off, on your comments on Health & Hygiene growth, which sounds like was pretty strong, can you expand on what drove that? And also, when do you think the pricing actions in Europe and other regions will be fully annualized?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Again, I think it was driven by a couple of factors. In North America, I think we had some share gains here and we've also continued to introduce some new products with our Health & Hygiene customers here that are exciting our customers and they're optimistic about their growth. Adult incontinence in North America continues to be one of the fastest growing segments in Health & Hygiene, so we're optimistic about that.

I think, in Europe, there, we're also optimistic about Health & Hygiene products, but we have a higher percentage of Specialties products there. Some of those go into building and construction in Europe. Some of them go into furniture and bedding. And there, we typically consciously take price/volume tradeoffs there to optimize our assets and I think we're likely to see that stabilize, but we won't see recovery in volumes until economic activity in those segments pick up in Europe.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Okay. And then, just on your comments on consumer, just given the sluggish end markets, should we expect more optimization of the footprint as we head into fiscal year 2017? I'm just trying to get a sense as to some of the parameters for cash flow for 2017. I know it's early, but restructuring CapEx and cash taxes. Thank you.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Now, look, I think, with regard to food packaging, for the entire year, if you'll recall at the beginning of the fiscal year, we had forecasted volumes somewhere around minus 1% to 0%. And actually, volumes were coming in slightly better than that in the first half of the fiscal year. And given Q3's results, we now believe that our original estimates for volumes is probably fairly accurate as to where things are going to come out.

I would also remind everybody that the diversity of Berry's portfolio, the acquisition of Avintiv and the steps that we're taking, food packaging in North America now represents something like 65% of our CP business and it continues to fall in terms of its overall impact on Berry, so the strength of Berry's diversification is paying off. We're also optimistic that, in the future, food consumption will increase as economic activity picks up but we are taking all the appropriate steps to right-size our assets, get our cost structure in the right position, be prepared for volume growth if it occurs, but also to optimize our earnings if the current environment continue. So, I think, overall, on balance, Berry has done the right things to maximize the profits of our business.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Yeah. And on cash restructuring, sorry?

Mark W. Miles - Chief Financial Officer

Yeah. Ghansham, I would still expect – while we're not giving specific guidance for fiscal 2017, based on what we see today, I would still expect a decrease in 2017 versus fiscal 2016 following the acquisition of Avintiv this year.

Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Your line is open.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Good morning. Just following up on Ghansham's question. Is your thought that consumer volumes for the full year will come in, kind of, in line with original expectations? And with all the puts and takes in volumes, can you just talk about your expectations for where volumes may shake out for the fiscal year by segment? I think, in the last quarter, you talked about HH&S, up 2%; Engineered, flat; Consumer, negative 1%. Kind of, where do those stand now?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Again, yeah, those are exactly the forecast that we gave at the beginning of the year. We still believe that, again, with Consumer Packaging a little stronger in the first half of the year, a little slower in fiscal Q3. We still believe that our original forecast will hold. On Engineered Materials, we originally forecast flat. We're still optimistic that we'll come in ahead of that for the full fiscal year. And for HH&S, with all the pluses and minuses we described, we still believe the total will come in around 2%.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And then, the $32 million in price/cost mix and synergies that you referenced in your remarks, is it possible to tease out what buckets those fit into in terms of price/cost versus mix versus the synergies?

Mark W. Miles - Chief Financial Officer

Sure, yeah. The amount, just as a reminder, is about the same amount we had last quarter. In the split, this quarter is almost the same as last quarter. It was about a third, a third, a third between synergies from the acquisition of Avintiv, a third is pricing actions on our non-contractual business, and a third is continued efforts to reduce our cost, substitute lower cost materials and drive down the cost of our products through light-weighting, et cetera. And that $32 million did include, as a reminder, $3 million of unfavorable lag, so it was really $35 million, excluding that $3 million, because that $3 million was just a timing item.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. I'll turn it over.

Operator

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open.

Tom Narayan - RBC Capital Markets LLC

Hi. Actually, it's Tom for Arun. In (31:56) looking at your EBITDA guidance. Could you comment at all on how – seasonally how the fiscal fourth quarter compares to the third quarter? Just doing some rough math, it would appear that your guidance suggests sequentially lower EBITDA on 4Q. Is it just conservativeness, or is something else going on there?

Mark W. Miles - Chief Financial Officer

Yeah. We certainly – in terms of seasonality, we're not a highly seasonal business. But generally speaking, our March and June quarters are our two strongest, followed by September, followed by December. But again, there's not significant seasonality in our business. And obviously, we're continuing to put out a guidance that we feel comfortable that we can beat and exceed. Consistent with what we've done this year, we've raised it every quarter. And so, we want to continue to drive upside in our guidance.

Tom Narayan - RBC Capital Markets LLC

Okay. Thanks. And then, on the – you noted the $31 million decline in selling prices impacting your top line. How much of that is resin cost pass-through? We heard another plastic packaging company note that they expected higher than expected resin costs in the back half of 2016. Are you guys seeing that?

Mark W. Miles - Chief Financial Officer

Yes. If you look at the timing of just the resin cost curves, this quarter, as the quarter progressed, we got close to zero on a year-over-year basis. But at the beginning of the quarter, we had lower resin year-over-year, so it resulted in some negative price pass-through. But again, with the quarter progressed, it got close to zero by the end of the quarter. So, most of that price delta was earlier in the quarter.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

And I would just add that, with regards to resin prices, we always have difficulty forecasting that into the future. Prices were up slightly, as Mark mentioned, in fiscal Q3. But I would also note that oil prices have fallen here towards the end of the quarter. And historically, resin prices tend to track long-term with oil prices.

Tom Narayan - RBC Capital Markets LLC

Okay. And my last question now. On synergies, how much have you achieved as of now? I know you guys have the $50 million by year-end and then $80 million achieved through 2017. Is that still where everything is tracking? Or I think you said you exceeded it? Why are you maintaining, I guess, the $50 million by year-end?

Mark W. Miles - Chief Financial Officer

Yeah. The $50 million in fiscal 2016 is still our (34:38) projected estimate with a $30 million carryover into fiscal 2017 for a total of $80 million. So, we're still on track for that. We had a little bit in the December quarter realized. March was, I recall – so, around 75% to 80% realized in the same. In June, it actually got slightly higher in June on a realization basis.

Tom Narayan - RBC Capital Markets LLC

All right. Thanks. I'll turn it over.

Operator

Thank you. Our next question comes from the line of Chris Manuel with Wells Fargo. Your line is open.

Gabe S. Hajde - Wells Fargo Securities LLC

Good morning. This is actually Gabe on for Chris. A couple of questions. Mark, can you talk about the working capital adjustment that you've seen thus far this year with respect to adjustments for Avintiv and how you guys manage that business and then what that – maybe how that plays out heading into next year?

Mark W. Miles - Chief Financial Officer

Yeah. For the year, we're negative $26 million on working capital. However, in the prior year, it was negative $38 million. So, we've actually gained a little bit of ground overall in working capital, and that's in spite of about a $30 million one-time negative impact this year from the Avintiv changes that we drove. Primarily, last quarter, there was a little bit of tailwind to this quarter, but most of those actions impacted actually our March quarter and our December quarter. So, we're over 90% through that. And as you pointed out, Gabe, those should be onetime and not repeating as we roll into fiscal 2017.

Gabe S. Hajde - Wells Fargo Securities LLC

Okay. And I guess, sticking with cash flow. A question earlier, trying to center around the restructuring spend and synergy capture. I think that number was about $65 million this year. I guess, maybe I'm trying to interpret Jon's comments around staying competitive in the market, we would expect some sort of spend next year as well. Can you kind of combine that with what CapEx might look like versus this year with the new facility spend and if there's been any change in timing with that, facility that is? (36:52)

Mark W. Miles - Chief Financial Officer

Sure. Our guidance for this year around CapEx is $285 million. And you're right, in terms of restructuring and business optimization costs, it was in the mid-$60 million. I think the capital number, $300 million-ish, feels like about the right capital number for Berry outside of something unusual. And again, next year, we would expect that restructuring cost to come down outside of something new coming up. But as we see it today, it should come down as we roll forward into fiscal 2017.

Gabe S. Hajde - Wells Fargo Securities LLC

All right. Thank you, Mark.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

And maybe just to comment about the new facility as you asked. Look, we continue to be excited about Health & Hygiene growth. As we discussed earlier today, we still expect that facility to come on sometime late in 2018, and we're still in the middle of design, engineering, and site selection.

Operator

Thank you. Our next question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.

George Leon Staphos - Bank of America Merrill Lynch

Hi, everyone. Good morning. Thanks for the details. I guess, the first question I had for you, Mark and Jon, following up on a prior question. Seasonality, I used to remember, for Berry, pre-Avintiv, as being a toss-up between the fiscal third and fiscal fourth quarter in terms of importance. And depending on where the, if you will, the cold cup business fell during the summer, that was a driver of which quarter won, so to speak. So, has Avintiv changed the seasonality, such that now that December quarter is less important and September quarter less important as well? Question one there.

Question two would be related, I would imagine, with it being a relatively hot summer that you would have seen fairly good volume from your cold cup customers. Now, we didn't have that built into our models. But anecdotally, I would have expected that would have been an upward tension point. What kind of trends did you see in that particular element of your business? And I had a couple of follow-ons.

Mark W. Miles - Chief Financial Officer

Yeah. George, with respect to the first part of the question, seasonality, you got it exactly right. Base (39:12) Berry, the way you laid it out is correct and the Avintiv acquisition did change the math there a little bit, primarily driven by their...

George Leon Staphos - Bank of America Merrill Lynch

Right.

Mark W. Miles - Chief Financial Officer

International exposure. As you know, Europe gets a little weaker in August, actually where we are today. And so, just the international aspect of that business changed the seasonality a little bit in the September quarter.

George Leon Staphos - Bank of America Merrill Lynch

Okay.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

And, George, with respect to drink cups, look, this has been another strong year in totality for drink cups, and so we're pleased with that. I would say there's been some choppiness in the delivery schedules. Fiscal Q2 was extremely strong. I think we did see some customers back up on inventory in fiscal Q3. But when you average the full year-to-date, it has been another strong year for drink cups.

George Leon Staphos - Bank of America Merrill Lynch

Okay. Thank you for that. I guess, the next question I had, as you've more or less now gotten a year under your belt with the acquisition of Avintiv, has there been any adjustments to the accounting accruals that you would have had initially? Have there been any adjustments in things like depreciation that we should be mindful of on a going-forward basis? And then, I had one follow-on – one last one.

Mark W. Miles - Chief Financial Officer

Yeah. I mean, George, nothing other than just the normal purchasing accounting. Certainly, we had a step-up that we have to recognize additional amortization expense. The depreciation expense, there was a modest true-up this quarter, less than $5 million, which...

George Leon Staphos - Bank of America Merrill Lynch

Mark, was that down or up on the depreciation true-up?

Mark W. Miles - Chief Financial Officer

It was down.

George Leon Staphos - Bank of America Merrill Lynch

Okay. That's what I had thought. Just trying to reconcile the numbers, was there anything else?

Mark W. Miles - Chief Financial Officer

No, that was it.

George Leon Staphos - Bank of America Merrill Lynch

Okay. And last question, and I will turn it over. Jon, last call, we had asked you about the margins that you're putting up within Berry. And certainly, they were at all-time records. You should be pleased with that. As you look out in terms of how you protect that level of margin performance going forward, I guess, last quarter was a lot around cost and scale and really scale on the market.

As you've been able to evaluate Avintiv within the mix, is that still the primary area in terms of – is the premise of what I phrase is correct or you expect to get that mode around your business or have you found other areas that should help you maintain and grow these margins going forward? Thank you. Good luck in the quarter.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Thanks, George. Look, I would say, first and foremost, the operating margin results that we got, which we're very pleased with, are a validation that Berry's cost structure and scale provides us significant competitive advantages. The other area that I would add, and we talked a little bit about it in the call, is that we continue to drive improvements in mix, especially in HH&S, but also within Engineered Materials, nice improvements in mix. And most of the volumes in HH&S, particularly where we saw declines, were conscious decisions to mix up the higher value Health, Hygiene and true specialty value-added products. So, I think it's cost, I think it's scale and I think it's mix. And we're still hopeful in the future that volumes will turn the other way. But if it doesn't, we think Berry is in a terrific competitive position.

George Leon Staphos - Bank of America Merrill Lynch

All right. Thank you very much. I'll turn it over. Good luck in the quarter.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Freuchtel with SunTrust. Your line is open.

Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Hey, good morning. Just following up on the depreciation. It looks like depreciation declined about $6 million in the quarter, absent the true-up for Avintiv. Should we expect depreciation to decline at a similar rate going forward? And also, what do you believe is an appropriate long-term level of base capital spend for your equipment relative to your depreciation expense?

Mark W. Miles - Chief Financial Officer

Sure. Yeah. We – with your first question, that was the only unusual item with respect to depreciation, so...

Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Okay.

Mark W. Miles - Chief Financial Officer

Nothing else that I would highlight. With respect to the capital question, we spend about $100 million a year on maintaining our facilities and equipment. The balance of the capital spending is split between growth projects as well as driving further cost reductions in our manufacturing and material costs.

Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Okay. Great. Thanks for that. And did you see any benefit of the innovative Versalite offering in the quarter? And do you have any plans of expanding into additional innovative products in the near term?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Yeah. I think, as we've said in the last couple of calls, first of all, volumes of Versalite on a year-over-year basis are up substantially. But as we've described in the past, while generally there's almost nothing about low oil prices that we don't like, in the case of Versalite, where we have to compete against Styrofoam specifically, low oil prices have driven a delta there and has created a headwind.

We focused in the near term on aggressively reducing our cost structure, and we're seeing the benefit of that. And we continue to work cooperatively with our materials suppliers to try to optimize the cost structure of Versalite. And in the meantime, we continue to optimistically look for new volume opportunities there. And as I said, year-over-year, the growth is nice. But certainly, that's one of the few areas where low oil prices created a headwind for us.

Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Wilde with Bank of Montreal. Your line is open.

Mark William Wilde - BMO Capital Markets (United States)

Hi. Good morning, Jon and Mark.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Good morning.

Mark W. Miles - Chief Financial Officer

Good morning, Mark.

Mark William Wilde - BMO Capital Markets (United States)

Just thinking on that new product theme, can you give us just a little bit of color on where – what you're doing in terms of volume on some of the new packaging products, like NuSeal and Barricade, as well as volume lift from the new products that you mentioned in HH&S?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Yeah. I think, in general, where we have new technologies and new innovations, we're seeing improvements in volumes. Where we're seeing challenges in volumes are in more commoditized product lines. If you think about HH&S, you think about bedding and furniture applications. When you think about Consumer Packaging, I would say it's in the more standardized closures and some bottle offerings. So, we still view innovation long term as an important part of our organic growth. We just have to see how that offsets pressure in the more commoditized lines.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And, Mark, any sense in the current quarter about where you see the interplay between kind of cost and price from a margin perspective?

Mark W. Miles - Chief Financial Officer

Yeah. I mean, that's something that our divisions are focused on daily. As Jon mentioned earlier, we look to optimize our cash flows and profits. And I think, generally, our operating business is doing a good job of balancing that tradeoff.

Mark William Wilde - BMO Capital Markets (United States)

But do you expect headwind or tailwind from, kind of, price/cost as we look at the fourth quarter here?

Mark W. Miles - Chief Financial Officer

Now, look, it's still early to call, but I would expect – we've gotten $30 million-ish in the last couple of quarters. I still think that's going to be positive whether or not it's $30 million or $25 million or $20 million. I think it's still too early to call. But I would expect that positive trend to continue.

Mark William Wilde - BMO Capital Markets (United States)

Okay. All right. And then, finally, I think, Jon, you said that you were seeing some signs of improvement down in Latin America. I wondered if you could put a little color around that.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Yeah. Look, I think, ex-Venezuela, in the quarter, we saw volumes improved and we saw pickups in demand. And I think, from a GDP perspective, people were talking about minus 4 and now they're talking about zero or 1. But on an absolute basis, that's a big change and improvement. And so, we think we're seeing the early signs of, at least, hitting a bottom and starting to turn up.

We are more optimistic about Latin America and very optimistic about Asia in the fourth fiscal quarter, and I think you got to separate Venezuela from that. Venezuela is a unique challenge. Berry doesn't have a lot of exposure to Venezuela, but we have a small amount. Mostly, I think, if you think about Brazil and the rest of the region, we're cautiously optimistic about improvements there.

Mark William Wilde - BMO Capital Markets (United States)

Okay. That's great. I'll turn it over.

Operator

Thank you. Our next question comes from the line of Bill Hoffmann with RBC Capital Markets. Your line is open.

Bill Hoffmann - RBC Capital Markets LLC

Yeah. Thanks, and good morning. Jon, I know one of the longer term strategies in the Avintiv acquisition was some cross-selling opportunities, and I know it takes time. Is there sort of a target you are trying to challenge the company to develop some of those cross-selling opportunities of Berry products into Avintiv customers on a global basis?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Well, Bill, as you well know, I'm not a patient guy, so we would like to have those come sooner than later. But I would expect we'd start seeing the benefits on that in fiscal 2017.

Bill Hoffmann - RBC Capital Markets LLC

Any thoughts on, like, what percentages it might impact from a volume standpoint?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

I think we'll comment on that when we give guidance for 2017 in November.

Bill Hoffmann - RBC Capital Markets LLC

Okay. Thank you. And then, just with regards to Europe and really the Avintiv business there, there's a couple issues in Europe; obviously Brexit, and I'd like to hear your thoughts on what you think might be the impact of volumes over there. And then, two, it sounds like you've been doing some realigning of your markets over there. I'm just wondering, if you can comment on whether you're done with that or you have more to go.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Look, I would say that our European team has done a fantastic job, and we really have a great organization over there. I would say most of the steps that we're taking are conscious steps in our control and they're having a huge positive impact on our profit margins there. And so, we're pleased with that.

With regards to Brexit, we really – I would say our exposure to Great Britain is small compared to all of Europe. And so, it's not really material from that perspective. We're very excited about Health & Hygiene there and certain aspects of the technically-specified Specialties businesses.

The other thing that we're cautiously optimistic about is using some of our European assets as the launching point to serve more rapidly-growing demographics, for example, in Northern Africa. So, I'm quite optimistic about Europe, and I think we're taking the appropriate steps and I'm not really concerned about Brexit with regards to its impact on Berry, specifically.

Bill Hoffmann - RBC Capital Markets LLC

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Debbie Jones with Deutsche Bank. Your line is open.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Hi. Good morning. I was hoping we could talk about Engineered Materials. You mentioned destocking an issue in the quarter. I just want to know what gives you confidence that the volumes will improve in the back half. Have you seen kind of in the first month of the quarter that the destocking has ended? And kind of what specific categories are driving the growth?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Well, first of all, our Engineered Materials business has had just a fantastic year. And for those of you that have followed Berry for a long time, you can appreciate the milestone of reaching a 20% operating EBITDA quarter, just an absolutely great result and the testimony to our team there.

As I said before, in the first half of the year, we saw volumes above our expectations as we forecasted them at the beginning of the year. Q3 was slightly softer, but we believe in that particular business, largely driven by inventory destocking, they typically have about 30 days of turn on inventory. And so, I would say that we're starting to see a recovery there. And it's really broad-based.

We had a very good quarter in our Tapes business. All of our core Films businesses performed very well, and we're even starting to see some improvement. The one business we have in Engineered Materials, which serves the oil and gas type maintenance, our Seal For Life business, even that business from a demand perspective has turned ever so slightly, but positive in the right direction. And so, I think all signs point to a stronger fiscal Q4.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. I think that's helpful. My second question is a point of clarification. Mark, the free cash flow guide – your EBITDA went up, your tax rate went down. I know you called out the cash tax and interest expense items, but I wasn't quite sure how to think about how those impacted the guidance.

Mark W. Miles - Chief Financial Officer

Yeah, Debbie, you got it right. Our effective tax rate for the year decreased. However, our cash tax actually is slightly higher. And so, a part of that is offsetting the $10 million EBITDA increase that we have for the year. So, we're still holding the $475 million.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. And the interest expense component?

Mark W. Miles - Chief Financial Officer

The interest expense – when we refinanced two of our term loans in the quarter, we basically had to term out the old notes. And so, we had to pay all the interest then and start over. So, it's just a timing issue because we had to settle those up in the quarter, so that also had a negative cash flow impact, but just pure timing. Our interest costs are actually decreasing going forward by $10 million as a result of that refinancing.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. I just wanted to confirm that that's what it was. Thank you. I'll pass on (53:46).

Operator

Thank you. Our next question is a follow-up from the line of Brian Maguire with Goldman Sachs. Brian, your line is open.

Brian Maguire - Goldman Sachs & Co.

Yeah. Hey, Mark. Just following up on the interest expense point. I know you guys have a lot of floating rate debt and we've seen a big move up in LIBOR recently, but I know you guys have a floor on that. So, just wondering, could you just remind us what that floor is and how close you are to, maybe, breaching it?

Mark W. Miles - Chief Financial Officer

Yeah. Our LIBOR floor is 1% on all of our variable rate debt, and $2 billion of our term loans are actually hedged. And so, the components that's actually subject to LIBOR going above 1% having an impact on Berry, you have to take off that $2 billion and we're still well below the 1% floor in terms of the current LIBOR. I believe it's around 60 basis points.

Brian Maguire - Goldman Sachs & Co.

Got it. Thanks. And then, one for Jon. Jon, you correctly pointed out earlier that, longer term, polyethylene and remember (54:44) resin in general are linked to oil. And usually seasonally, they're a little bit weaker in the back half of the calendar year, but this year has been a little bit stickier on polyethylene and there's four guys out there trying to nominate a price increase for September.

Just wondering what actions you can kind of take to try and mitigate that if these guys are a little bit sticky on their pricing. And there was a big project that came online in Mexico earlier this year. Just wondering if there's any opportunities for you to source more of your raw material internationally these days. Thanks.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

First of all, I'm not going to comment on short-term fluctuations in resin or what particular suppliers are nominating or not nominating. I would say a couple of factors that we're optimistic about. One is Berry's scale. And with the acquisition of Avintiv, the global footprint that we now have to purchase resin, we're taking every advantage of that. So, we'll acquire resin anywhere in the world where it makes economic sense to Berry.

Secondly, we believe that there's significant increases in supply coming here, largely driven by low cost feeds. We think that's true for polyethylene, especially here in North America. But we also believe that it's true for polypropylene on a global basis. And so, we think that will allow Berry with its scale and global footprint to take the fullest advantage of whatever cost savings are available to us.

Brian Maguire - Goldman Sachs & Co.

Thanks very much.

Operator

Thank you. Our next question is also a follow-up from the line of Arun Viswanathan with RBC Capital Markets. Your line is open.

Tom Narayan - RBC Capital Markets LLC

Hi. Yeah. Thanks. It's Tom again for Arun. Really just real quick on the light-weighting on volumes. This may help some folks thinking about volumes. On that slide four, you note that it's negative $30 million top line hit. Is there a way to parse out how much of that kind of on a year-over-year comparable basis is this light-weighting issue? How substantive is that? Thanks.

Mark W. Miles - Chief Financial Officer

Yeah. It's a little hard to get the exact number, but it's somewhere between 0.5% and 1%. So, in rough terms, it's about half of the $30 million.

Tom Narayan - RBC Capital Markets LLC

Okay. Thanks.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

And I would just add to that, that historically we've thought about that from the traditional Berry side of the business. But with the acquisition of Avintiv, they've also been quite successful in driving lower area weights, and that's an important component of that business as well. So it kind of runs across the entire volume.

Mark W. Miles - Chief Financial Officer

And the benefits to that would show up in that $32 million price/cost spread down in the EBITDA bridge below that on slide four.

Tom Narayan - RBC Capital Markets LLC

Oh, I see that. Great. Thanks.

Operator

Thank you. Our next question comes from the line of Chris Manuel with Wells Fargo. And this will be our last question for today's session.

Chris D. Manuel - Wells Fargo Securities LLC

Thank you for taking the follow-up, guys. And, Jon, I wanted to see if you can comment at all – we appreciate your vigilance on reducing debt, but anything that you've seen come across the desk in terms of M&A that's interesting? Or can you comment on seller expectations if they've come in a bit? And any geographies where you might be seeing opportunities?

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

Well, as always, Chris, as you're aware, this is – the plastics side of the packaging industry remains a very fragmented space here in North America and around the world. So, there's always lots of things to evaluate. As you well know, Berry has historically been very diligent and focused. And so, that's part of our four-point strategy, but it is consistent with our top priority being continuing to focus on hitting our leverage target by the end of fiscal 2017.

Chris D. Manuel - Wells Fargo Securities LLC

Thank you.

Operator

Thank you. And I am showing no further questions at this time. I'd like to turn the call back over to Jon Rich, Berry's CEO, for any closing remarks.

Jonathan D. Rich, PhD - Chairman & Chief Executive Officer

We certainly appreciate everybody's participation on today's call. We thank you for your interest in Berry, and we look forward to talking to you again in November. Thanks, everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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