Berry Global Group, Inc.'s (BERY) CEO Thomas Salmon on Q2 2021 Results - Earnings Call Transcript

Berry Global Group, Inc. (NYSE:BERY) Q2 2021 Earnings Conference Call May 4, 2021 10:00 AM ET

Company Participants

Dustin Stilwell - Head of Investor Relations

Thomas Salmon - Chief Executive Officer

Mark Miles - Chief Financial Officer

Conference Call Participants

Ghansham Panjabi - Robert W. Baird & Co.

Anthony Pettinari - Citi

Mark Wilde - Bank of Montreal

Lucas Beaumont - UBS

Neel Kumar - Morgan Stanley

Arun Viswanathan - RBC Capital Markets

Kyle White - Deutsche Bank

Adam Josephson - KeyBanc Capital Markets Inc.

Gabe Hajde - Wells Fargo Securities

Arthur Almeida - Goldman Sachs

Philip Ng - Jefferies Group LLC

Salvator Tiano - Seaport Global Securities, LLC

George Staphos - Bank of America

Operator

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

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

Dustin Stilwell

Thank you. Good morning, everyone. Welcome to Berry’s Second Fiscal Quarter 2021 Earnings Call. Throughout this call, we will refer to the second fiscal quarter as the March 2021 quarter.

Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion this morning. After today’s call, a replay will also be available on our website 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’ll have a question-and-answer session. In order to provide everyone the opportunity to participate, we do ask that you limit yourself to one question at a time with a brief follow-up and then fall back into a queue for any 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 website.

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, 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. Now, I’d like to turn the call over to Berry’s CEO, Tom Salmon.

Thomas Salmon

Thank you, Dustin. Welcome, everyone, and thank you for being with us today. First, let me start with our number one core value on Slide 3, and that is safety.

We believe safety doesn’t happen by accident. And everything we do at Berry starts with safety in mind. As you can see on the slide, we have an ongoing commitment to identifying, managing and eliminating risk. We are proud of our industry leadership in safety by keeping our team members safe as evidenced by our OSHA incident rate of 1 at the end of 2020, significantly better than the industry average of just below 4.

Our team’s emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This work has resulted in our very strong start to the first half of our fiscal year, and the numbers speak for themselves.

For us, environmental, social and governance are not just words on a page, but are leading principles in everything we do. These principles fuel our commitment to caring not only for the communities where we have operations, but to ensuring that we are providing better opportunities in bringing innovations to provide multiple lives to natural resources.

In alignment with this, we recently became the first North American headquartered plastics packaging converter to have a 1.5 degrees Celsius target validated by the science-based target initiative. This is possible, because we have reduced our market-based greenhouse gas emissions by 19% since our base period in 2016, which means we are on our target to achieve our impact 2025 goal at 25% reduction in emissions intensity.

Plastics in spaces where we participate provides an advantaged carbon footprint. And our teams are working continuously to reduce the material used to help further our value chain partners to achieve their Scope 3 greenhouse gas reduction targets.

More than 85% of the resin we produce are procured for our fast-moving consumer goods packaging products are made from recycled or renewable materials or recyclable at the end of their use, which is well on our way to our goal of 100% by 2025.

Just recently, we announced another partnership, this one with Borealis, providing us access to now over 600 million pounds annually of post-consumer recycled content.

Moving on to Slide 4, with a summary of our quarterly highlights from our second fiscal quarter, results for revenue, EBITDA and earnings per share all came in stronger than we anticipated, including solid demand across each division.

Strong momentum that the team has driven over the past several years delivered record results for any quarter in the company’s history for these respective metrics. Diversity of our portfolio across various end-markets and regions continue to provide the consistency and dependability we’ve demonstrated for decades.

Our top strategic priorities remain the same, consistently growing organic volumes and improving our balance sheet. In the first half of fiscal 2021, we’re off to an exceptional start in achieving these goals. Organic volume growth came in at 5% for the quarter and 6% for the first half with all 4 segments, again, delivering strong volumes.

Stay-at-home food, health and wellness, along with the personal protective products continue to see solid growth in the quarter. Away-from-home and certain other markets, while still facing some softness, are seeing improvements.

Additionally, our strong results on earnings and stable free cash flow allowed us to reduce our leverage and in the period at 4 times net-debt-to-adjusted-EBITDA. We are well on our way to meeting our objective of getting leverage below 4 times.

After we’ve achieved this target, we anticipate operating our company while maintaining our leverage in a range of 3 to 3.9 times on a go forward basis. We believe that continued execution of growing organic volumes and strengthened our balance sheet will deliver significant shareholder value.

And, lastly, as most of you were aware for the beginning of our fiscal year [indiscernible] we saw a significant cost increases in our primary raw material, that being resin. Additionally, we’ve experienced inflation in other raw materials and other costs such as corrugate and freight. With a strong volume growth momentum in the businesses along with our efforts to improve the timing lag of pass-through of inflation in our customer contracts. We’ve seen good progress towards this objective and continue to actively pass these costs through.

Our updated guidance reflects this progress relative to our expectations on inflation recovery. It includes a modest incremental impact from inflation over the next few quarters, which is offset with an increase in mixed benefit primarily from our HH&S segment, along with a positive impact from currency. As a result, we’re increased our organic volume growth assumption from 4% to now 5%, an increase in our fiscal year operating EBITDA guidance to $2.25 billion, which is a $50 million improvement from the midpoint of our previous range.

We began fiscal 2021 with confidence in our ability to grow organically, as we’ve demonstrated over the past year, and I believe, we are well positioned to continue to see long-term predictable and sustainable growth with customer-linked capital investments that target continued expansion into both faster growing segments and emerging markets.

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

Mark Miles

Thank you, Tom. I would like to refer you to Slide 5 now. For the second fiscal quarter, reported sales were up over 13% to a record $3.4 billion. The quarter revenue included organic volume growth of 5% including all 4 segments showing positive organic volume growth. As Tom noted, demand for our products remain strong in certain markets, which had previously experienced pandemic headwinds have continued to improve.

The quarter also included higher selling prices from the pass-through cost inflation that increased revenue by 6% along with a 3% increase related to foreign currency translation. These increases were partially offset by the sale of the U.S. flexible packaging, converting business that closed at the end of November.

From an earnings perspective, our operating EBITDA increased by 9% to a quarterly record of $590 million driven by the 5% volume growth, product mix and realized cost synergies. Adjusted earnings per share increased by 34% to $1.59 in the quarter, which included benefits just referenced related to EBITDA along with interest expense savings from debt reduction of over $1 billion in the last 4 quarters. These strong financial results are the byproduct for our entire global teams focus on organic growth opportunities and driving cost productivity, while managing the increased demand from our customers and the human resource challenges related to the pandemic.

The results are yet another example as you can see on Slide 6 of our proven performance over many different economic cycles. As referenced on prior calls, we have consistently driven top-tier results in key financial metrics including 20% or more compounded annual growth rates for both free cash flow and adjusted earnings per share.

Now looking at the quarterly performance of each of our core operating segments on Slide 7. For the quarter, our Consumer Packaging International division delivered a 9% improvement in revenue, including a 7% increase related to foreign currency and a 4% increase in organic volumes. Regionally, we have 2% volume growth in developed markets such as Western Europe, with stronger growth in emerging markets such as China and India.

From a market perspective, our products serving at home food continue to generate strong performance, while our food service business will continue to improve as countries reopen. Industrial and automotive markets which were negatively impacted at the start of the pandemic continue to improve and generated strong year-over-year growth.

The CPI team produced an impressive 12% improvement in EBITDA, primarily driven by the strong volume, foreign currency translation and cost productivity. We are encouraged by the positive volume results and are optimistic given the pipeline build and momentum in the business.

Net sales in our Consumer Packaging North America division were up 15% to $731 million, primarily as a result of higher selling prices of 9% from the pass-through of inflation and 5% increase in organic volumes. The organic volume growth in the quarter was primarily attributed to continued strength in our core consumer businesses from products such as closures, bottles and containers.

This quarter marks the 12th consecutive quarter of positive volume growth for the Consumer Packaging North America division, primarily driven by their long-term strategy of focusing on advantage products and targeted markets with strong customer linkage. We’re very pleased with this achievement, and are also encouraged by their continued strong momentum and pipeline. EBITDA was $133 million; the same as the prior year quarter as strong volumes and cost synergies were offset by the timing lag of pass-through of inflation.

Our Health, Hygiene, & Specialties divisions delivered sales of $781 million. The 21% increase included higher selling prices of 13% from the pass-through of inflation and organic volume growth of 8%, including growth in all 4 regions globally.

The organic volume growth in the quarter was primarily attributed to organic growth investments, along with continued demand for healthcare apparel, premium hygiene and specialty products, such as disinfecting wipes, fabric care, water and air filtration, as well as a recovery in the building and construction market. EBITDA increased by $44 million, or 39%, primarily driven by the organic volume growth, favorable product mix and cost productivity.

We continue to see a benefit during the quarter of approximately $25 million in EBITDA from favorable product mix associated with pivoting our assets to produce products related to COVID-19 protection.

Sales for our Engineered Materials division were 15% higher on a comparable basis at $798 million. The increase was primarily attributed to higher selling prices of 9% from the pass-through of inflation along with organic volume growth of 3%. Volume growth was primarily driven by our consumer facing products and some of our industrial businesses, along with a modest recovery of certain markets that were negatively impacted by the pandemic, such as our can liner business that serves away from home waste disposal.

EBITDA was $114 million in the quarter, which was $7 million below the prior year on a comparable basis. This decrease was primarily a result of a lag and passing through cost inflation and the deep freeze in the southern part of the United States, but the impact of some of our facilities in this division.

Next on Slide 8, free cash flow for the last 4 quarters ended March 2021, totaled $951 million. Our free cash flow continues to be utilized to reduce our outstanding debt and we have paid down over $1.3 billion over the past 6 quarters, which has lowered our annual interest expense and reduced our debt leverage to now 4 times.

We remain committed to maintaining a strong balance sheet, and we believe our consistently increasing and dependable cash flow will provide us the opportunity to further improve our strong balance sheet as we have demonstrated historically. We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile.

During the quarter, we issued additional sets of investment grade rated first priority senior secured notes $800 million with a fixed rate of 0.95% and an additional $775 million with a fixed rate of 1.57%. We also refinanced our term loans lowering their spread by 25 basis points.

We use the proceeds of the issuance and refinancing to replace existing variable rate term loans, which will reduce our interest expense by $15 million annually. The combination of debt pay down, earnings growth, interest rate reductions and refinancing activity has improved our interest coverage ratio over the last year and a half from 4.7 times to now 6.5 times.

Next, our updated fiscal 2021 operating EBITDA and free cash flow guidance as shown on Slide 9. Given our continued strength through the first half of the year and stable demand outlook across our business, we’re increasing our organic volume growth assumption for fiscal 2021 to now 5%, including low-single-digit growth in the back half of this fiscal year, building on last year strong performance, all supported by our robust and growing pipeline, increased level of capital expenditures, and the positive trends momentum we’re seeing in each of our businesses.

Given the continued strength in our pipeline, we are raising our capital expenditures spending expectation by $50 million to support incremental growth projects. Additionally, we are increasing our operating EBITDA by $50 million from the midpoint of our previous guidance provided in February to $2.25 billion. We have included a negative impact from inflation and the associated timing lag and passing through inflationary costs.

We expect the majority of the impact from the recent unprecedented increases in resin prices in the United States to impact our results in the June 2021 quarter. So we expect this lag will be largely offset in the June quarter from continued favorable product mix.

The guidance assumes that both of these factors dissipate in the September quarter. And as a result, we expect operating EBITDA in the back half of the year to be split relatively evenly between the June and September quarters, and will be similar with the second half prior to results when adjusted for our recent divestitures and the COVID-19 related mix benefits.

We’re proud of the continued strong execution by our team as the unprecedented resin inflation we have experienced has been more than offset by volume growth and productivity.

Our fiscal 2021 free cash flow guidance remains in the range of $875 million to $975 million. The range of free cash flow includes $1.575 billion to $1.675 billion of cash from operations, partially offset by capital expenditures of $700 million.

We also continue to anticipate further strengthening of our balance sheet and expect to be in our targeted range by the end of fiscal 2021.

This concludes my financial review. And I’ll turn it back to Tom.

Thomas Salmon

Thank you, Mark. Before we close our prepared remarks today, I want to touch on what we’ve been focused on and what’s driving our strong results. We continue to invest in each of our businesses to build and maintain our world-class low-cost manufacturing base with an emphasis on key growth markets and regions. Overall, the diversity of our end markets and product offerings as well as the essential nature and demand consistency of our products have been core to the underlying performance of the business.

I’m very confident in our team’s ability to meet our near and long term expectations and commitments to provide sustainable, profitable growth. We have multiple drivers of organic volume growth shown on Slide 11 and 12. Our focus is on both faster growth end-markets and emerging markets along with sustainability-led packaging.

As we highlighted on our last earnings call, regard our global inhalation healthcare solutions, going forward, we’ll regularly showcase targeted products or markets we are focused on. We expect emerging markets to grow faster than advanced economies with increasing populations and the need for our protection products. And we will focus on mega trends previously discussed. This has allowed us to increase revenue in emerging markets from $100 million in 2013 to now over $1.5 billion.

Furthermore, as you can see on Slide 12, we are continuing our support of circularity through our ability to manufacture recyclable films and incorporate sustainable materials. We recently announced a $70 million investment to support our growth opportunities, which will enhance our manufacturing capabilities for more use of recycled content and PHA resins supporting bio-resin us. Berry, along with many of our customers, had dedicated sustainability goals, many of which specify the increased use of recycled or recyclable materials. This investment will further enhance Berry’s portfolio with fully recyclable, biodegradable or compostable film to support its customer needs.

Berry is committed to remaining at the forefront of the innovation necessary to meet customer sustainability goals through these investments in the latest equipment, technologies, advantaged film development and design for circularity.

As a global leader, we are driven to innovate as you can see on Slide 13. We’ve highlighted just a few of the amazing products we designed to manufacture with sustainability in mind. On the top right, you can see our tethered closure offerings. Our CPI group unveiled a range of closure designs that meet the European Union legislation requirements.

These closures remain attached to the container throughout its use for ease of recycling. On the top left of the slide, we manufacture the J-Cloth Plus wipe, the first and only contact clearance, externally certified biodegradable and compostable wipe. This wipe is produced with 100% biodegradable fibers and can be disposed off in any green recycling bin after use.

We remain steadfast in our commitment to lead and collaborate to drive innovation and acceptance of products targeted towards improving recyclability, reuse and reduction of virgin plastics all with a goal to promote a more circular economy.

In summary, on Slide 14, building on our strong first quarter, we delivered outstanding results across all of our operating segments, we again have delivered on our strategic goals of driving organic growth and improving our balance sheet all while setting financial records for any quarterly period for EBITDA, revenue and earnings per share.

For the fiscal year to date, adjusted earnings per share has impressively increased 55% compared to the prior year to date, while operating EBITDA and revenue were both up 14% and 12%, respectfully.

And finally, with consistent dependable end-markets, a leading cost position along with sustainable capacity to invest in long-term steady growth, we are confident in our ability to consistently grow low-single-digits through our customer-linked capital investments that target continued expansion into both faster growing end-markets and regions.

I thank you for your continued interest in Berry. And at this time, Mark and I would be glad to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Ghansham Panjabi with Baird.

Ghansham Panjabi

Yeah. Hey, guys. Good morning. Congrats on the progress.

Thomas Salmon

Morning.

Ghansham Panjabi

So, at the onset of COVID, you pointed towards a sort of a 65/35 split of the portfolio, advantage versus disadvantage, specific to COVID? What are we in the recovery curve specific to the 35% relative to the pre-COVID baseline? And are you starting to see any signs of the 65% moderating in context of many CPG companies pointing towards slowing demand? And, I guess, I’m referring to what you’re specifically seeing for that 65% in 3Q as well.

Thomas Salmon

Thanks, Ghansham. Yeah, in our guidance, we’re basically assuming that the benefits of COVID basically over as of the June quarter. And I think if you look at this quarter, you can see the benefits of the diversity of our portfolio. All 4 businesses delivering positive growth, strong pipelines, enabling that growth coupled with the capital investments that we’ve been making around the mega trends that we believe will sustain us well beyond the end of the pandemic, that being health and wellness, food safety, e-commerce and sustainability trend.

So, all the continued investment we’ve been making, the pipelines all tie around those strategic initiatives. And I would say, in spite of what’s going to be a difficult comp in the back half of the fiscal 2021 for some of our businesses that had benefits relative to COVID, we still anticipate low-single-digit growth, driven by the overall diversification of the portfolio that we have, with strong expectations around engineering materials and CPI.

So, feel real good about the outlook. We feel we’ve invested accordingly to build this business around low-single-digit growth over the long-haul, and we feel very, very good about the outlook going forward.

Ghansham Panjabi

Great. And for my follow-up question on resin and your embedded outlook for the December or I guess for your 4Q, can you just take us through what you’re assuming from a resin trend-line perspective? Are you assuming that resin plateaus and then you catch up on price/cost by fourth quarter? Are you actually assuming that resin moderates from current levels? And if so, can you baseline that against which sort of month we should think about, maybe February levels or March or whatever else you thinking at this point? Thanks so much.

Thomas Salmon

It’s difficult to predict it on a by month basis. But we certainly believe we’ll begin to see moderation. We’re still going to have a headwind for the full year from a lag perspective. But I’d remind you, this is probably one of the most significant impact to the resin facilities in the Gulf Coast that we’ve seen in 35 plus years.

The ability and the diversity of the portfolio to ultimately prevail, given the strong growth that we had, and the good work our commercial organizations have done in terms of improving lag and pass-through mechanisms are strong advantages for the company going forward, but we do expect moderation. And I would say that, it’s a speculation here, but we – the resin companies will probably need through May, June timeframe, before we start seeing more normality going into the back-half of the calendar year.

Ghansham Panjabi

Thanks so much.

Mark Miles

In terms of our guidance – Ghansham, it’s Mark, good morning – we haven’t assumed that relative to our guidance, while Tom said that’s probably our best estimate at this point, based on the information we have today. We’ve assumed resin being flat at current pricing for the balance of the year with respect to our guidance.

Ghansham Panjabi

Very clear. Thank you.

Operator

Your next question comes from Anthony Pettinari with Citi.

Anthony Pettinari

Good morning.

Thomas Salmon

Hey, Anthony.

Anthony Pettinari

Hey, regarding the increases you’re seeing in non-resin costs, I’m wondering if you could talk about any pricing actions taken in the quarter to recover those. And to the extent that you’re able – if it’s possible to give a sense of how much progress you’ve made in shortening the lags for non-resin based raws and other costs, maybe how long it historically took to pass those through and how much you’ve been able to shave off that time?

Mark Miles

Yeah, I’d say it’s ongoing, Anthony. So we continue to work with customers to pass through inflationary costs of all kinds, including certainly our primary raw material resin and shortening that lag, difficult to quantify, per se, but it’s an ongoing effort that our commercial teams are working with customers to shorten the timing lag on pass through resin, as well as put in other index clauses whether or not it’s corrugate or freight. It’s going to vary depending on the product, and how significant of a cost component that is for that respective product.

But I would characterize it as an ongoing effort. As we stated in our prepared comments, team’s done a great job of continuing to work with customers, make sure they have product and pass on inflation as appropriate.

Thomas Salmon

I think, Mark, highlighting the most important part, we’ve really made certain that we prioritize service and supply above all things else. And in areas that certain components of where we’ve seen inflation weren’t tied to [SPR DS as we] [ph] began very early in showcasing those incremental costs and looking to have offset. So the team really has done a very good job. I’m pleased with the sense of urgency that we’ve shown in terms of passing that through.

Anthony Pettinari

Okay, that’s helpful. And just following up on that, I mean, you indicated a timing lag is baked into the guidance. Is there an amount of cost that you won’t get back in fiscal 2021 that you would expect to recover in fiscal 2022 or the beginning of fiscal 2022 that you could quantify?

Mark Miles

Yeah, again, it’s ongoing, right? This is a dynamic process. They’re certainly in the year, we’re going to have a significant amount of, I’ll call it, under-recovered inflation, both on resin and other raw materials. We have variety. We’re very diversified from a customer perspective. So it’s, as I said, an ongoing initiative. And there will certainly be an ongoing effort to recover that inflation.

But I apologize for being redundant. Again, our top priority is making sure customers are getting product. And we’re taking all the necessary actions, including incremental cost to get a product to customers on time.

Anthony Pettinari

Got it. That’s helpful. I’ll turn it over.

Operator

Your next question comes from Mark Wilde with Bank of Montreal.

Mark Wilde

Thanks. Good morning and congratulations on a good quarter.

Thomas Salmon

Thanks, Mark.

Mark Wilde

Tom, I wondered – we think about the volume growth this year, the 5%, how would you kind of parse that out between the portion you think is kind of COVID benefit related and then just kind of other organic growth?

Thomas Salmon

I think it’s important to start with. We began this journey around investing around large mega trends early in 2018 with targeted capital investment, and looking for customer linkage along the way. That has proven beneficial and in each of our businesses. And as we stated at the beginning of the pandemic, each of the business has different nuances relative to portions of the portfolio maybe positively or negatively impacted.

In aggregate for the company as a whole, it was neutral to slightly positive for the company with the HHS portion of the business on the healthcare side being most advantaged. So, that’s why we feel so good about the longer-term prospects for us to continue to deliver that low-single-digit growth, because this is a journey that we began all the way back in 2018. We showcase that we would begin the growth in 2020, which we did early.

And then, ultimately, the pandemic hit. So it is ultimately just benefited some of those strategic investments that we made then. And we’ve continued to make throughout the pandemic. I think that’s helping to set Berry aside long term, because we’ve been able to continue to maintain that capital investment, tied to specific customers to increase our position geographically as well as around these bigger – these growth trends.

Mark Wilde

It’s been a quite a remarkable turnaround time. If there were 2 or 3 key things that you would point to as kind of drivers to the better organic growth, what would they be?

Thomas Salmon

Targeted focus around specific organic growth, where we have advantages and tie that growth and that investment to specific customers, increase your geographic presence and geographies that ultimately are delivering higher growth rates, which we’ve done a very good job increasing that exposure to over $1.5 billion.

And ultimately, we were able to capitalize on a transformative acquisition that gave us truly global value delivery capability that is fully integrated and delivering exceptional promise for us to serve large global brands around the world with local value delivery.

Mark Wilde

Okay, that’s good. I’ll turn it over. Thanks, Tom.

Operator

Your next question comes from Joshua Spector with UBS.

Lucas Beaumont

Hi, guys. This is Lucas Beaumont on for Josh. I just wanted to touch on your free cash flow bridge, if we could. Could you please walk us through your updated assumptions for working capital interest and the other lines items between EBITDA and free cash flow? Also, just I was a little bit surprised that there wasn’t more of a headwind from the higher raws on working capital for the outlook.

So if you could maybe just talk about the factors impacting your expectations there versus 3 months ago as well, that’d be great. Thanks.

Mark Miles

Sure, yeah, this is Mark. Good morning. Relative to free cash, as we, I think had in the release, our EBITDA outlook for the year is $2.25 billion, CapEx $700 million. Our interest number is going to be in the $310 million to $320 million range, depending on how the back half shakes out from a rate perspective.

And then, as you pointed out, we’ve got a use of working capital of about $100 million in the outlook, and then taxes, our outlook there remains the same in about 25%. And those gets you down to that $875 million to $975 million of cash. And with respect to the second part of your question, team’s done a great job on working capital. Quite honestly, part of it is just strong demand has driven our inventory down.

We continue to find new ways to service customers with lower inventory levels. So while none of us wanted to see the unfortunate weather events in the southern part of the United States, the reality is post that event, we’re going to be a better company with respect to working capital management service to our customers. So we haven’t – as a result of that, we haven’t seen that negative impact, because inventory levels are at lower levels.

Lucas Beaumont

Great, thanks. I just wanted to touch on bioplastics again if we can. Our recent conversations with bioplastics producers have indicated that converters really only made minimal changes at the packaging level to use their products. So I was just wondering could you help explain to us, is that right? And I guess what part of your operations would need to change if changes are needed? And what kind of an investment do you see is needed there to be able to apply those products?

Thomas Salmon

We’ve been fortunate to close new applications in bio-based material. We’re trying to educate our end customers on literally the range of possibilities, whether it’s mechanically recycled, whether it’s bio-based, whether it’s molecular recycled material, each material, whether it’s virgin, or otherwise, they all have different melt viscosities and such requiring various degrees of tweaking.

But to a large extent, there’s not a significant amount of change required to run those materials. And it’s really all about presenting the feature benefits to our end customers, so they can make an informed decision, for their end-customer. Some investments that we may choose to make in the future allows us to use a wider spectrum of materials, to give us an opportunity to have a broader selection of materials at different costs and price points to create optimum blends and mixes. So – but all in all, yes, it’s correct that it doesn’t require a significant amount of modification.

Lucas Beaumont

Great, thank you.

Operator

Your next question comes from Neel Kumar with Morgan Stanley.

Neel Kumar

Okay. Thank you. In Consumer Packaging International, can you just break down the 4% volume improvement by end-market? How did the trends look in industrial business versus the grocery and more consumer-oriented markets? And could you just also give a sense of how that looks geographically?

Thomas Salmon

I’d say finally on CPI I saw a similar growth and growth positive in terms of food, household, healthcare, being the primary drivers and CPI, emerging market growth is very strong for us as well, that they’re further along in the recovery, no doubt about it. Much of Europe remains in the throes of the pandemic. And we’ve continued to see, the strong in-house and in-home consumption, coupled with improving trends on the industrial side. So it’s an improvement position that that team has done a really solid job and continue to innovate and continue to close new business, dispensing systems, trigger pumps, airless pumps, and the likes have all been, strong areas of opportunity for us, coupled with the success that we’ve had, around our sustainability leadership.

That continues to be an area that, with the investments that we’ve made for mechanically recycled material, as well as the molecular recycle access that we have. We’ve made really strong progress in introducing specifically the advanced recycled material to our food-based customers. We have over 27% of our overall food base customers working on a specific project or already having committed to advanced recycling material, as it continues to become more readily available.

So we’re really pleased with that progress inside that space. But as we wholly expect that we continue to see improvements, the opening, you’ll see further industrial strength. But the trends that we’ve seen at our home consumption, we believe are going to be sustainable for us. Very pleased with how that team’s operated in a difficult environment.

And again, the linkage to our global key accounts that that business has enabled is we’ll provide growth opportunities for years to come.

Neel Kumar

Great, that’s helpful. And then in terms of just volumes, can you just give us a sense of how quarter-to-date trends are looking across the segments? And then, you talked about longer-term volume expectations of low-single-digit growth. In HH&S in particular, I was just wondering, if you could just on your degree of confidence that volume growth can still be positive in 2022, despite lacking a couple of years of very strong growth, and just potentially shifting to a more normalized environment?

Thomas Salmon

We’ve invested in each of our businesses, to deliver low-single-digit growth. We remain that steadfastly committed in our ability to deliver that growth for the franchise. As you recall, in our HH business, we made a targeted pivot to increase our position around hard surface disinfectant wipes.

We pivoted more, premium hygiene, premium fem care and adult incontinence to give more balance to that portfolio, coupled with better geographic presence in terms of developing regions of the world. And we delivered on all of those. We’re not going to – we really can’t comment on a current inter-quarter tight performance, but suffice to say, we took that into consideration when we gave our guidance, increasing the full year outlook to 5%.

Operator

Your next question comes from Arun Viswanathan with RBC Capital.

Arun Viswanathan

Great. Thanks for taking my question. I’m just curious you’ve brought leverage down to a pretty favorable level here, and it sounds like you’re continuing to focus on that. And when we get into the 3 to 3.9 range over the next year, so maybe you can just kind of reiterate your priorities for cash use at this point? Would you consider – is the board considering a dividend, and then maybe could also comment on potential for share buybacks? Thanks.

Thomas Salmon

Yeah, the primary strategic objectives for the business continued to be around investing in generating profit organic growth, continuing the improvement of our balance sheet, as we said, we intend to stay within that targeted leverage range between 3 and 3.9 times, while operating the company. And, we’ll continue to use this cash flow that we’re able to consistently generate further debt reduction, we will consider a creative bolt-on acquisitions that allow us to stay inside that range as well as returning cash to shareholders in the form of share repurchases and dividends. So, we’re in a very strong position really driven by that that cash flow generation, that’s been really become a cornerstone for the company.

Arun Viswanathan

And where are you finding the most organic opportunities, I know, you’ve made some investments in HH&S, and in China as well, you’ve discussed dispensing systems. But, I guess, going forward, where are you finding the most opportunities by segment, maybe if you could help us out? Thanks.

Thomas Salmon

Well, I’d say really across the across the business, health and wellness continues to be a key category for us in each of our businesses, and globally. The ability to ultimate support, the growing e-commerce trends with noted investments we recently made inside our Engineered Materials business, food safety barrier properties that we can ultimately support inside of our food category continue to be areas of opportunity, both domestically and internationally, and sustainability.

We clearly believe sustainability is a growth platform for us. And the level of investments that we’ve made both in terms of mechanical recycling, as well as the access that we’ve enabled for the molecular recycled materials is something we’re really excited about, and is soon becoming a really significant growth driver, we believe for the company’s organic growth goals.

Operator

Your next question comes from Kyle White with Deutsche Bank.

Kyle White

Hey, good morning, thanks for taking my question. I apologize, if I missed this. But what was the impact on the lag in the pass-through of resin during the quarter? And what is your guidance assume from this impact for the June quarter as well?

Mark Miles

Thanks, Kyle. Yeah, we do continue to have a negative lag that we’ve experienced here today, and expect that for the full year just due to the increases in resin prices. Our average remains about the same. We have about a net 1 month lag across the business, each customer is different. But that’s a general average for our business about net 1 month lag on pass-through.

Kyle White

Yeah. Are you putting the finer point in terms of the dollar amount impact that you had in the quarter? And then what you’re expecting for fiscal 3Q from this?

Mark Miles

I mean, all those assumptions are embedded in our guidance, but we’re not specifically calling out how much of that relates to the timing line on resin.

Kyle White

Yeah. Fair enough. I wanted to go back to the bio-based resin question. Are you truly agnostic to alternative resins in terms of being able to convert them? Or are there some limitations by grade? And do you have any competitive advantage when it comes to using alternative resins beyond your scale, relative to some of the other packaging converters? Or is it just a matter of being able to qualify that raw material? Thanks.

Thomas Salmon

[Since Berry has] [ph] we made strategic investments to make certain that we’re well positioned to have in our own internal capability on post-consumer materials coupled with the access that we have to the molecular recycle materials is unique to Berry. I think, clearly, we have made it a point to set ourselves apart with our end customers to give them both access to educate them on design, with these materials in mind, coupled with the tradeoffs that they can consider, again, so they can make an informed decision.

We believe, 1 of our primary roles is to be demand creators. And, with the fact that, we’ve now secured 27% of our food customers in Europe adopting some advanced recycled or molecular recycled solutions, is really good progress given the infancy of that technology. So, we’ll let markets play out as they will, I have a lot of confidence in our global sourcing organization, our material science know-how, and I believe it’s unique. And we believe it will be shown out, again, in support of our long-term low-single-digit growth commitments that we’ve made in the future.

Kyle White

Thank you. I’ll now turnover. Good luck in the quarter.

Mark Miles

Thanks.

Thomas Salmon

Thanks.

Operator

Your next question comes from Adam Josephson with KeyBanc.

Adam Josephson

Tom and Mark, good morning, and congrats on a really good quarter again. Mark, forgive me if I missed this, but in terms of your second half volume expectation, can you give us a sense of what you’re expecting out of the 4 segments? I’m asking particularly about HH&S, just given how exceptionally difficult the comparisons are, obviously, over the last 4 quarters, the growth has been tremendous.

Mark Miles

Yeah, no worries, Adam. So we didn’t give it by segment. But I would say, again, overall, we’re expecting positive volumes certainly. And as we said, a year ago, when we reported earnings, we had some businesses that I think, Ghansham mentioned that earlier in the call, but we had some businesses that were disadvantaged related to the pandemic when it started. And some were neutral to advantaged, and as we start lapping those comps, those things are going to reverse. So specifically, our Engineered Materials business had some headwinds early on in the pandemic. So we would expect them to be more favorable than the average over the back half.

Same thing with CPI with China and Europe, being some of our businesses, they’re being really negatively impacted as they shutdown almost a year ago now today. And the opposite is true with HHS, specifically having a strong period during the pandemic. So, in total, those things are going to net out just like they netted out a year ago the opposite. It’s just going to – we’re going to have some reversals, but we don’t give specific numbers by segment. But in general, that’s the way we see it playing out over the rest of this year.

Thomas Salmon

I think, Adam, if you also considered during this time, the pace and consistency of the investments, that we’ve continued to make in these businesses to support, these long-term growth objectives have been very, very clear.

Adam Josephson

No, I appreciate that time. And just back to the slide on the sustainable solutions in terms of PCR, again, compostable or bio-based. Tom, can you just give us a sense of what percentage of your portfolio those represent and what your goal is, I asked just given the supply chain constraints and the price constraints rarely have PCR, and then just some of the disadvantages of compostable and bio-based versus just virgin resin. So just wondering how far you see the company going in those directions, just given whatever constraints there are, et cetera.

Thomas Salmon

Yeah, we that – I think, Adam, you brought up some interesting point, there’s a lot of solutions out there that our end customers can choose from and around. Our goal and our objective is to educate them on the range of possibilities both in terms of performance as well as feature benefits that can meet their needs. That’s why we’ve been very holistic in our view clearly making large investments both in the advanced recycling as well as the mechanical recycled materials, but it’s about 5% of our overall portfolio right now.

And, we think that advanced recycling, the molecular recycling is ultimately a virgin alternative, and that’s why we’re so excited about and believe it. It has such hope to help address the plastic waste, goals and objective of the industry and of our end users. The ability to take those materials that were less easy to recycle, break them down to the original composition, re-polymerize them and have virgin quality like material is why we’ve made such a huge foray into those materials, we believe on a large scale basis. It is 1 of those solutions to address this worldwide problem. And there’s not a resin company we do business with and in some form or the other is not making an investment or R&D around this technology know-how.

We’re really excited about it. And that’s – it provides that alternative that doesn’t require a significant trade-off, if you will. And that’s why we’ve made the proactive steps to give ourselves the access to qualify the percentage of end customers that we have in Europe, and educating the U.S., and rest of world on that know-how, as well with some broadly known commercialization successes that we’ve noted in previous calls.

Adam Josephson

Okay. Thanks a lot, Tom.

Operator

Your next question comes from Gabe Hajde with Wells Fargo Securities.

Gabe Hajde

Good morning, Tom and Mark. I was curious, thinking about, I guess, looking at 2022. And I appreciate that we’re not done with 2021 yet, but just to make sure, I guess, directionally, and if you can make any qualitative comments, do you have an $80 million headwind kind of cold out in your guide from inflation and other. And, I think, you’ve talked about directionally a $20 million to $25 million mixed benefit primarily in HH&S kind of per quarter, so really kind of offsetting 1 another if I were to roll forward to 2022.

Is there anything else that you would point us to whether it’s under or over absorb fixed overhead? I appreciate we got to make our own assumption about volumes. But just anything out there that’s kind of one-time in nature that would make this year look different than kind of going forward?

Mark Miles

So I think, Gabe, it’s Mark. Good morning. That was well said. I think, we’re obviously continued to focus on driving organic volume growth and earnings growth across all our businesses. And there’s a number of things that we’re working on driving that, but in terms of just really large numbers, I think those are the 2 largest numbers recovery on inflation, and then how much of this mix benefit dissipates and how long will it take if it ever dissipates.

Gabe Hajde

Okay. And then, I guess in the spirit of sustainability, the reduced or use recycle. You didn’t really use to have kind of larger format packaging, and I’m thinking about the bigger containers that you acquired as part of our PC. Have you guys kind of explored increased usage of these larger format reusable containers? To the extent there’s either a closed loop nature to your manufacturing process and/or dialogue with customers to implement more like I said some of these larger format packages?

Thomas Salmon

Yeah, it’s a good question, Gabe. We’ve announced previously some successes and some closed loop programs, specifically with Georgia-Pacific, we’re taking the best practices from those initiatives and applying them to broader part of our business and it’s growing in interest for sure. And the ability to ultimate that it helps provide an identifiable recognizable source of those materials even in instances where they may be reprocessed or repelletized is a real advantage for it. So it is a growing component of the overall sustainability strategy for our end users.

Gabe Hajde

Thank you. Good luck.

Mark Miles

Thank you.

Operator

Your next question comes from George Staphos with Bank of America Securities.

Unidentified Analyst

Hi, everyone. This is [Kasham Keeler] [ph] on behalf of George Staphos. Congrats on the quarter. I guess, returning to the segments, what is the biggest source of volume and EBITDA increase in guidance from segment level?

Mark Miles

I would say broadly, it’s been a recovery of the – when we were flagged at the industrial related businesses. So the things that had headwinds at the start of the pandemic, the recovery in those businesses has been stronger than we anticipated as the year started.

Unidentified Analyst

Got it. That’s helpful. And then, I guess, just turning to HHS, what’s your utilization there? And then for what period of time would you be able to grow without having to spend more capital on that business?

Mark Miles

We’ve got a – as you can imagine, we have a lot of different products and assets and so utilization broadly is going to vary depending on the region in the asset. I would say, we’re generally pretty full in that business in HH&S and we’re adding capacity every quarter incremental machines are going and we’ve got several new meltblown lines going in across the world. Now, we’ve got some other film assets that are also being added as well as nonwoven, non-meltblown, I mentioned those earlier being added across the world each quarter.

Thomas Salmon

And what I would take from that is – we’re in a growing substrate with growing demand dynamics, and we’re supporting that as a leader, not only domestically, but around the world. So we’re pleased that throughout the pandemic, again, we were able to continue to maintain that level of investment to support our larger customers, these customer-linked solutions. And why we feel very good strategically about our ability to deliver over the long-term that low-single-digit growth consistently and profitably.

Unidentified Analyst

Thanks. Good luck in the quarter.

Mark Miles

Thank you.

Operator

Your next question comes from Arthur Almeida with Goldman Sachs.

Arthur Almeida

Hi, good morning, Tom. Good morning, Mark.

Thomas Salmon

Good morning.

Mark Miles

Good morning.

Arthur Almeida

I was hoping you could talk to us a little bit about how you achieved a positive price cost spread this quarter. I imagine outside of the faster pass-throughs on pricing and the mix component that you mentioned during your prepared remarks, you likely had some benefits from maybe lower cost inventories flowing through the P&L? But looking ahead, do you expect that to continue? It sounded like, Mark, in your prepared remarks, you would expect the favorable product mix to offset the majority of the impact from higher resin costs? And what would that look like from a price cost perspective for the balance of the year?

Mark Miles

Yeah, your comments are spot on we do have a negative lag and towards negative price cost in 2 of our businesses, EM and CPNA year-over-year. CPI was relatively neutral, as the inflation has not quite been a significant outside of the U.S. as well as we’ve benefited from some year-over-year cost synergies there. And really, the favorability has been driven in our HH&S business. We have pretty efficient pass-throughs there. And then the mix, as you pointed out, and we have in our prepared comments, continues to benefit that segment. And as we rolled the year forward, we continue to see that lag in pass-through of inflation.

And as we mentioned, we’ve got that mix benefit for the June quarter. And then both of those things kind of flip in the September quarter, we would expect that inflation recovery to improve in the September quarter, as pass-through start to kick in on our contracts. And our assumption relative to our guidance is that those mixed benefits start to back off in the September quarter. Obviously, we don’t have a lot of great transparency to that as we sit here today. But that’s a conservative outlook relative to our guidance.

Arthur Almeida

Right. And as you said, I would assume resin prices stayed flat. So if they come down like a few forecasters are predicting that would just be an added tailwind to earnings. And then, I guess, a final question is if you could add a little bit more color into what’s driving the $25 million mix benefit that’s incorporated in this guide, but wasn’t included in the previous guide? Is that purely HH&S was there a structural change there between now and when we last spoke in February?

Mark Miles

Yeah, just stronger health care personal protection equipment products, those lines that make those assets we’re making lower selling price items like furniture backing, and other more industrial applications that generate a lower profitability. And our assumptions prior had assumed that those mix benefits go away at the end of the March quarter. Obviously, as we sit here today, we’ve got better transparency than the current quarter, and so we view that mix benefit continuing in the current quarter. We’ll continue to revisit that as I said earlier, don’t know-how long that will last and how it will – if at all, it will go away in the future.

Arthur Almeida

Perfect. Thank you.

Operator

Your next question comes from Phil Ng with Jefferies.

Philip Ng

Hey, guys, congrats on a strong quarter, and thanks for squeezing me in. So cost aside on the non-virgin alternatives, is it technology where it needs to be distinct scale up. And from a performance standpoint, what are some of the limitations? And if we kind of look at the next call it 3 years, that 5% of your portfolio where you’re using non-resin product, where do you see that going, and how does that kind of impact your profitability as well?

Thomas Salmon

There is not significant trade-offs in the molecular recycle material. And, they’re most of the resin companies are in a scale up version right now, looking to prove out the technology. We’re partnering with them ultimately to, obviously, supply feedback as well as educate our end customers about it. But I would expect to see a much larger percentage of our portfolio made up of this substrate.

As you said, it’s probably in that next 2 to 3 year type timeframe before that happens. But the prospects for large scale use to be a cornerstone of our supply chain is very high, in my view, at this stage. I have no reason to believe otherwise, and we’re going to continue to push demand and the education, which again, we believe is one of our primary roles.

Philip Ng

And, Tom, you don’t see that having a negative impact on your margin, maybe even actually a positive is always think about it.

Thomas Salmon

Well, that’s part of the – any kind of emerging technology, as the demand increases, the level of cost competitiveness will continue to improve. So that’s why we’re trying to get out in front of this early. That’s why we secured a significant portion of the material that will become available between now and 2025, so that we can get introduced to the market as quickly as possible. And we’ve had, as you see – as you saw just really good success with our food customers in Europe to this point. So we’ll continue to focus on that as an area of concentration.

Philip Ng

That’s super exciting. And just 1 on the EM segment, I don’t know if you guys call this out. How much of the hit was the winter storms, and with that headwind reversing, do you see EBITDA actually growing in fiscal 3Q and full year on a year-over-year basis? Thanks a lot, guys.

Thomas Salmon

Yeah, there’s probably maybe less than a dozen plants, I guess, that were impacted by the polar vortex. But nonetheless, it has some impact on those plants and equipment. We’re fortunate with the diversification of facilities that we have, we can move that business from one site to the next, but they’re back up and running, delivering the goods as we expect them to. We do anticipate, again, continued consistent growth inside our Engineered Materials business, as Mark outlined earlier, as you see an improvement in the economy. It had a – it was 1 of the most negatively impacted, given us industrial mix that will have some positive trends in the coming quarters.

Operator

Your next question comes from Salvator Tiano with Seaport Global.

Salvator Tiano

Yeah. Hi, guys. Thanks for taking my questions. The first 1, actually, I wanted to understand a little bit on pricing, especially since as you mentioned, HH&S was actually delivered post spread during the quarter which was very exceptional. To what degree, do you think some of this pricing may be coming, I guess, from strong demand, and you can potentially hold to it and actually see some margin expansion in HH&S or potentially in Engineered Materials and elsewhere, versus what is purely pass-through of higher costs?

Thomas Salmon

I mean, the team continues to good job, again, trying to optimize the assets that we have and sell our products where they provide the most value to the market. Again, the pandemic obviously has put increased focus on safety, people within site certainly in the healthcare industry with both healthcare workers as well as patients and visitors. And we – how long that trend towards nonwoven-based product versus reusable, I think is still TBD. But, historically, people have not reverted back. Once they make that transition to the safer product, they generally stay in it.

But, obviously we’re in an unusual time of the pandemic and we recognize that.

Salvator Tiano

Yeah, okay, makes sense. The other thing I wanted to get an update is just on the HH&S. If you can provide a breakdown of revenues by the key end-markets, how does it look now when we look at diapers, wipes, masks and gowns versus how it looks free COVID? And for the key markets, especially diapers, what are you seeing in terms of demand now? And what’s the outlook?

Mark Miles

Yeah, I don’t have the exact percentages in front of me, Salvator. But certainly the business has pivoted. Tom, called it out, I think, a couple of years ago, that we continue to invest in the faster growing areas for nonwovens, adult incontinence, healthcare, as we’ve mentioned. Hygiene is still a very important category to us, Baby-care, we continue to try to compete in the most value-added products in that space. The premium care product category, we continue to bring innovation to our customers in that category across the world.

And so we’re going to – it’s going to continue to be an important category for us going forward.

Thomas Salmon

Yeah, I think it’s a much different businesses than it was. When we first took it on the teams made, I think really great forays into the growth component niches, specifically premium hygiene, premium fem care, adult incontinence, and then given ourselves that same access in the fastest growing region of the world, that being China. And we are now complementing that with a further healthcare investment to support healthcare in that geography as well.

So not to mention the good work that teams have done with hard surface disinfectant wipes, supporting our leadership position in North America, and entering now Europe with this innovative technology and it’s really a new emerging market for us that we’re excited about. All of these, again, are supported with customer linkage. So we feel really good that the pivot of the portfolio is working as we desire.

And as Mark said, the pandemic has, I think, given us good exposure to the benefits of disposable drapes and gowns, and with the change in terms of elective surgeries coming post-pandemic, that’ll be good news for HHS. But strategically, that business is well positioned to deliver though single-digit growth.

Salvator Tiano

Okay, that’s perfect. Thank you very much.

Operator

Your next question is a follow-up question from George Staphos with Bank of America.

George Staphos

Hi, everyone. Good morning. Joining late, just very quickly, I know we’re late in the call, Tom, have you talked at all about dispensing what the growth rate was in the quarter or what the annualized revenue is at the present time within the business?

And then, more broadly, if we think about how Berry looks post-reopening, post-COVID, obviously, you’ve gotten some very strong trends within HH&S to your credit and to your investment strategy over the last 4 to 6 quarters.

Is there any segment in your business right now, where you’d expect volume trends to be negative once we’re past COVID and we’re back into the reopening why or why not? Thank you and good luck in the quarter.

Thomas Salmon

Closures, dispensing solutions continue to be a target area for growth. Globally, it’s close to a $2 billion business for us across the entire franchise. We continue to innovate in that category and continue to believe that, we’re going to be in an advantageous position given our global footprint and our ability to serve our customers locally.

And, George, as you noted, we have made targeted investments. We’ve been making those consistently over the last several years all around the mega trends that we think will deliver consistent, predictable, low-single-digit growth over the long-term of all of our businesses. They’re all wired for growth in that regard, whether it’s EM, CPI, CPNA or HHS. And really proud of the team, how they’ve executed, how they’ve maintained their focus, how they’ve been able to ultimately deploy these capital investments and execute innovation and new product closes during the difficult time when you didn’t have the traditional means to close those types of businesses.

So we feel really bullish about the outlook to deliver growth, delever the company, to use sustainability as a growth platform for our company and to take advantage of this global footprint that’s enabled by the most recent largest strategic acquisition that we’ve done in our history to really provide that local value delivery capability to the major brands around the world.

George Staphos

Tom, did you mention how quickly dispensing grew in the quarter?

Thomas Salmon

Mid-single-digits.

George Staphos

Okay, thank you very much. Good luck in the quarter, guys.

Thomas Salmon

Listen, we appreciate very much everyone’s interest in our results for the quarter and look forward to our next call. Thanks, everybody.

Operator

Thank you again for joining us today. This concludes today’s conference call. You may now disconnect.