Berry Plastics Group's (BERY) CEO Jonathan Rich on Q4 2016 Results - Earnings Call Transcript

| About: Berry Plastics (BERY)

Berry Plastics Group, Inc. (NYSE:BERY)

Q4 2016 Results Earnings Conference Call

November 29, 2016, 10:00 AM ET

Executives

Dustin Stilwell - Head, IR

Jonathan Rich - Chairman and Chief Executive Officer

Mark Miles - Chief Financial Officer

Tom Salmon - President and Chief Operating Officer

Analysts

George Staphos - Bank of America Merrill Lynch

Chris Manuel - Wells Fargo Securities

Jason Freuchtel - SunTrust

Tom Narayan - RBC Capital Markets

Tyler Langton - JPMorgan

Alex Hutter - Jefferies

Brian Maguire - Goldman Sachs

Debbie Jones - Deutsche Bank

Mark Wilde - Bank of Montreal

Ghansham Panjabi - Robert W. Baird

Danny Moran - Macquarie

Operator

Good day, ladies and gentlemen and welcome to the Berry Plastics Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Dustin Stilwell, Head of Investor Relations. Sir, you may begin.

Dustin Stilwell

Good morning, everyone. Thank you for joining us, and welcome to Berry's fourth fiscal quarter 2016 earnings call. Throughout this call, we will refer to the fourth fiscal quarter as of September 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 left of the page and selecting the webcast presentation.

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

As referenced on Slide2, during this call, we will be discussing some non-GAAP financial measures, including operating EBITDA, adjusted EBITDA, adjusted net income, adjusted free cash flow and net debt. 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 Investor Presentation on our website.

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 statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release, Annual Report on Form 10-K and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements.

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

Jonathan Rich

Thank you, Dustin. Good morning, everyone, and thank you for joining us. This morning we have several topics to cover with you including our fourth quarter and full fiscal year results and update on the AEP acquisition and the appointment of Tom Salmon as our new President and Chief Operating Officer. We'll also provide our perspective on the overall market conditions, as well as our expectations for fiscal 2017.

On September 30, the company announced that I would retire as Chief Executive in February 2017 and that Tom Salmon was elected to the role of President and Chief Operating Officer as part of a thorough succession planning process conducted by the Board of Directors. I want to start this morning by congratulating Tom in his newly appointed role.

Tom joined Berry in 2007 as part of the Covalence acquisition. For eight years he was President of our Engineered Materials Division and for the past two years was President of Consumer Packaging. Tom began his career at GE and also held leadership positions with Honeywell and Tyco. For the past six years I worked closely with Tom and I am very confident in his leadership abilities.

In 2017 Berry will celebrate its 50th year in business. From our simple beginning in 1967 with one injection molding machine producing plastic cast, today Berry is a global business with annual revenues of $6.5 billion, over 21,000 employees and 115 facilities around the world. I am very proud of our accomplishment over the past six years.

The company has an extremely strong and deep leadership team and the time is right to pass for the baton. I look forward to continuing to my relationship with the company as Executive Chairman or intend to advise and assist Berry in any way I can, and remain involved with our investors.

And now I'd like to turn it over to Tom Salmon who will provide an overview of our September quarter and 2016 fiscal year results. Tom?

Tom Salmon

Thanks Jon, and good morning everyone.

First I want to sincerely say thanks and congratulate Jon for significant accomplishment that Berry has achieved under his leadership as Chairman and CEO. I'm honored to take on this role as Berry's President and Chief Operating Officer. I look forward to continue with Berry's long history of delivering value to our customers and shareholders while providing great opportunities for our employees and the communities where we are located.

I'm very pleased to report that Berry had another strong quarter in fiscal Q4 and that for the full year 2016 we exceeded our guidance for operating EBITDA and adjusted free cash flow.

Turning to Berry's specific results for the quarter starting on Slide 3, revenue for the September 2016 ending quarter was $1,618 million, a 35 % increase over the prior year. Operating EBITDA was $301 million, an increase of $96 million over the prior year. Both sales and operating EBITDA were record results for any September quarterly period.

Our operating EBITDA margins in the quarter were up 150 basis points to 18.6%. Adjusted net income was $0.73 per diluted share compared to $0.50 in the fourth fiscal quarter of 2015. We generated $231 million of adjusted free cash flow in the quarter versus the prior year result of $189 million.

For the full fiscal year 2016, adjusted free cash flow was an annual record of $517 million providing a yield of approximately 10% on our September 30 market capitalization. In total volume in the fourth fiscal quarter was down less than 1% from the same prior year period adjusted for acquisitions.

For our Health, Hygiene, & Specialties division, volumes were up in the heritage Avintiv business by 1% globally with Health and Hygiene related products up mid single digits versus the prior year. Volumes in the specialty products lines were lower than last year.

As reminder, our specialty offerings consist of high margins, technically specified products, like materials for air and liquid filtrations, dryer sheets and building wrap also contained higher volume, lower value add products used in furniture and bedding applications. In the last several quarters, we have chosen to shift our assets to higher value add products which has resulted in higher margins and EBITDA but yielding lower physical volumes.

International volumes in heritage Avintiv were up in the quarter led by Asia. I’ll also remind you that Berry's international businesses in South America and Asia generally have operating EBITDA margins above the total company net average.

Volumes for Engineered Materials products were flat versus last year but improved in lower year-over-year volumes we saw in the June quarter when customers reduced inventory levels.

Demand for food packaging and restaurant food service products in North America remained soft consistent with reported market data on consumer spending and consistent with what our customers have reported. Berry's volumes in the Consumer Packaging division were down about 2.5% versus the September 2015 quarter while pound volumes continue to be affected by ongoing light weighting and package downsizing both of which generally benefit our earnings. We continue to take steps to optimize price and volume trade-offs to maximize earnings.

Long-term, we believe that our global HH&S division will grow volumes 3% to 5% and both Engineered Materials and Consumer Packaging will grow 1% to 3%. With our recent acquisition of Avintiv and pending acquisition of AEP, we continue to position the company towards market segments and geographies that should benefit from higher growth rates.

A year ago in October, we closed the acquisition of Avintiv which has proven to be transformative for the company. The integration process continues to exceed our expectations. In the first year we have surpassed our initial synergy targets of reducing material and SG&A costs, and we expect to achieve additional synergy opportunities as we complete the integration.

Now I will turn the call over to Mark who will review Berry's financial results in more detail and discuss our financial outlook for fiscal 2017. Mark?

Mark Miles

Thank you, Tom and good morning everyone.

I would like to refer everyone to Slide 4 now. As Tom previously mentioned, Berry posted record net sales for any September ending quarter of $1,618 million which was a $422 million or 35% increase over the September 2015 quarter. This increase was primarily a result of the acquisition of Avintiv that closed on October 1, 2015.

After adjusting for the historical revenue of acquired business in the September 2015 quarter, net sales on a combined basis were $1,645 million. When bridging the combined revenues, total organic sales volumes declined by less than 1% in addition to small unfavorable impact from currency translation.

From an earnings perspective, operating EBITDA increased by $96 million from the prior year quarter to $301 million which is also a record for any September ended quarter. After adjusting for acquired business, operating EBITDA on the combined basis for the September 2015 quarter was $276 million. The $25 million increase was primarily a result of a $22 million improvement in our product mix and price cost spread which included contributions from sourcing synergies and the $3 million favorable timing lag impact from contractual resin costs pass-through arrangements with customers.

Lower SG&A costs in net productivity and manufacturing provided another $10 million to our improved earnings. These positive contributions were partially offset by an unfavorable impact of $6 million from currency translation. Operating EBITDA margins were 18.6% for the quarter which was 180 basis points improvement over the same prior year period on a combined basis.

Now turning to Slide 5, net sales for 2016 were fiscal year record of $6,489 million compared to $4,881 million in 2015. This 33% increase was primarily due to the acquisition of Avintiv. After adding this historical revenue acquired business, net sales on a combined basis for 2015 was $6,816 million, 5% reduction in net sales when we combine fiscal 2015 results includes 4% from lower selling prices as a result of a pass-through of lower plastic resin cost and a 1% unfavorable impact from currency translation.

Organic sales volumes were flat on a year-over-year basis. Operating EBITDA for fiscal 2016 came in at record $1,210 million. This $109 million increase in operating EBITDA from 2015 on a combined basis was primarily result of $117 million improvement in our product mix and price cost spread which included contributions from sourcing synergies and a $9 million favorable timing lag impact from contractual resin cost pass-through arrangements with customers.

Net productivity improvements and manufacturing provided another $10 million to our improved earnings. These kinds of contributions were partially offset by an unfavorable impact of $12 million from currency translation.

Operating EBITDA margin was 18.6% for fiscal 2016 which was a 250 basis point improvement over 2015 on a combined basis. Looking at the results of our operating segments starting on Slide 6, our consumer packaging division recorded $122 million of operating EBITDA compared to $128 million in the September 2015 quarter. The year-over-year decrease included $6 million of incremental manufacturing and SG&A cost primarily associated with plant consolidation activities.

Excluding these items, operating EBITDA was flat for the quarter as improvements in product mix and price cost spread offset the volume softness. For the full 2016 and 2015 fiscal years, the consumer packaging division posted $508 million of operating EBITDA in both years while operating EBITDA margins improved from 17.7% in fiscal 2015 to 18.4% in fiscal 2016.

Next, as noted on Slide 7, our Health, Hygiene & Specialties division generated revenue of $560 million in the quarter compared to $119 million in the September 2015 quarter. After adjusting for acquisitions and net sales for the September 2015 quarter on a combined basis were $568 million. When bridging the combined revenue, organic sales volumes and average selling prices in the quarter were flat with the 1% unfavorable impact from currency translation.

Our HH&S division recorded a $109 million of operating EBITDA in the quarter, a 22% increase over the prior-year on a combined basis and operating EBITDA margins were 19.5% which was an improvement of over 380 basis points. The increase was the result of a $11 million benefit in product mix and price cost spread and $14 million of lower manufacturing SG&A cost primarily from acquisition cost synergies, partially offset by a $6 million unfavorable impact from currency translation.

Turning to Slide 8, net sales for Engineered Materials division for the quarter were $365 million compared to $370 million in the prior year quarter. The 1% decline is due to lower selling prices on a year-over-year basis of 1%, as well as small unfavorable impact from currency translation. Operating EBITDA for our Engineered Materials division was $70 million and increase of 20% over the prior year quarter. Margins increased over 320 basis points to 19.2% primarily a result of improved price cost spread along with net productivity gains and manufacturing and lower SG&A cost.

Slide 9 provides a summary of our 2016 September quarter and fiscal year income statement. Operating income for the quarter increased by 41% to $151 million. This $44 million was due to the $96 million operating EBITDA improvement partially offset by $48 million of additional depreciation and amortization primarily resulting from the acquisition of Avintiv.

Interest expense was $69 million for September 2016 quarter, a $30 million increase from the prior year quarter as a result of borrowings associated with Avintiv acquisition offset by interest savings from free cash flow used to reduce debt and the term loan refinancing completed last quarter.

Our expected annual cash interest expense for fiscal year 2017 is $275 million which contemplates the continued utilizations of free cash to pay down debt throughout the year and the financing of the AEP acquisition.

Our effective tax rate was 7% for the quarter bringing the fiscal 2016 full year rate to 23%. 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 NOL for shareholders of record immediately prior to our IPO.

From a free cash flow perspective, the company has essentially a cash tax payer with the 15% discount. After utilization of the pre-IPOs covered by the tax receivable agreement, we will then be able to utilize the approximate $500 million of Federal NOLs included in the Avintiv acquisition.

This is an increase of $100 million from our previously communicated amount as the final pre acquisition tax returns provided additional NOLs acquired by us. A $60 million TRA payment was just made last month, representing our estimated obligation to our pre-IPO shareholders for the 2016 fiscal year results and that’s been included a reduction to our adjusted free cash flow for fiscal 2017.

After making this payment, we have a $114 million remaining on the tax receivable agreement to be paid in subsequent years. We estimated our fiscal 2017 effective tax rate, our income statement purposes at 32%.

Net income for the quarter increased to $77 million compared to $48 million in the prior year period. Adjusted net income per diluted share increased 46% from the September 2015 quarter to $0.73 in the current quarter. For fiscal 2016, our net adjusted net income per diluted share increased by 46% to $2.53 compared to $1.73 in fiscal 2015.

Next on slide 10, the company generated $290 million of cash from operations compared to $245 million in the prior year quarter an increase by 35% in fiscal 2016 from $857 million. We have utilized our free cash flow to reduce our debt and repaid $524 million of debt in fiscal 2016.

Our adjusted free cash flow, defined as cash from operations less net spending on EP&A and payments made under the tax receivable agreement was $231 million in the September 2016 quarter compared to $189 million in the prior year period. Using our September 30, market capitalization, our $517 million of adjusted free cash flow in fiscal 2016 represents nearly 10% adjusted free cash flow yield.

Our financial guidance in current line assumptions for year 2017 is shown on slide 11. Note, that we are providing financial guidance for fiscal year 2017 assuming a February 1st closing or the AEP transaction.

So the extent of the closing is different the impact will be included in our updated guidance in subsequent quarter conference calls. We have targeted our fiscal 2017 adjusted free cash flow at $550 million, which was reduced by the $60 million tax receivable payment that was made in the first fiscal quarter. This estimate assumes no impact to working capital and constant currency rates.

Additionally, our capital spending is forecasted to be $315 million. Within our adjusted free cash flow guidance, we are also assuming other cash taxes primarily related to the international jurisdictions of $80 million and other cash uses of $60 million primarily related to items such as integration expenses and synergy realization costs associated with Avintiv and AEP.

As we look forward to the December 2016 quarter and fiscal 2017, I would like to remind everyone that our December 2015 fiscal quarter and fiscal 2016 year included an extra week of operations. Accordingly, our reported fiscal 2016 first quarter and annual results should be adjusted down by 8% and 2% respectively to provide comparability to our December 2016 quarter and fiscal 2017 results.

This concludes by financial review, and now I’ll turn it back to Tom.

Tom Salmon

Thank you, Mark.

We continue to focus on our top priority of reducing our net debt to adjusted EBITDA ratio to our predictable and strong free cash flow. I am pleased to report that we reduced this ratio to our fiscal 2016 year-end level of 4.5 times, representing a reduction of $0.06 from 5.1 at the close of the Avintiv acquisition a year ago.

Our plan for the upcoming fiscal 2017 year remains unchange from a year ago as our top priority is to achieve a target leverage ratio for low four times net debt to adjusted EBITDA. We currently forecast to reach that level on or before the end of fiscal 2017.

I’d like to update everyone on our pending acquisition of AEP industries. In late August, we entered into an definitive merger agreement under which Berry will acquire all of the outstanding shares of AEP in a cash and stock transaction. Each AEP shareholder can elect to receive either $110 of cash or 2.5011 shares of Berry common stock per AEP share in the transaction, subject to an overall 50/50 proration to ensure that 50% of the total outstanding AEP shares are exchanged for the cash consideration.

Upon closing, AEP shareholders will own approximately 5% of Berry on a fully diluted basis. The potential combination of AEP with Berry’s and Engineered Materials Division offers the opportunity for significant value creation for Berry and AEP shareholders alike, as we realize procurement and operating cost savings across the two organizations.

Our initial expectation is to realize $50 million of annual cost synergies within the first two years. I am pleased to report that we have received early termination of the HSR waiting period from the SEC and we anticipate the close of the transaction to be completed in the March quarter subject to the approval of AEP shareholders.

With respect to guidance for fiscal 2017, as Mark discussed, our adjusted free cash flow target is $550 million and assumes successful closing on our acquisition of AEP effective February 1, 2017. The guidance also assumes overall organic sales volume growth to be 1%, which includes 3% growth from HH&S, 1% growth from Engineered Materials and 1% decline in our consumer tax division. Our conservable approach to guidance will be the same as last year and we plan to provide updates quarterly as appropriate.

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 of Berry will continue to drive our results and achieve our goals.

I thank you for your continued interest in Berry. And, now, we are ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from George Staphos with Bank of America Merrill Lynch. You may begin.

George Staphos

Hi, everyone. Good morning. Thanks for all of the details and congratulations to Jon and Tom on the next chapters of your careers, obviously we enjoyed working with you. I guess, the first question I had on AEP, can you talk about the progress in terms of actually closing the transaction. Has it been more or less as you expected, was it delayed for any reason and if the later what have been the issues if you can remind us? And then I had a few follow-ons.

Mark Miles

Sure. Good morning, George. It’s Mark.

George Staphos

Hi Jon. Hi Mark.

Mark Miles

Good morning. So we have as Tom I think noted in the opening comments, we received early terminations so the regulatory approvals from SEC is complete and so now we’re just going through the registration process with the SEC and we will be filing an amendment soon.

So I would say it's on track normal course, obviously could have went faster had we not been subject to the random review by the SEC but we were, so we’re just going through that process as normal and our next amendment should be filed in the next week.

George Staphos

Okay. And that’s the only thing that’s held up the process from what you can see?

Mark Miles

That is correct.

George Staphos

Okay. I appreciate that. Can you talk about this question and a couple of others, and I’ll turn it over and try to come back in queue, around guidance. Can you talk at all about how much AEP is anticipated to add to your free cash flow for 2017 including the effect of the integration spending which I am assuming much of that’s going to be related to AEP.

And then within guidance what are you using for foreign exchange if anything what should we assume for synergies with AEP and what rate are you using for - on interest expense, you said currencies at the fourth quarter average that we just reported or is it the current interest rate?

Mark Miles

Okay, George. I think I’ve got all of your questions. If I have missed one, please let me know. This is Mark again.

George Staphos

Will do.

Mark Miles

With respect to AEP, we still feel very comfortable with the annual cash flow that it will generate of around $85 million on a normalized basis. In fiscal 2017, however it's de-minimis impact to our fiscal 2017 results because A, we only have it for 8 months and more importantly B, we will have all the closing costs associated with the acquisition that will impact our free cash flow such as advisor fees et cetera, as well as the normal synergy related costs that we have at the beginning. So the impact of 2017 is very modest but we still feel very good about the $85 million of free cash that we will add once we get past these start-up costs from the acquisition.

With respect to FX, we use basically the end of September's rates, I will tell you we have very little impact from FX, the biggest impact is the Euro related translations, so for us FX as you can see in our reported results has a fairly modest impact due to our heavy concentration in North America and the U.S. specifically.

And with respect to interest rates, we have a 1% floor on our floating rate debt, so we have about $2 billion of floating rate debt to the extent LIBOR stays below 1% it’s not relevant; to the extent it goes above 1%, you would just have to take that impact times around $2 billion to determine the impact which will become less as the year unfolds as we pay down that debt because that's the debt that we're paying down throughout the year.

George Staphos

Okay. That makes sense. The last one I will turn it over and it sounds like there is not much in the synergy then from AEP for obvious reasons, if you can confirm that. The tax rate was pretty low this quarter, is that from just fourth quarter's being noisy what was behind that? Thank you.

Mark Miles

Okay. We do have - again we continue to feel confident with the $50 million of cost synergies for AEP. The impact of those synergies is built into our outlook for fiscal 2017 but they're offset again by the costs associated with achieving those that come upfront in the transaction. But there is an amount baked in around $20 million in fiscal 2017.

With respect to the tax rate, yes it was impacted by a couple of factors one was the new accounting regulation that allow you to take the benefit of stock compensation expense relative to our stock options, as well as the R&D tax credit and some one-time tax planning projects that we completed in the quarter.

George Staphos

Thank you, Mark.

Operator

Thank you. Our next question is from Chris Manuel with Wells Fargo Securities. You may begin.

Chris Manuel

Good morning gentleman, and congratulations both to you Jon, it’s been wonderful working with you over the last few years and congratulations to you as well Tom, and look forward to spending lot of time with you over the next couple of years.

Jonathan Rich

Thanks Chris.

Tom Salmon

Thank you, Chris.

Chris Manuel

I had a couple of questions I wanted to run through, I mean one that kind of follow on to what George was talking about, the currency has moved a chunk here and I recognized it's not a big, big component but, Mark, I think I know you all enough to know usually leave room for some conservatism but at current currency rates, do you still feel that your numbers would be okay, that you laid out here today?

Mark Miles

Yes, we do.

Chris Manuel

Okay, that's helpful. And then second if you could kind of remind us because we're part way through it, where are you on - what's the current synergy target for Avintiv, how much have you got via year end and is it still embedded into 2017, and then with the timing being moved back a little bit for AEP or at least kind of as we had modeled things or thought about things the $50 million do you have a sense of timing for that coming through both 2017 and 2018 or kind of how that phases?

Mark Miles

Chris, good morning, it's Mark again. With respect to the Avintiv synergy, we still feel good about the $80 million of synergies, $50 million of that realized in our fiscal 2016 results and the remaining $30 million in our fiscal 2017 results, as we identify more synergies related to that transaction that will be upside to the guidance that we provided with respect to Avintiv.

AEP again we still feel very confident with the $50 million synergy and I would expect similar to Avintiv but in the second year will be on a full run rate basis and as we identify more synergies just as we did with Avintiv, we will update the market on a quarterly basis.

Chris Manuel

Okay. Do you think that you can get to maybe half of those in the 8 months you own at this year if I was splitting it, would that be a fair way to think about it or?

Mark Miles

Yes, just under that.

Chris Manuel

Okay. And then I have a question for you Tom. The - what you've embedded here in the numbers is still a little bit more degradation in the consumer business and HH&S it looks like slowing a bit to kind of 3% or you've been running kind of mid single digits. Can you maybe kind of run through some of what you're seeing in each of those pieces, I know you've been working on up churn mix and such in the Avintiv piece but are you kind of behind - most of that behind you at this point, I think particularly in specialty, you were still down a little bit this quarter per client but are we close to running through the course of that number one.

And then two, in the consumer side, what are you seeing with respect to you're already part way through the current quarter but what's the path or is there a path to maybe get that back to kind of flat?

Tom Salmon

So Chris couple of big questions clearly our guides tend to be conservative on the HH&S side demand has continued to improve each of the quarters in 2016 and certain headwinds that impacted 2016 have fallen off given us lot of confidence in our 2017 estimate of 3%, we now have - we have also seen excellent growth in Asia. So we feel very comfortable with that business. As we talked, we've made certain trade-offs in terms of volumes versus margins in that business and 3% conservative achievable number.

Relative to Consumer Packaging, the consumer continues to be challenged and what we're seeing is just that. Volume remains steady but sluggish, the guidance that we provided in 2017 is consistent with what we achieved in 2016 and again as opportunities arise to update that guidance will do so.

We also believe that the Avintiv acquisition has provided a tremendous opportunity for us to build plans long term to globalize that business. And having the platform to globalize business, take advantage of higher growth rates in other regions of the world is very positive thing.

Chris Manuel

Okay. That's very helpful, and thanks guys and congratulations on strong finish to the year as well.

Operator

Our next question is from Jason Freuchtel with SunTrust. You may begin.

Jason Freuchtel

Hi, good morning guys. Yes it looks like your depreciation expense increased pretty significantly quarter-over-quarter in 4Q and has fluctuated over the course of 2016. Can you just comment on what's driving a fluctuation in depreciation expense?

And additionally it looks like, I guess for forecasting purposes depreciation expense has been about 60% of CapEx over the past couple of quarters, is that a good metric to use going forward or what variables could impact that metric?

Mark Miles

Yes, good morning, Jason. This is Mark again. So we had some volatility in our depreciation on a quarterly basis due to the true-ups from the Avintiv acquisition and the purchase accounting related to that. So I would simply look at our annual amount and divide it by four that's what was driving some of the bumps quarter-to-quarter and going forward that should continue to be a good result although decreasing out some of the purchase accounting step-ups run off. Right so as time unfolds obviously depreciation and CapEx will converge outside of M&A activities.

Jason Freuchtel

Got it. And then I guess in terms of your synergy expectation, I think I noticed in your proxy, you shared that you didn't receive pricing information from AEP, I guess in terms of expecting some synergy benefit from sourcing and pricing, what is that that gives you confidence that you can achieve your synergy expectations both in fiscal 2017, as well as in fiscal 2018?

Tom Salmon

I would say this, this is Tom. Shareholders should continue to note that sourcing scale and benefit provides really a valuable competitive advantage for Berry and I think it's clear historically from other acquisitions we've done we've demonstrated the ability to execute on those synergies and we feel very confident in our ability to do so here as well.

Jason Freuchtel

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. You may begin.

Tom Narayan

Yes it's actually Tom for Arun, I know you guys discussed this just now I wondered if you maybe get little bit deeper on the Consumer Packaging volumes down 2.5% this quarter, last quarter it was down 2% and you guys are forecasting down 1% in 2017. I get that there is fuzziness there and you could revaluate then, but could you maybe talk about maybe what's behind that some degree of optimism there or what things you could do or perhaps your customers are doing that could potentially turn the tie there and lead to the kind of improved performance in Consumer Packaging volumes.

Jonathan Rich

It's a good question. Couple of things, in terms of fourth quarter performance it really was more of the timing function in terms of certain demand and business being pushed for one quarter to the other. It was not symbolic of what the entire year reflects, so that definitely reflects Q4.

We are focused on innovation. There is a tremendous number of opportunities for us and the number of account relationships we have with key end users throughout our company gives us unparallel access and our opportunity to work with those customers to find and understand unmet needs in the marketplace is what we do from a consumer insight and marketing perspectives.

Clearly, we'll continue to reveal in future calls progress we are making on the innovation front, but clearly areas around barrier technologies, hybrid structures and the others are key components of our longer-term growth for the Consumer Packaging business. We are bullish as I said and as I said to address the previous call, we also believe this is a business that long term we have a great platform to continue to grow this business globally.

Last I'll say that during this time we are - the marketplace and our consumers have seen a difficult stock environment. We continue to temper our investment in certain areas and focus on manufacturing efficiency and rightsizing our assets. We are ready for the turnaround. So when the turnaround happens Berry is going to be very well poised to take advantage of that.

Tom Narayan

Okay. That's a helpful. On diapers we noticed some Nielsen data that showed what appear to be a potential shift from a branded to private label, there could have been some issues in that data and some ecommerce may have been taking share. One, is that net kind of negative for you guys, are you seeing that? And also with the potential for capacity increase in diapers, Tom, just market wide could you comment on that end market and what's happening there?

Tom Salmon

Certainly to be a real player and simple we don’t care either way we do both. We participate in both the branded as well as private label space. So it's an opportunity for us on both hands. Clearly, dynamics in terms of just being a global business, we can take advantage of regions with higher birth rates and that is the advantage for Berry for sure.

Tom Narayan

Okay. And I noticed a pretty sizable shift in working capital in 4Q, pretty sizable benefit. Could you comment on the timing there why 4Q is such a big impact there and kind of how to think about that?

Jonathan Rich

Yes, I'd say it's normal seasonality with our business. We continue to drive improvement in working capital obviously that's part of our ongoing efforts as a company. We are highly focused on generating free cash and we understand working capital as a component of our free cash but nothing unusual.

Tom Narayan

Okay. Thanks. I'll turn it over.

Operator

Thank you. Our next question is from Tyler Langton with JPMorgan. You may begin.

Tyler Langton

Good morning. Thanks. Jon, I missed it but could you just turn through what the Q4 volumes were in HH&S and Engineered Materials?

Jonathan Rich

Sure. They were both relatively flat in both of those businesses for the September quarter. Again Health and Hygiene being up also by the Specialties as we look to move to higher value added products in our Specialty segment and Engineered Materials was slightly up. We rounded it flat, but basically flat for the quarter.

Tyler Langton

Got it. Thanks. And then just looking for 2017 just 3% volume growth guidance for HH&S, could you talk a little bit about what you are expecting from sort of Health and Hygiene in those numbers and what you might be expecting from Specialties?

Jonathan Rich

Like we said earlier the demand has continue to improve in each of the quarters in 2016 and we have some of the headwinds that impacted 2016 falling off - the run rate gives us stronger support for the 3% growth rate. Again we believe also that the international growth that we have seen specific in Asia will continue and us being fresh into the New Year, we’ll remain very confident at 3% estimate.

Tyler Langton

Thanks. Last question on working capital, I know you guided to flat for 2017, I guess ultimately with AEP, do you think you get some working capital gains going forward?

Jonathan Rich

I mean as we get in – as we get deeper into that acquisition and to the extent we have opportunities there, we will certainly update our guidance and look forward to doing that but for now, we think the right way to view it is flat assumption conservatively for next year.

Tyler Langton

Okay, great. Thanks so much.

Operator

Thank you. Our next question comes from Philip Ng with Jefferies. You may begin.

Alex Hutter

Good morning, it's Alex Hutter on for Phil Ng. Congratulations on a nice quarter guys.

Jonathan Rich

Thank you.

Alex Hutter

So first just back to AEP, it’s our understanding that annual negotiations with resin suppliers takes place typically in the calendar fourth quarter with the AEP deal closing February, are you able to leverage the scale of polyethylene purchases you gain from AEP throughout the entire system in 2017 or is that more of a 2018 event now?

Jonathan Rich

Well, listen clearly I will reiterate the sourcing scale definitely benefits us in terms of resin negotiations, while there may be some calendarization when agreements are negotiated that happens really depending on the opportunity and clearly we certainly will begin those negotiations with AEP and we believe that we will be able to capture associated benefit on that.

Alex Hutter

Great. And then resin prices have been suddenly high in 2016 as you head into 2017 and your guidance, what have you baked in for the resin prices and what are you seeing in the overall resin market are you starting to see polyethylene turn to more of a buyer’s market?

Jonathan Rich

I would say that’s, resin prices are very difficult to predict, we assume flat resin costs for the end of the fiscal year. Our guidance on both free cash and EBITDA should not be significantly impacted relatively to improvements in resin. Near term, we do think that additional capacity addition should provide a positive supply demand dynamic for converge like ourselves.

Alex Hutter

Great and then it seems you’ve like a pretty good line of sight to getting to the high end of your leverage target by the end of next year, can you talk about how you think about capital allocation once you get there your appetite for dividend was looking to get more aggressive on M&A again or just how you’re viewing that?

Jonathan Rich

Yes, well we would discuss that during later calls to our top priority remains simply to in the target leverage range on before the end of fiscal 2017.

Alex Hutter

Great, thanks very much, and congratulation on the new role Tom.

Operator

Thank you. Our next question comes from Brian Maguire with Goldman Sachs. You may begin.

Brian Maguire

Yes, good morning. Thanks for taking my questions and have my congratulations Tom and John on your next chapter and might as well.

Mark Miles

Thank you, Brian.

Brian Maguire

Just looking on Slide 11, appreciate the outlook for free cash flow. It looks like there is some components there, that you could kind of bridge back to EBIT number that is around $1.34 billion is that kind of roughly about right $1.34 billion for EBIT in 2017?

Mark Miles

Yes, that’s correct Brian.

Brian Maguire

Okay, great. And then just kind of wondering if you had any initial thoughts on impact from potential that’s perform in the U.S. it’s got have been a hot topic since the election, I realize you guys have a lot of NOLs in the U.S. and the cash taxes are in very high but as you kind of think about the duration of those intervals could potentially stretched out or just kind of general thoughts you have on lower tax rate given the size of your U.S earnings.

Mark Miles

Yes, we - this is Mark again Brian. We continued to monitor certainly the proposed changes that are being talked about obviously being predominately a U.S. company majority of earnings coming for the U.S. for the expense tax rates to go down in the U.S. we would benefit from that but we’ll continued to monitor that and take the actions as appropriate to manage the company’s cash flow and earnings and certainly saying the best of those

Brian Maguire

Okay, great and then so I’m just following on the prior question, should we just then assume that for your resin assumptions of 2017 you don’t have much of any benefit from lower resin prices in your guidance.

Jonathan Rich

That’s correct.

Brian Maguire

Okay. And then are you seen an inflation in non-resin raw materials these days or any tightness in labor markets in particular?

Jonathan Rich

Nothing noteworthy…

Brian Maguire

Okay, great. Appreciate the time.

Operator

Thank you. Our next question comes from Debbie Jones with Deutsche Bank. You may begin.

Debbie Jones

Hi, good morning. Jon congrats on the retirement. My first question is on cash interest expense for next year. Mark you mentioned that contemplation have continued utilization of free cash flow to pay down debt in your comments earlier, should we assume a similar pay downs what we saw in 2016?

Mark Miles

Yes, I think our quarterly – I think our – if you look in our quarterly cash flow we basically used that you know on a quarterly basis to pay down debt and I would expect just to do the same this fiscal year.

Debbie Jones

Okay. And then I wanted to just see if you guys can talk about growth CapEx spending by its segment in 2017 and how that compares to 2016. And I am trying also to figure out do you need to spend more meaningfully in consumer to get to that 1% to 3% longer term target that you have?

Tom Salmon

Relative to that the spend – we don’t break that out by getting segment but as I said it in earlier response, we have focused quite heavily actually on tampering reinvestment in certain areas and focused in our time around manufacturing efficiencies and rightsizing the assets. We don’t think it will require significantly larger amount of capital to achieve those growth target.

Debbie Jones

Okay. Thanks. And just last question, can you talk about how your M&A strategy coincide with your leverage target. Do you see acquisitions got there that interest that you think you kind of stay natural in terms of where you are trying to get to leverage by the end of 2017?

Tom Salmon

You know, I’ll reiterate. Clearly, my number one objective is to achieve the target leverage range on a core end of fiscal 2017 that’s we’re focused on as well as making certain that we execute on the AEP acquisition and complete executing on the synergies relative to Avintiv.

Debbie Jones

Okay. Thanks. I’ll pass it over.

Operator

Thank you. Our next question comes from Mark Wilde with Bank of Montreal. You may begin.

Mark Wilde

Good morning, Jon. Good morning, Tom, Mark. Tom, I wondered if we could just come back to consumer packaging and you can just help us think about sort of the moving peep from your perspective in that business sort of the benefits from some of the new products that you are rolling out versus what’s going on in sort of the underlying existing products?

And then finally, whether you get any benefit in volume from bank that you are buying resin or affectively or more cost efficiently than your competitors or whether you assume that resin benefit just goes to the bottom line rather than volume?

Tom Salmon

Well, Berry handle most of the managers in terms of probably go to market. Clearly our people, our processed, our product, our scale you know are all components of it. But, to be clear the consumer packaging business you know just continues the challenge consistent with what we are seeing from the consumer and our end customers.

We clearly believe if they get stronger our discretionary spend becomes more valuable to the consumer that will move benefit from that. I think there is a real opportunity with the scale and the reach that we have from an end user base to work with our customers on finding ways to innovate more affectively with them by providing consumer insight and what those unmet needs are and we continue to work with all of the major consumer packaging companies to uncover what those nuggets of opportunities might be. Clearly in future calls we’ll breakout greater details in some of the areas of the innovation and that we’re working on inside the company at a later date.

Mark Wilde

And Tom, is it possible to get a sense of you know, in consumer packaging say, what percentage of your business is kind of new products that you’ve rolled out in the last two or three years?

Tom Salmon

That’s also something that we will present you in future calls, definitely some.

Mark Wilde

Yes. Okay. All right. And then finally, can you just with the dollar quite strong right now, is that influencing at all like you think about offshore acquisitions?

Mark Miles

Mark, good morning. This is Mark here. We’re just continuing to focus on hitting that leverage target. We want to make sure we get there by the end of fiscal year. So that’s our number one priority. We are certainly monitoring currency with respect to operations in our earnings cash flows and taking the appropriate actions. Our number one priority is hitting that leverage target.

Mark Wilde

Okay. Fair enough. I think that’s been quite clear this morning. Thanks.

Operator

Thank you. Our next question comes from Ghansham Panjabi with Robert W. Baird. You may begin.

Ghansham Panjabi

Hi, guys. Good morning. You know, I guess, some of your peers have commented on some level of inventory destocking in certain channels both during the calendar year 3Q and also 4Q. First off are you seeing any signs of that as well in your various segments in the current quarter and also your most recent quarter?

Mark Miles

We clearly in the Engineered Materials business we saw that versus last year but the September quarter close during the fourth quarter was everywhere itself, so we definitely - we saw in Engineered Materials but it's back on normalized rate right now, those are ebbs and flows that happen throughout the course of the year and we will manage it accordingly over 12 months calendar.

Ghansham Panjabi

Okay. And then the $80 million other cash tax, I guess within our actual jurisdictions, Mark how much of that would be recurring?

Mark Miles

So we have about $40 million of other cash tax in fiscal 2016, we took a conservative look at that for the guidance, I think $80 million should prove to be very conservative but with the AEP acquisition just the uncertainty of how that would impact our taxes, we feel that was a prudent thing to do but we will continue to update that quarterly.

Ghansham Panjabi

Okay. Just one final one on the CapEx of 315 for 2017, how much of that is the Avintiv capacity for HH&S you're adding in the U.S.? Thanks.

Mark Miles

We certainly have a component built into that, we haven’t disclosed the actual amount and we are continuing to monitor the spending on that and obviously we want to make sure it matches the demand as we add capacity for that market.

Ghansham Panjabi

Well for that capacity addition in the U.S. is a bulk of it in 2017?

Mark Miles

There is a big portion in 2017 yes.

Ghansham Panjabi

Okay, thanks.

Operator

Thank you. And our next question comes from Danny Moran with Macquarie. You may begin.

Danny Moran

Hi guys, good morning, thanks for taking my questions. I just had a follow-up on Brian's question on the implied fiscal 2017 EBITDA guidance and just the bigger picture bridge, it sounds like we have $30 million from additional Avintiv synergies eight months of AEP EBITDA synergies from AEP and then volume growth, you had impressive price cost in fiscal 2016, are you anticipating some of this reverses?

Mark Miles

We do have the lag benefit that we received in fiscal 2016 which was just under $10 million, we removed that from our fiscal 2017 guidance otherwise we assume no additional upside.

Danny Moran

Okay, got it. Thanks. And then when should we start to see some of this volume improvement, could this come as early as fiscal 1Q or is this more back half weighted?

Mark Miles

Yes we're close into the year right now obviously we're just into the November timeframe but we should see that predominantly in the back half of Q3.

Danny Moran

Got it. Okay and then just one last one from me, I think you gave a range on CapEx of $110 million to $330 million last year you mentioned this depends on how much you spend but it depends on where volume shake out for your CapEx spend, it looks like volumes came in below expectations, yet CapEx was unchanged, how should we think about this range in fiscal 2017?

Mark Miles

Yes I mean there is obviously a lag impact on CapEx and volumes right as you add capacity throughout the year there is a lag impact, so I would say capacity that you're adding now is more, the larger portion of the impact is going to be in the next fiscal year.

Danny Moran

Okay. Great, thanks guys. Good luck in fiscal 2017.

Operator

Thank you. Our next question is from George Staphos with Bank of America Merrill Lynch. You may begin.

George Staphos

Thanks. Thanks operator, thanks for taking my follow-up questions guys. Did you put down what your expectation for depreciation amortization is for fiscal 2017 on a net basis obviously when AEP is closed upon?

Mark Miles

We have not, George let us circle back on that. We will look at how we can get that out either before the call or on our next earnings call.

George Staphos

That would be helpful Mark, obviously as we try to evaluate the business and the level of spending and there are some questions on this as well is helpful, it's not the only marker but it is helps to have a mark relative to depreciation. Do you think given your spending level relative to your current depreciation which is whatever north of $500 million that is any areas that perhaps need some reinvestment maybe it doesn't occur in 2017 but maybe 2018 or 2019 on a more accelerated basis or you feel pretty comfortable with the run rate of 315 relative to the phase of business as it exist today?

Mark Miles

I think we feel very comfortable with the $300 million capital budget plus again about 20 for AEP which is how you get to 315 and achieving the growth rates that we have talked about today.

George Staphos

Okay. Appreciate that. My last question again there are a lot of good questions on volumes and innovation relative to company and I guess I had a near term question and a bigger picture question and I will turn it over, is it possible we're almost into December now to comment to what kind of volume trend you've seen thus far in the fiscal first quarter. Obviously if you adjust it for the extra week you had last year and then bigger picture, since you've gone public, you have obviously you performed well relative to consensus expectations you should be applauded for that but one thing that has been a challenge for Berry not just one quarter, two quarters but longer term has been the volume story, so Mark, Tom, Jon as you think about it, is it that a consumer still struggling or you're getting traction on your innovation but there are other portion of the portfolio that are fading or maybe subject to more competition, how would you have us think about that? Great quarter, congratulations and good luck in the upcoming year.

Jonathan Rich

Hi George, this is Jon. First of all, I would say with regards to the current quarter, no significant movements there are other than we were pleased to see the revision to the GDP results today than any improvements in economic activity in the U.S. should benefit our business and we've been - we've been looking forward to that.

I think with regards to long term, obviously the steps we've taken with the business through the acquisition of Avintiv and now the acquisition of AEP are diversifying the company's portfolio towards health, hygiene and medical. We think these phases not only here in the U.S. but on a global basis will benefit us with larger volume gross in the future and we are - we’re optimistic - cautiously optimistic of our Consumer Packaging and as Tom said, we’re going to look to diversify that business globally and hopefully see a turnaround here in North America as the economy's continued to improve.

George Staphos

So you don’t think it's been really competitive factor or a natural fading of some portion of your business let to the sluggish volume in particular consumer it's, you’re not concerned about that?

Jonathan Rich

Not concerned and I think it’s been reflected in consumer behavior and it's very similar to what our customers look forward as well.

George Staphos

All right, thank you Jon again. Congratulations to you as well, we’ll see you soon hopefully.

Jonathan Rich

And again with no other questions I would like to thank everybody for their continued interest in Berry and we look forward to talking to you again at the end of the next quarter. Thanks everybody.

Operator

Ladies and gentlemen this concludes today's conference. Thanks for your participation. Have a wonderful day.

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