Berry Global Group, Inc. (BERY) CEO Tom Salmon on Q2 2020 Results - Earnings Call Transcript

Berry Global Group, Inc. (NYSE:BERY) Q2 2020 Earnings Conference Call May 1, 2020 10:00 AM ET

Corporate Participants

Dustin Stilwell - Director & Head IR

Tom Salmon - Chief Executive Officer

Mark Miles - Chief Financial Officer

Conference Call participants

George Staphos - Bank of America

Anthony Pettinari - Citi

Anojja Shah - BMO Capital Markets

Ghansham Panjabi - Baird

Tyler Langton - JPMorgan

Neel Kumar - Morgan Stanley

Arun Viswanathan - RBC Capital Markets

Brian Maguire - Goldman Sachs

Kyle White - Deutsche Bank

Gabe Hajde - Wells Fargo Securities

Operator

Ladies and gentlemen, and thank you for standing by, and welcome to the Berry Global Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Dustin Stilwell. Thank you. Please go ahead, sir.

Dustin Stilwell

Thank you and good morning, everyone. Welcome to Berry's second fiscal quarter 2020 earnings call. Throughout this call, we will refer to the second fiscal quarter as the March 2020 quarter.

Before we begin our call, I would like to mention that on our Web site, we have provided a slide presentation to help guide our discussion this morning. And after today's call, a replay will also be available on our Web site at berryglobal.com, under our Investor Relations section.

Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question-and-answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time and then fall back into the queue for any follow-up or additional questions.

As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. 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 Web site.

And finally, a reminder 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, our Annual Report on the 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'd like to turn the call over to Berry's CEO, Tom Salmon.

Tom Salmon

Thank you, Dustin, and good morning everyone.

I hope everyone is safe and healthy during these extraordinary times. First and foremost, I want to express my sincere appreciation for the commitment and dedication of our employees and continuing to work seamlessly with our business partners to ensure our key supply chains remain uninterrupted and operational. We're taking precautions in our facilities to keep our people safe by aggressively cleaning and disinfecting high touch areas, practicing social distancing and good hygiene as we've been doing for many weeks now. With our number one priority and core value always being health and safety of our people.

Everything we do at Berry starts with safety. As you can see on Slide 3, we have a never ending commitment to identifying, managing and eliminating risks. And we're very proud of our safety record with an over 40% improvement in recordable injury rates since 2016, and also recordable rate significantly below the industry average. We understand that what we do here very is very valuable part of the supply chain making supplying products that are protecting each other, our friends, our families and our neighbors and communities around the globe. We are truly living our mission of always advancing to protect what's important.

As you can see on Slide 4, the safety and supply of necessities such as food, medicines, sanitizing products and protected health care apparel, to name just a few have never been more vital. Additionally, we donated materials to help stop the spread of the virus. As part of this effort, we donated approximately 100,000 facials to local care healthcare workers and first responders, which were in short supply and over 50,000 hand sanitizer bottles to communities and businesses to aid in the protection of spreading the infection to name just a few.

Now, let me highlight the key topics we would have you take away from today's call. We had a terrific quarter with solid organic volume. Our portfolio diversity is unmatched and recession resistant is proven through past economic downturns approximately 65% of our business is an advantage to neutral end markets related to Coronavirus pandemic, the integration of RPC remains on track. We expect low single digit volume growth post COVID-19 and feel very confident that we can exceed our free cash flow guidance of $800 million this fiscal year.

Looking at some highlights for the quarter and segments on Slide 6. We generated March quarterly records for both net sales and operating EBITDA both increasing over 50% to $3 billion and $530 million respectively. Our adjusted earnings per share increased 42% to $1.19. And we reported significant improvement in free cash flow bringing our four quarters total at $886 million.

For the March quarter organic volumes were up 2% led by our health, hygiene and specialty segment which recorded stronger than expected volume growth of 3%. As you might recall, we anticipated volume growth inflection within our HH&S business in the June quarter. And we're very proud of the team achieving this goal a quarter ahead of plan. I'm equally pleased with our Engineered Materials team delivering volume growth in the quarter of 2% in line with our commitment.

Our consumer packaging North American business had flat lined for the quarter with strength and health care, household cleaning and grocery offset by weakness in food service and industrial markets. We remain encouraged by the momentum of the division with a growing revenue pipeline.

And lastly, our Consumer Packaging International Business reported improved volumes sequentially and we continue efficiently integrate the business with intense focus of developing our growth pipeline and realizing the cost synergies to our initial forecast of $150 million.

With respect to the impact of COVID-19, we're very fortunate to have an extremely diversified and stable portfolio of products with 70% being consumer non-discretionary products such as food and beverage, healthcare, hygiene and personal care. We estimate the impact of COVID-19 to be a net 1% benefit to volumes in the quarter. Specifically, both our consumer packaging businesses are experiencing strong demand in healthcare, hygiene and grocery markets and some weakness from impact of COVID-19 in food service and more economically sensitive industrial markets.

Health, hygiene and specialties continue to see benefits from increased demand for hard surface disinfecting wipes, personal protective equipment and healthcare apparel, such as surgical face masks and gowns. Engineered Materials has strong demand in grocery films, retail trash bags and ecommerce films partially offset by modest declines in our industrial businesses and certain product categories such as can line are sold to schools and office buildings.

While some markets we serve will be more damaged during these uncertain times offsetting others will be more negatively impacted. We believe our underlying long-term demand fundamentals remain intact as we continue our focus on delivering protective solutions that enhance consumer safety.

Before I pass the call over to Mark, I want to discuss the strong, defensible and predictable nature vary and make sure it's fully appreciated. We're in close communication with our key customers and suppliers working collaboratively through these uncertain times and today, our supply chain remains robust and fully operated.

We enter the second half of the fiscal year with positive volume momentum driven by our forecast and focused investments towards driving long-term sustainable growth, solid cost containment plans, solid balance sheet and confidence in our ability to execute our plan and deliver on the outlook we're providing here today.

We know that the quarters ahead has some uncertainty around consumer purchasing behavior. But it's one of the world's largest manufacturers of non-woven materials and protective packaging. We're in a strong position to weather the toll that COVID-19 pandemic is having on the global economy. Through the wide range of products that we manufacture and the proven benefits they provide. Our diversified portfolio is stable and will continue to deliver to meet or exceed expectations for 2020 and beyond.

As we've highlighted on prior calls, we are taking proactive approaches in providing environmentally friendly solutions, educating consumers and providing design innovation all the aid in the collection and support of the circular [indiscernible] for plastics. In fact, one of our key organic growth opportunities for Berry comes from an increasing consumer demand for more sustainable or environmentally friendly packaging.

As you can see on Slide 7, plastic packaging offers several environmental advantages versus other substrates such as two times less energy consumptions, six times less water usage, five times less solid waste, and four times less greenhouse gas emissions to name just a few. This past year was a transformative year for us at Berry and we continue to make tremendous progress toward all of our goals to maximize positive impact and lead the transition to a more circular economy.

As we announced in early April, we are ahead of schedule for impact 2025 strategy and set a new record for annual usage of post consumer plastics. More specifically, we continue our long-term reduction in greenhouse gas emissions intensity, haven't reduced its intensity 3% year-over-year and 46% since we began measuring carbon footprint in 2008. We're ahead of schedule for achieving our sign base target of 25% reduction in greenhouse gas emissions intensity by 2025, having already achieved a 14% reduction versus our baseline.

Over the years, customers, consumers alike have become accustomed to the advantages of plastic packaging, weight, versatility, durability, convenience barrier properties, keeping fresh food fresh longer and cost effectiveness. During these extraordinary times, trends such an elevated focus on health and hygiene, increased at home consumption and increased ecommerce adoption become immensely important and plastics provides all the necessary winning characteristics. Characteristics such as shelf stability and preservation, property, size optionality and customization, multi-use capabilities, antimicrobial, impact, clarity and cost efficiency.

These trends are now forced to the forefront will be largely adopted longer term as consumers demand their products to be safe from disease and shop more online. The bottom-line is that plastics has become an indispensable and necessary part of all of our lives that protect us, help prevent the spread of diseases and enhances our life each and every day. And at Berry, we're very proud to be the leader of providing protective packaging solutions.

Now I'll turn the call over to Mark, who'll review Berry's financial results in more detail. Mark?

Mark Miles

Thank you, Tom. I want to wish good health for everyone and their families.

As Tom referenced and shown on Slide 8¸ second quarter reported sales were up 53% to just under $3 billion. The increase included revenue from the acquisition of RPC, along with organic volume growth of 2% and putting 3% volume growth in health, hygiene and specialties and 2% in Engineered Materials. These positives were partially offset by lower selling prices due to the pass-through of lower resin costs in the sale of the Seal for Life business.

From an earnings perspective, the March quarter operating EBITDA also increased over 50% to a quarterly record of $539 million. The increase included contributions from the RPC acquisition, synergy realization and the benefit from 2% organic volume growth. These improvements were partially offset by the sale of our Seal for Life business, an unfavorable price cost spread as expected and our health hygiene specialties, in consumer packaging North America segments due to a timing benefit from falling resin costs in the prior year quarter.

Now looking at the results of each operating segment, with the prior year quarterly results restated to match the current structure starting on Slide 9.

For the quarter, our consumer packaging international division delivered sales of $1.1 billion, an operating EBITDA of $175 million. This division primarily consists of business acquired as part of the RPC transaction in July 2019 and therefore not included in our historical results. So for comparison purposes, we are utilizing RPC results prior to our ownership.

Volumes were 2% lower than the prior year due to the impact of COVID-19 in Asia, along with weakness in European industrial markets, partially offset by growth in grocery, pharmaceutical and hygiene markets. Operating EBITDA was slightly lower as cost synergies were offset by a timing benefit from lower polymer costs in the prior year quarter. Through our first nine months of ownership, we continue to be encouraged by the growing pipeline and momentum of the business and proud of the execution of the team.

Next on Slide 10, sales in our consumer packaging North American division were $706 million in the quarter which was 10% higher than the March 2019 quarter as a result of the addition of the North American rigid business from the RPC acquisition, partially offset by lower selling prices from the contractual pass-through of lower resin cost to our customers.

Organic volume was flat in the quarter with 60% of the portfolio seeing growth in end markets, such as healthcare, hygiene and groceries, partially offset by reduced demand for food service and industrial related products.

Operating EBITDA for our consumer packaging North American division in the quarter was $151 million, compared to $124 million in the prior year quarter. This 22% increase was primarily driven by the contributions from the RPC acquisition, including synergies from the combination.

Turning to Slide 11, our health, hygiene and specialties division delivered sales of $576 million in the quarter compared to $642 million in the prior year quarter. The decrease was primarily attributed to the contractual pass-through of lower resin prices to our customers, the sale of the Seal for Life business in an unfavorable impact from foreign currency changes. These headwinds were partially offset by stronger than expected volume growth of 3% in the quarter with growth in all four regions globally.

Segment volumes benefited modestly in the quarter related to the Coronavirus, which we estimate at around 1%. We are encouraged by the progress our team has made and the positive momentum of the business as demonstrated by the 3% volume growth and selecting a quarter ahead of our expectation.

Operating EBITDA decreased by $6 million from the prior year quarter when adjusted for the sale of the Seal for Life business. This modest decline was consistent with our expectation as a result of timing like benefits received in the prior quarter. And we continue to expect price costs in the segment to inflect positive in the June 2020 quarter.

Next on Slide 12, sales for Engineered Materials division were $598 million for the quarter compared to $619 million in the prior year quarter. This decrease was attributed to the pass-through of lower resin prices partially offset by organic volume growth of 2% in the quarter; volume growth in the quarter turned positive as we expected and was a result of our efforts and focus to regain market share with regional and local customers as we continue to onboard new business wins.

Operating EBITDA in our Engineered Materials dimension increased 4% to $116 million primarily as a result of improved productivity and 2% volume growth in the quarter. We are encouraged by the progress our team has made and the positive momentum of this business as well. As positive momentum is not only seen in our positive volume growth, but can also be seen with price costs coming in positive in the March quarter from improved productivity a quarter ahead of our expectations.

Slide 13, provides a summary of our income statement for our second fiscal quarter. Overall, operating income increased nearly $100 million over the prior year quarter primarily attributed to the improved operating EBITDA just discussed partially offset by incremental depreciation and amortization from the RPC acquisition. Our net income for the quarter increased over 70% to $126 million and adjusted earnings per share improved over 40% to a quarterly record of $1 19 per share.

As a reminder, we do not add back amortization of intangible to acquisitions to our adjusted earnings per share. If we were to add back this amortization, it would increase our annual adjusted EPS by more than 30% and believe this should be considered when comparing to other companies that make such adjustment.

Next on Slide 14, the company generated $350 million in cash flow from operations in the quarter compared to $170 million in the March 2019 quarter, increasing over 80% primarily from incremental cash flow resulting from the RPC acquisition.

Net capital expenditures in the quarter were $115 million as we incurred spending on cost reduction initiatives as well as customer link growth related projects and in line with our $600 million plan for fiscal 2020.

Our free cash flow for the quarter was $200 million and improvement of over $100 million compared to the prior quarter, primarily attributed to our growth in EBITDA.

When the fourth quarter ended free cash flow was $886 million, we remain committed to maintaining a strong balance sheet and are consistently increasing dependable cash flow provides us the opportunity to improve our strong balance sheet as we have demonstrated historically. The company maintains a strong liquidity position with over $950 million of cash at the end of the quarter as well as an undrawn $850 million asset base line of credit, representing $1.8 billion of liquidity. Also, we have no financial maintenance covenants or near term debt maturities.

Additionally, the back half of our fiscal year is historically the strongest period of cash flow generation, with over $500 million expected in fiscal 2020.

Looking beyond 2020, including a realization of synergies and excluding the associated integration costs our normalized free cash flow would be more than $900 million, which represents a free cash flow yield of over 15% using our quarter end market capitalization.

And finally, while certain markets have been impacted by COVID-19 and related restrictions, we're fortunate to have such a diversified portfolio with strong stable end markets. Our guidance has assumed COVID-19 related restrictions continue for the remainder of our fiscal year. We believe approximately 65% of our portfolio is advantaged to neutral, with about 35% negatively impacted by COVID-19.

While we expect the Coronavirus to negatively impact our volumes from low-single digit growth to a low-single digit decline, we believe that we will still generate growth in EBITDA in the back half of our fiscal year driven by cost synergies and improved productivity.

Specifically on volumes for the back half of this year, assuming COVID-19 related conditions persists, we would anticipate our health, hygiene and specialty segment to produce high-single digit growth related to capital investments we've made, the continued pivoting of our portfolio to higher growth products, along with higher demand from our healthcare products.

Both of our consumer packaging businesses we believe will experience low-single digit volume declines related to weakness from the impact of the pandemic and food service and more economically sensitive industrial markets, partially offset by solid demand and healthcare, hygiene and grocery.

Within Engineered Materials we believe low to mid-single digit volume declines are likely as pre-buying phase for stronger demand products and grocery films, which will be offset by declines in our industrial businesses and certain product categories such as institutional canned liners sold to schools and office buildings.

The net negative impact we are anticipating related to COVID-19 on volumes of earnings are transitory. As the restrictions are lifted, we anticipate all of our segments will return to positive organic growth as demonstrated in the most recent fiscal quarter from the pre-COVID-19 volumes and earnings levels.

As such our fiscal year 2020 free cash guidance and assumptions are shown on Slide 15. We anticipate our fiscal year free cash guidance will be in excess of $800 million to at least $1.4 billion of cash flow from operations partially offset by capital expenditures of $600 million. Our free cash flow represents a free cash flow yield of over 17% using our quarter end market capitalization.

Cash taxes are expected to be $150 million and cash interest costs are projected at $430 million assuming interest rates at the end of the March quarter. Additionally, we expect restructuring costs primarily related to the RPC acquisition of $75 million and a $25 million cash benefits and working capital from lower material costs.

This concludes my financial review. Now I'll turn it back to Tom.

Tom Salmon

Thank you, Mark.

Given the evolving situation and the uncertainty related to the potential effects of the COVID-19 pandemic, we believe it is prudent to remain focused on our top three financial objectives of improving our strong balance sheet, organically growing our businesses and integrating the RPC acquisition. We're 100% dedicated to producing sustainable, profitable growth as demonstrated in this recently completed quarter. We continue to work diligently across all of our businesses to grow organically and have been able to demonstrate organic volume growth by providing advantage products in targeted markets, as evidenced in our recent results.

Organic growth projects in both Engineered Materials and health, hygiene and specialties divisions are now benefiting us with Engineered Materials growing 2% and HH&S growing 3% in the recently completed quarter. Our anticipated capital expenditures in fiscal 2020 of $600 million is further evidence to our commitment to move capital dollars into those markets and regions seeing greater growth while maintaining our low cost position in the markets we serve to drive further value for Berry.

Our HH&S division is performing very well as we continue to benefit from the pivot to higher growth markets such as premium hygiene, capital investments like our R5 line in China, our non-woven white line in Morrisville, North Carolina, the continued pursuit to increase our share of wallet with existing customers and now an added caveat for essential products like wipes, max and gowns needed to combat the Coronavirus pandemic. We believe this business will show mid-to-high single digit growth for the remainder of 2020.

Next, the acquisition of RPC gives us world-class product innovation engine, where we enjoy leading positions in higher value added closures, dispensing systems, medical devices and healthcare packaging. Specifically, our healthcare environmental solutions are showing strong growth we produce market leading respiratory inhaler devices to world leading brands, among many other healthcare packing products for injectables, nasal, [indiscernible] and dermal applications. Our position as a sustainable packaging recycling solutions provider drives our differentiation.

We have and will continue to commit resources to create profitable, sustainable organic growth across these markets. Similarly, RPC presence in emerging markets complements Berry's growth objectives in multiple industry segments and provides a geographically diversified global portfolio of products and end markets. We remain confident in our total cost synergy target of $150 million, with half or $75 million expected to be realized in fiscal year 2020.

As you know, we've never seen a global pandemic and macro economic market impact quite like we're witnessing right now. But, I can say that through historical recession, such as those in the early 2000s and in the great recession of 2008/2009, that the results of the economic recession saw a modest negative impact on volumes, lower input and raw material costs provided a modest tailwind to earnings along with more significant benefits to cash flow through lower working capital.

Similarly, with COVID-19, we would expect volumes to be down low-single digits with cost inflation providing a partial offset with a larger one-time benefit to free cash flow from lower working capital needs. I would add that our portfolio today is much more recession resistant, geographically diverse, with unmatched end market diversification.

For those reasons, I'm very confident in our team's ability to meet our near-term and long-term expectations and provide sustainable, profitable growth for all of our stakeholders.

And finally, Berry will continue to take steps necessary to remain a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. Our key priorities now are to safeguard the continued health of our employees and communities, ensure the reliability of our supply chain and provide accurate and timely service to our retail customers and consumers.

Additionally, we continue to be laser-focused on finding way to extract more value for our stakeholders by reinvesting in our leading low cost position, leveraging our resources around the businesses with a greatest opportunity to grow and create value for our customers, all while doing our part to protect our environment.

I'm confident that the people of Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important.

Thank you for your continued interest in Berry. At this time, Mark and I would be glad to answer any of your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of George Staphos from Bank of America. Sir, your line is now open.

George Staphos

Hi, everyone. Good morning. Thanks for all the details. Hope you're doing well and thanks for what you're doing on COVID. My two questions and I will turn it over, if you could give us additional color in terms of which segments should see a sequential pickup in price cost and when the time on that might be over the back half the year that would be helpful.

I think you mentioned VM should be more positive price cost coming up in the June quarter, but I want to make sure that I had all those details. And then, away from the inflection on price cost, if you could talk a little bit about whether you've been involved in any projects, trials related to COVID remedies. Obviously, the industry has to get working on infrastructure and capacity before any remedies are approved hopefully that'll happen somewhere down the road. Can you comment on what trials you might be involved in? And then more broadly, you'll have this pandemic and the recession is, in your view, changing the view of plastics in the market based on any data, not your perception based on data that you might have. Thank you, guys.

Tom Salmon

Thanks, George. First and foremost, we committed that Engineered Materials originally the projection was both it and HHS would pivot to positive on price cost in the June quarter, Engineered Materials pivoted a full quarter early and we remain on track for HH&S to pivot to positive in the June quarter.

It's interesting relative to our involvement relative to COVID, it's quite extreme and I would say that the health and safety concerns for people we believe will remain a top concern post COVID. I can't get into specifics but there are certain flexible applications right now that that we are working with and around, know that will support in some instances, vaccinations in terms of how those materials are actually produced. I can't go into a lot of particulars on that. But needless to say, our involvement relative to COVID is extreme, with the business ultimately making materials for gowns and drapes, back covers for healthcare tables, infection prevention wipes, the material ultimately for disinfectant wipes, surface disinfectant wipes, filtration for form and blood, healthcare under pads, we touch the healthcare system in a tremendous number of ways on a global basis.

So, clearly the differentiation, our portfolio, the investments that we've made to support this differentiation specifically in HH&S as we previously communicated with investment through the R5 in China, with the air filtration investment in China, with the investments that we've made in Morrisville on surface disinfectant wipes are all a part of that fight towards a resolution to COVID-19 and how we protect people. And again, we do not believe this is a short-term trend, we think this will be sustainable. And I would tell you, George, no, I've never been more proud of our company. And people, in turn, how have they managed through this crisis, working remotely to provide an uninterrupted supply of products to our end customer. So I'm very proud of the team and what they've done.

And frankly, our investments that we've made, we're a large contributor to the success that we had pinned into growth a full quarter early and the business remained very, very solid and very strong and we were similarly pleased with Engineered Materials, because relative to COVID, we similarly saw benefit in trends like crackers snacking and snacks were Engineered Materials benefits from some of the converted films it makes to manufacturers.

Mark Miles

George, it's Mark. Just good morning. Just to add to the price cost question, your first part of the question. We've got a relatively neutral assumption in or the balance of the fiscal year across the businesses. Certainly to the extent there's any incremental deflation in the market that would be a tailwind we've got a conservative assumption and our guidance associated with incremental deflation we use current costs that we projected forward.

George Staphos

Yes. And Tom, just I don't want to double dip here. But do you have any data right now that tells you whether the consumer is viewing plastic better, worse, the same based on what's been happening with COVID and/or, just the realities of being in a deeper recession? Thank you guys, I'll turn it over.

Tom Salmon

Well, the reality is we continue to see strong growth in our food businesses both in CPI International, as well as in CP North America, the pipeline for opportunities in those two businesses in those categories specifically continues to grow and be very robust. And that's why as we've said, the impact of COVID are clearly transitory and we feel very comfortable that these businesses will pivot to grow post COVID and the pipeline of opportunities on deck substantiate that outlook.

And listening clearly, the attributes of plastics in terms of protection barrier are, I think very evident right now and we continue to want and we'll do our part relative to waste, but we couldn't be more proud of being ahead of schedule on our impact 2025 goal, where we're focused on creating competitive advantages in our business by using design, and its optimization to make products more usable or reusable, recyclable, compostable.

And I think us continuing to act internally to demonstrate the part that we're playing in terms of reducing greenhouse gas emissions, landfill waste and energy, I think is huge. And we'll continue to work with our end users, our partners, trade organizations, to focus on how we modernize our infrastructure to continue to increase recovery and loss to ultimately address that concern and I feel really proud of the work that the lines and plastics waste is doing and other organizations like Ellen MacArthur and others, but we're very bullish and we're going to do our part to address those areas that need to be addressed, but the attributes of plastics speak for themselves. And they are ringing very loud right now for sure.

Operator

Your next question comes from the line of Anthony Pettinari. Your line is now open.

Anthony Pettinari

Good morning, and thanks for all the details, especially with what you're doing on safety. Your Consumer International Business sells into some Asian and European markets that saw negative volumes in the quarter and I was just wondering if you looked at the trends in the three months of the quarter and into April, did you discern anything with regards to demand, are you seeing kind of continued deterioration in Asia and Europe, maybe some stabilization or maybe even improvement?

Tom Salmon

The impact in CPI clearly industrially driven, the automotive business was very negatively impacted both in Europe as well as Asia. Our operations are back up and running throughout Asia right now, I would say that demand is continues to be somewhat muted, our outlook for the back half is forecasting down low single digits. And in Europe, they were clearly a little further ahead relative to COVID. There is definitely some easing of some policies right now throughout Europe. And as we provided our guidance, we felt that most prudent to just assume absolutely no change. And therefore, any type of improvement in terms of stay at home restrictions, the degree to which businesses are open and returning workers to the offices, people traveling to and from work and schools, impacts a number of our businesses that have been negatively impacted, like food service and others. Clearly we saw weakness in industrial demand, pre-COVID beginning, it'll take some time for that to work out. But, Asia as a whole for us, certainly heavily driven by our HH&S business is very positive where we'll show, double-digit growth and growth as well as in earnings in the back half of the year.

Anthony Pettinari

Okay. That's very helpful. And then with regards to the CapEx guidance, unchanged for the year, the investments that you've highlighted around stretch films, masks, wipes, PPE. Is it possible the size of the CapEx dollars associated with those investments and then expected returns or earnings contribution? And then are there any CapEx investments that you're maybe pushing out in other parts of the business to keep that overall number flat?

Tom Salmon

We believe maintain our guidance, relative to CapEx makes really good sense. We've seen no real success directing investments into growing spaces where we're targeting specific markets with advantage solutions and tying those up to Letters of Intent from our end customers is proven very valuable in HH&S, in engineered materials and in consumer packaging in North America and we're deploying that same strategy in CPI. We believe it's prudent for us to continue to reinvest in our business. We feel comfortable with that level. And it's a strong sign and testimony that a) we're going to continue to reinvest our low cost position and b) we're focused on continuing to develop a sustainable platform of growth opportunities, where our company can continually be relied on delivering growth on a go forward basis post COVID. So we think it's prudent.

We're always choosing relative to different opportunity based on the return on investment. So we're not really trying to be short-term oriented in anything we do. It's always strategically in terms of how it's going to benefit the business and it's pretty balanced right now.

So, in terms of size, it really ranges all over the map and it'd be probably be too long of a discussion because, some are in the several million dollar range and some certainly larger than that, so it's a little bit very.

Operator

Your next question comes from the line of Anojja Shah from BMO Capital Markets. Your line is now open.

Anojja Shah

You call that some weakness in food service, understandably this quarter. Can you remind us for Berry what the relative sizes of food away from home versus food at home? And then, more specifically, we saw some CTC guidance discouraging self serve drink machines. Can you also tell us how much of your portfolio is disposable drink cups? Thanks.

Tom Salmon

Food Service for our company ultimately is a little over 20% of our business for consumer packaging, North America, obviously during COVID with people being restricted from traveling to school, to work, that business has been negatively impacted. And I would say it was probably most pronounced in the month of March. We're seeing some stabilization relative to demand here in April. However, we've clearly forecasted that any -- just to continue to have the stay at home restrictions and no change in the back half. So any change relative to shelter and place, people returning to work, normal activities, we think we'll have an incremental improvement especially through drive through which is a large component of our business mix.

Mark Miles

Most of our cut business within foodservice is filled by the employees, not by their consumers and to the extent that were in, in-store dinning comes back and consumers have the ability to refill, I know some of our customers are choosing for them to get a new cup as opposed to reusing the same cup. But most of our business is employee filled, not consumer filled.

Operator

Your next question comes from the line of Ghansham Panjabi from Baird. Your line is now open.

Ghansham Panjabi

Hi, everyone. Good morning. Hope everybody is doing well. So Tom, just kind of picking up on the last question, on the 35% of the portfolio that's not advantaged, can you give us some of the other big buckets apart from food service that you just mentioned in terms of what would constitute that 35%. Just trying to get a sense as to what variables are pretty backdrop, we should think, as we kind of recalibrate as the operating environment changes relative to that 35% bucket.

Tom Salmon

Yes. So you think about our business, for example, anything automotive related engineered materials, we sell tapes for wire harnesses, so it is going to directly be impacted by auto bills, directly the institutional can letter business is really business that's managed through distribution, but it's sold to schools, municipalities, all of which are shut down right now. So as those continue to open. Clearly, we'll see a lifted demand as a result, those are some particular examples.

Ghansham Panjabi

And then on Slide 8, we have the sales in EBITDA bridges, it looks like you generate about 4 million of EBITDA on 32 million of sales. That's about 13% contribution margin. Can you just give us some more color on that? Is there any sort of negative mixed component on the new volume that you've been on-boarding?

Mark Miles

Yes. I wouldn't say it's negative mixed due to on-boarding. I would say it's just due to overall mix of what products are selling more versus what products are -- have revenue declines. So I would just say it's overall company mix not a reflection of new business win.

Ghansham Panjabi

Is it COVID-19? I guess that's what I'm trying to ask, is the product that you're selling, the plus 1%, you called out for the first quarter specific to COVID-19 in terms of the benefit, is that lower margin product that you're selling?

Mark Miles

I understand. I would say overall it's similar, certainly we have some categories that are going to be a little bit stronger and some that are going to be a little weaker. But I would say overall, in the aggregate, that percentage would not have a different margin characteristic than products that are advantaged to neutral.

Operator

Your next question comes from the line of Tyler Langton from JPMorgan. Your line is now open.

Tyler Langton

Just on the volume guidance for the low-single digit decline in the second half, I was just wondering, I guess how much visibility do you have on that maybe compared to sort of, recent trends and with that, would it have any other impact from that volume decline on earnings or in the second half of earnings really just kind of move with those volumes?

Mark Miles

I would say generally earnings would move in line with the volumes. And the outlook is consistent with our current look, both from a shipment and order perspective. As we stated, we're assuming that it doesn't improve. But as restrictions are lifted to stay in place orders are removed in a phased approach or in a more accelerated those would all be tailwinds with respect to our guidance. So we've assumed current outlook, current demand remains for the rest of our fiscal year. Obviously, we've got a little different dynamic and that our fiscal year ends here in September. So our look forward is a little bit shorter than some of our other peers that are looking through the balance of the calendar year. But again, as things are lifted as businesses go back, comeback that will all be tailwinds with respect to our 2020 guns.

Tom Salmon

I'd also say, during this period the level of connectivity with our end users, both in terms of choppy demand, demand outlook, et cetera, has been something that we've continued to stay very, very close to. And the team's feel very comfortable with what they put forward right now. And again, we clearly believe this is transitory for the company, and that, any improvement that we see relative to restrictions being relieved, will be additive to our outlook.

Tyler Langton

That's helpful. And then, just the quick follow-up, in terms of the synergies on RPC and I guess, is there any risk to getting those synergies just because of COVID related travel restrictions or mean are, flipside, if any feeling any better about hitting that level or seeing the upside?

Tom Salmon

We've maintained, we'll deliver $75 million in this current fiscal year, our first year of owning RPC. And again, we were very thoughtful in that outlook as we obviously prepared for this presentation. So we still feel comfortable with $75 million. Team has done extraordinary job, given the environment. I'm amazed in terms of people sheltering in place, the amount of work that's getting done everything from utilizing augmented reality to help to qualify applications and businesses remotely. Something we invested in, several years ago is bearing a lot of fruit both to maintain stable operations as well as qualifying new business, but we feel good about the synergy outlook and the $75 million we've committed to.

Operator

Your next question comes from the line of Neel Kumar from Morgan Stanley. Your line is now open.

Neel Kumar

In terms of the 65, 35 portfolio breakdown related to COVID-19, I understand is compliant to a net negative impact and volume in the second half. But is there a way to quantify the magnitude of impact for the 65% piece versus the 35% piece of the portfolio?

Mark Miles

Sure. Yes. On the 65% is going to be in the mid-single digit range and the 35% is going to be in the double-digit decline range.

Neel Kumar

In terms of the double-digit decline for the 35% piece, with that mainly be to the consumer packaging segments, just given different service exposure.

Mark Miles

No, it would also be the engineered materials business. Some of the examples Tom provided, like our canned liner businesses sold to offices, schools, et cetera. Obviously with people not going to work or working from home, I should say that's going to be less consumption on office canned liners.

Tom Salmon

Similarly, any impact in terms of industrial demand, there's a component there as well in terms of shipping and volume going through warehouses and things like that for shrink films and stretch films.

Neel Kumar

Good. That's helpful. And then in terms of HH&S, I was wondering, you can just give us a sense of what you're seeing in the diaper market in terms of underlying trends. Seems like there were some probably some pull forward demand into the second quarter. What do you seen in terms of equal demand? Has there been any significant slowdown?

Tom Salmon

We've really been focused on finding ways to innovate differentiate during this time and frankly, it's allowed us to ultimately pick up share in premium hygiene area. So things like using the elastomeric products in both our films and non-woven applications to support greater comfort in the premium Baby Care markets. That's certainly something that's an advantage for us right now and demand has been stable for our business. So we feel very comfortable with that. There certainly was some, what I'd argue as pre-bind done. But all-in-all, I think the level of differentiation we have and how we're now incorporating both our non-wovens know-how and capability with our films know- how is truly creating a competitive advantage and allowing us ultimately then to win additional business, so that our piece of the pie, grows in that space. So that was part of the strategy that we've outlined before. The team's doing a great job executing against it.

Operator

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Arun Viswanathan

Great, thanks. Good morning. Thanks for all the details. Well, I just wanted to go back to the trends in EM and HH&S, I guess, is just a year ago or so you had a March quarter on EM, where you saw some supply chain issues and maybe some share losses? I guess, is it your assessment that those who have been resolved and you maybe gaining share back? And then similarly in HH&S, we've had some difficult periods in baby care. Would you consider, maybe an inflection point here in the baby care market? Thanks.

Tom Salmon

In engineered materials, yes, clearly, we recovered and the team did an amazing job in recovering share from tier two, tier three distribution during this period. They also on boarded a record pipeline of converted film opportunities that support ecommerce as well as I mentioned earlier, the cracker and snack segments for the business. And we continue to also deploy about $150 million of which will invest over the next three years, all focused on next generation products to support things like the snacking businesses and ecommerce trends.

So feel really good about the business, the business did a really nice job in terms of that recovery. And as we said, we believe the outlook is transitory for that business and it is poised to grow just as it did in the second quarter, which we're very proud of. Relative to HH&S, baby continues to be a relatively flat market, if you will, flat to decline in some areas, but our investment has really been on how we take advantage of targeted capital advantage, investment with advantage products and higher growth regions of the world. Like our R5 line in China, like the elastomer focus in terms of where we can combine our know-how in both films and non-woven to create differentiation. And we will continue to be a leader and a winner in that place as a result because of the growth characteristics around premium hygiene right now.

So we feel really good in the business portfolio we have, in HH&S is very diversified. And as you can see right now, the investments that we made were pre-COVID. But nonetheless, they reinforce our strategic objective as being a protection solutions provider and it's bearing great fruit with our outlook being high-single digit growth in the back half of the year.

Arun Viswanathan

And then I guess, as you look into future periods, your free cash flow, I guess this year, you're expecting free cash flow in excess of 800 million, given what you just said, would you expect continued growth in free cash flow, I guess, in fiscal '21? I guess I'm assuming that CT continues to grow maybe low single digits.

And then, you just highlighted growth rates in HH&S and EM. And then, international kind of stabilizes. So, yes, maybe you can just comment on your kind of long-term free cash flow trajectory. Thanks.

Tom Salmon

We have grown our free cash flow every year as a publicly traded company. It's an objective that we have as an organization to continue that trend going forward and we'd expect to continue that in 2021 and beyond.

Operator

Your next question comes from the line of Brian Maguire from Goldman Sachs. Your line is now open.

Brian Maguire

Just a couple of questions on resin trend. Obviously oils had a big move in the last couple of months. And we expect you'll get some flow through benefits there, I guess. As far as the guidance goes, it didn't sound like you're baking in any benefits to EBITDA or working capital for movements from here. But you're just thinking about in prior periods where we've had big moves in oil, I think we've seen some volume destocking and particularly in EM, I think a lot of that goes through third-party distributors and there's a lot of destocking that takes place. Just wondering if you factor that into the volume outlook, you gave for the second half of the year some destocking potential there.

And then, likewise, we've also seen periods with deflation is some of the smaller competitors in the market has been more aggressive, almost trying to pass that through to customers even before they get it. So just wonder if you've got a comment on the pricing environment as well if you're seeing more aggressive movement to try and pass to potential deflation benefits.

Mark Miles

With respect to destocking, actually think the trends likely to go the other way. I think certainly this crisis put a lot of emphasis on the supply chain. And so, customers wanted to make sure they have product. And we're really fortunate and pleased that we've been able to provide service to our customers, thanks to all of our employees continuing to manufacture parts. So I don't know that there's a huge risk. I mean, we certainly have some work, it's where historically there has been some modest stocking and destocking. But in general, our products are just not conducive to that in a lot of cases due to the space requirements. So I don't think it would be a material factor in either direction.

With respect to resin, we have not assumed any incremental deflation in resin in either our EBITDA or our working capital. In fact, we've still got some cushion in working capital, a modest amount with current resin pricing, current being April resin pricing. So to the extent that happens, your guess is probably as good as mine with respect to oil and how that ultimately impacts resin prices. But we do not have any of that assumed in our game.

Brian Maguire

There's no reason to think it wouldn't come down though. I mean, nothing different than prior periods you wouldn't be able to guess.

Mark Miles

I mean, it's hard to predict, but those markets where -- we talked about in the past, we pass-through resin prices to our customers. We certainly are benefit from a declining environment from the perspective of lower working capital, as well as just making our products less expensive and for our customers, therefore making a more competitive against alternative solutions. But in general, we're somewhat or someone indifferent with respect to that.

Tom Salmon

Part of your question, Brian was, I guess it led to our -- do we see competitors out proactively offering discounts based on what they assume is going to happen? You're going to have periods or periodic instances of that. But I wouldn't say it's pervasive right now or anything more concerned about. The $150 million we're investing in that business is, is to continue to grow and innovate, but also reassure ourselves that we're a low cost producer. And that we'll be able to continue to win in that space and deliver low-single digit growth. And, we remain very confident that we'll do that and that the near term, low-single digit, low-to-mid single digit outlook for EM is transitory and will clearly recover post COVID.

Brian Maguire

Then, just last one from me, the net debt seemed to come down more than we were expecting is a nice, nice progress there, may be more than even normally in seasonally from 1Q to 2Q, and I think you said $500 million more cash flow back end of the year. Just wondering if you could comment on the how net debt is progressing relative to your expectations. And then I think there was something around the $250 million of proceeds from investment hedges that you guys? Just wondering if you can comment on what that was about, and if any of that could continue in the rest of the year?

Mark Miles

Yes, sure. Net debt is progressing at plan. So we're -- good progress in the first half of our fiscal year and we have had a plan and certainly well-ahead of prior year and on progress and bringing that down. With respect to your question on the derivatives, those are just to reflect, we've raised our debt in U.S. dollars and so that's just to reflect moves in currency that was raised in the in the local currency. So we've got our debt matched to the cash flows of the company. So our U.S. dollar, euro and pound sterling, ultimate debt just reflect the cash flows of the business.

Operator

Your next question comes from the line of Kyle White from Deutsche Bank. Your line is now open.

Kyle White

Just two questions here up front. So you've had the RPC business for a few quarters now. You also did the Seal for Life divestment last year, have you identified any more businesses or maybe exposures within RPC or your legacy Berry business that may be viewed as kind of non-core going forward? That could be divested to aid and deleveraging? Or has this type of strategic review kind of been put on hold given the crisis?

And then related, I think, after the acquisition of RPC you are kind of targeting a four times leverage range two years post the acquisition, do you still view this target as achievable given the crisis?

Tom Salmon

The targets achievable given the crisis and we remain fully committed to delevering and improving our strong balance sheet. And relative to strategic reviews, we stopped nothing relative to COVID. We've had obviously heavily focused on the safety of our employees, maintenance of our supply chain, but we've made a commitment as a management team that through this COVID period, we will continue to focus on ways to continuously improve and make our business better and we continue to do just that.

So any reviews that we do which happen on a regular basis relative to monthly business reviews with each of the given businesses and performance outlooks all weigh into that factor. And I'm not going to comment on this call relative to what we've identified or not identified, but you should assume it hasn't, "stopped" the process per se. We continue to look and evaluate that as we always do, because of our incredibly diversified portfolio.

Operator

Your next question comes from the line of Gabe Hajde from Wells Fargo Securities. Your line is now open.

Gabe Hajde

Quick one on the competitive landscape and you partially addressed this, but I'm curious to the extent that maybe this crisis negatively impacts some of your competitors and I know it isn't a strategic priority today, but might there be opportunity to pick up a few distressed assets out there, again, to the extent maybe they were mismanaged or something like that? And now they're looking for a way out.

Tom Salmon

Listen, we obviously wouldn't comment. I think clearly, there's a likelihood that some companies are not ultimately going to benefit. But I continue to reaffirm that for Berry, the strength of our scale, for our customers, relative to supply continuity. What we've delivered during this period is uninterrupted supply, given the choppy demand continues to reinforce to me that the structure of our company, the diversity of our portfolio, the geographic footprint that we have, is second to none. And I believe it's ultimately going to be a strong value contributor to our shareholders, as well as our customers a long time going forward. But I'm somewhat speculative, but I would probably concur that, yes, it could certainly impact some companies. If this is a sustained, longer term trend. But as we've discussed, Berry performs very well in these environments. And now the diversity of our portfolio and geographic footprint is better today than it has been in any prior crisis.

Gabe Hajde

And then, I apologize I joined a couple minutes late if you guys have already addressed this, but I guess from a phasing perspective, if I look at the June quarter, historically has been normally the strongest and I think a lot of companies are sort of signaling, they'll be at the trough given stay at home orders and the like. Have you provided any guidance in terms of phasing of maybe second half EBITDA? Again, maybe just specifically second quarter if it would be lower?

Mark Miles

To our fiscal third quarter is traditionally our strongest I think, this, obviously this current event and crisis creates a little bit of a different situation. So I think it will be probably modestly lower. We didn't provide specific quarterly guidance, but I would expect it sequentially to be maybe slightly lower than the March quarter and the September quarter would be similar to the June quarter.

Operator

And the last question comes from the line of George Staphos from Bank of America. Your line is now open.

George Staphos

Tom, two questions for you and Mark, two questions. One, can you comment on the leverage target of four times? My guess is you think that's the right number for now. You've never written off, that that target could go lower over time, you probably would have updated us if you had changed your view in the press release, but just wanted to think about or hear how you're thinking about how that target might evolve over time, given the progress you're making, you're answering one of the other questions earlier that head of plan.

And then the second question I had, are there any projects that you are somewhat worried about completing that you need to get your guidance because of social distancing? Either you're having difficulty getting equipment in time or you had get having difficulty getting people in place to the last minute assembly of lines, et cetera such that that would be a risk this year.

Tom Salmon

It's actually I'll start with the latter part of your question. Any type of delays in terms of projects has already been factored in to our back half outlook. To give you a sense in our CP North America business, the pipeline is in aggregate robust enough to allow us to continue growing low-single-digit as it has for the past couple of years. And just in the current, year period of time, just the number of "delayed projects" that are one, they are close, it's just a matter of getting them process, would literally in and of itself generate a 1% tailwind in the back half of the year. And we've excluded that from our outlook, but I have to compliment our team. The fact that over the last several years, we've been using augmented reality devices to allow us to qualify projects remotely. The usage, obviously, inside our company is exponential right now. And it's been amazing to see what we can actually do remotely.

Any lifting or improvement that we see in terms of shelter and placement business opens George, that's only going to be an additional benefit for us in the back half of the year. And that's really how we thought about and why we got in the way we did to kind of create a scenario it says, pretty much a worst case where we're at right now and anything that ultimately improves in the quarter, the back half generates momentum for us both from an earnings and a cash perspective.

Relative to targets, as I said before, making good progress, we're rushing and running to get to the lowest level we can, our first milestone is four. And when we get to four, George, we will reevaluate and present views in terms of what the longer term outlook will be, if that's okay.

Tom Salmon

Well, if there's no further questions, I want to thank everybody for your time today and your interest in Berry Global. Again, we truly believe that today our portfolio is incredibly well situated for this difficult period that we're facing with COVID-19. We'll get through it. And we'll be a better country better road as a result of it and clearly Berry is going to be there to lend us value relative to protect the solutions going forward. Thanks, everybody.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.