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Berry Plastics Group Inc  (NYSE:BERY)
Q1 2019 Earnings Conference Call
Feb. 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Kyle, and I'll be the conference operator for today. At this time, I would like to welcome everyone to the Berry Global Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to hand it over to Dustin Stilwell, Head of Investor Relations. You may begin.

Dustin Stilwell -- Head of Investor Relations

Thank you, and good morning, everyone. Welcome to Berry's First Fiscal Quarter 2019 Earnings Call. Throughout this call, we will refer to the first fiscal quarter as of December 2018 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 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 do fall back into the queue for any follow-up or additional question.

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, I remind you that certain statements made today maybe 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 E. Salmon -- Chief Executive Officer & Chairman

Thank you, Dustin, and good morning, everyone. I want to thank you all for your interest in Berry, and welcome you to our fiscal 2019 first quarter conference call. I'd like to start today by mentioning that on Thursday we issued a press release announcing that we are considering a possible offer for RPC Group plc, a leading global plastics manufacturing company headquartered in Europe and listed on the London Stock Exchange. We will utilize our proven disciplined approach to complete our diligence process and assess the shareholder value-creation opportunity alongside other opportunities. Accordingly, we've requested access to RPC's diligence information consistent with our policy and the requirements of the UK takeover code, we will not be making any further comments or responding to any questions on the matter during this call or offline until further notice. There is no certainty that an offer will be made nor as the terms of which any such offer would be made. Further announcement in relation to RPC will be made as and when appropriate.

This morning we'll be discussing several topics including our quarterly results, highlights from our three operating segments, include investments in both organic growth and cost reduction, as well as our expectations for the balance of fiscal 2019. Afterwards Mark and I will be happy to answer any questions you may have.

Turning now to our overall financial results and highlights for the quarter on Slide 3. I'm proud to report we had another quarter of solid financial performance as we generated record results for any December quarterly period for many of our primary operating metrics. For the quarter, sales were December quarterly record at nearly $2 billion, increasing 11% over the prior year with growth in all three segments. We recorded organic sales dollar growth of 3% led by our Consumer Packaging division at 9%, and our Health, Hygiene & Specialties division at 2%. This was our fifth consecutive quarter of positive organic sales growth for the company. Operating EBITDA was also a December quarterly record at $331 million, up 7% from the prior year. Our adjusted earnings per share quarterly record of $0.77 was an increase of 15% compared with the prior year quarter.

Now, looking at some of our highlights specifically by segment. As I mentioned our Consumer Packaging business reported strong organic sales growth in the quarter of 9%, largely led by our food service products driven by stronger demand in quick-serve restaurants and convenience stores. We continue to be encouraged by the momentum of the division delivering five consecutive quarters of positive organic sales growth. Our Health, Hygiene and Specialties division recorded strong quarterly sales growth of 22%, as well as a 21% improvement in operating EBITDA including the impact of the Clopay acquisition that closed in fiscal 2018.

We will continue to be pleased -- we continue to be pleased with our acquisition integration of Clopay, which has provided us an opportunity to leverage technology in order to create more value with our customers. The HHS division has now recorded sales growth for eight consecutive quarters and grew 2% organically in the first fiscal quarter. Inside our Engineered Materials division, we delivered strong sales and operating EBITDA growth during the quarter of 3% and 7% respectively. The division made good progress in the period completing much of the qualification of alternate and new raw materials intended to maximize and reinforce our low-cost position in this space. As you recall in August of last year we announced the company's first share repurchase authorization of $500 million, and kicked off the program purchasing $35 million, before our fiscal year ended in September. In the December quarter, we repurchased an additional $54 million bringing our aggregate total to $89 million(ph)of shares repurchased since the plan was implemented.

We remain committed to a dynamic capital allocation strategy to maximize shareholder value, which will thoughtfully include investment to grow our business organically, execute strategic acquisitions, debt reduction, and return cash to our shareholders. Our financial performance and balance sheet has strengthened considerably over the past several years, driven by our consistent dependable and growing free cash flow, and we remain committed to maintaining a strong balance sheet. At Berry, we continue to believe the possibilities of plastics are endless. Whether it's used in applications, such as healthcare, medicine, food storage, and spoilage protection products, from cellphones to cars, plastics was one of the most versatile materials on the planet. We're encouraged by our progress and improved collaboration across the value chain.

As you'll see on Slide 4, on January 16th, we announced our participation as a founding member of a new global alliance to health and plastics waste. I'm very proud and excited to be part of this new organization, which is currently comprised of nearly 30 global companies and is making a $1.5 billion commitment over the next five years to invest in solutions to eliminate plastics wastes in the environment. This alliance is different from many other organizations, in that it spans the value chain, brand owners, plastics resin producers, chemical companies, converters like ourselves, as well as waste management companies and recyclers, are all aligned toward a common goal of how we ultimately end plastics wastes. As a whole, the alliance will work with governments, multilateral institutions, companies, non-government organizations, and community to support investments and drive progress over the next five years.

The primary focus is categorizing the four main areas, infrastructure development, innovation, education engagement, and clean-up. In addition to our efforts with the alliance, Berry is also partnering with key organizations to encourage recycling, as well as internal efforts to improve product recyclability, and increased offerings with recycled content. We similarly have pledged for that resin pellet, flake and powder loss, along with our partnership with Operation Clean Sweep. Berry has a long history of taking steps to reduce our environmental impact through our technology know-how, material science, and product design capabilities, that coupled with the use of post consumer recycled material is something we're very encouraged by. By joining the alliance, we are now able to make greater impact on the end-of-life for plastics products. One in which we hope will lead to an increase use of recovered plastics material, which can be reused again in the manufacturing process.

Before I turn the call to Mark, who'll review Berry's financial results in detail, I'd like to highlight that the company is well positioned to achieve our historical track record of growing our free cash flow and delivering on its commitment, just as we've done every single year as a publicly traded company. So today, we are reaffirming our free cash flow guidance of $670 million for fiscal 2019. Mark will provide more detail in his remarks and then I'll come back to summarize our strategy and open the call for questions. Mark?

Mark W. Miles -- Chief Financial Officer

Thank you, Tom, and good morning, everyone. I would like to refer everyone to Slide 5 now. As Tom referenced first quarter sales were $1,972 million, which was up $196 million or 11% over the prior year quarter, primarily due to recent acquisitions and organic sales dollar growth of 3%. From an earnings perspective we achieved the December quarter operating EBITDA record of $331 million, up 7% compared to the prior year quarter. Contributions from recent acquisitions along with cost-reduction efforts and price increases were partially offset by higher raw material, manufacturing and transportation costs. Accounting for the annualized impact of acquired businesses including cost synergies, our adjusted EBITDA was $1,439 million for the four quarters ended December 2018.

Looking at the results of each operating segments starting on Slide 6. Sales for our Engineered Materials division for the quarter was $669 million, an increase of 3% compared to the prior year quarter primarily attributed to the Laddawn acquisition, partially offset by a modest volume decline as a result of strong volumes in the December 2017 quarter. Operating EBITDA in our Engineered Materials division was $127 million, an increase of 7% compared to the prior year. We are pleased with our progress in the quarter completing much of the qualification of alternate and new raw materials intended to maximize earnings and reinforce our low cost position in this space. As discussed on our last earnings call in November, this negatively impacted volumes the last couple of quarters due to the inefficiencies created along with some destocking we believe occurred in the supply chain in the December quarter in anticipation of lower resin pricing.

Next on Slide 7, our Health, Hygiene & Specialties division delivered sales of $702 million in the quarter compared to $577 million in the prior year quarter. The increase of $125 million or 22% was primarily attributable to the Clopay acquisition and organic sales growth of 2%. The organic sales growth was primarily driven by higher selling prices partially offset by reduced volume in our baby care and specialty businesses, and an unfavorable currency impact. We remain focused on leveraging our scale and low-cost position to secure demand as the hygiene market works through a softer period.

We have worked hard to foster great relationships with the leading end-users in the hygiene category and our capabilities know-how and low-cost global platform position us well for the future as these brands will lead the way in terms of innovation and differentiation we will provide. Operating EBITDA increased 21% in the quarter to $116 million. This $20 million increase in operating EBITDA was primarily a result of the Clopay acquisition cost reduction initiatives and recovery inflation partially offset by an unfavorable currency impact.

Turning to Slide 8. Sales in our Consumer Packaging division was $601 million in the quarter, which was $50 million higher than the December 2017 quarter. The 9% organic sales growth was primarily driven by continued growth from our food service products that Tom referenced earlier. Operating EBITDA for Consumer Packaging in the quarter was $88 million compared to $95 million in the prior year quarter. The timing lag of recovery in higher raw material transportation and manufacturing costs were partially offset by the continued volume growth delivered in the division. Our results in the quarter also included increased costs in the start-up of new capital expenditures to support this continued growth.

Slide 9, provides a summary of our income statement for our fiscal first quarter. Overall, operating income improved 8% to $176 million due to the items previously discussed that drove the $21 million(ph)operating EBITDA improvement, partially offset by incremental depreciation and amortization from the recent acquisitions. Our net income for the quarter was $88 million compared to $163 million in the prior year quarter. The December 2017 quarter included a $95 million favorable adjustment to income taxes related to tax reform. Earnings per diluted share came in at $0.66, and adjusted earnings per diluted share increased 15% to $0.77 in the current quarter compared to $0.67 in the prior year quarter.

Next on Slide 10, the company generated $161 million of cash flow from operations in the quarter, representing an increase of 5% from the December 2017 quarter. Net capital expenditures in the quarter was $75 million, as we incurred spending on cost reduction initiatives, as well as growth related projects. Our adjusted free cash flow for the fourth quarter ended totaled $679 million, which represents an adjusted free cash flow yield of nearly 11% using our quarter-end market capitalization. Our consistently increasing, dependable and substantial free cash flow provides us the opportunity to improve our balance sheet, which included early principle payments of $100 million(ph)on our term loan in the December quarter. In addition to reducing our variable rate debt through cash flow applied toward debt reduction, we further reduced our earnings volatility from interest rate changes through an additional conversion of $400 million(ph)of variable rate debt to a fixed rate in January.

Our financial guidance and assumptions for fiscal 2019 are shown on Slide 11. We are reaffirming our fiscal 2019 adjusted free cash flow at $670 million, which includes $1,036 million of cash flow from operations, partially offset by capital expenditures of $350 million, or we plan to allocate a larger percentage of our capital expenditures to drive earnings growth through a focus on cost reduction initiatives. Our guidance continues to assume constant currency rates and a normal inflationary environment on our costs.

Additionally, cash interest is estimated to be $270 million, cash taxes of $165 million, and working capital and other cash costs of $45 million. As a reminder, we anticipate fiscal year 2019 to follow our normal historical trend of strongest to weakest earnings quarters being 1st June, 2nd September, followed by March with this December quarter that we just completed being the weakest.

Now let me take a moment to discuss the current landscape regarding pricing cost. Publish market prices for plastic resin, our primary raw material dropped in the fourth calendar quarter, the polyethylene reporting $0.06(ph)lower and polypropylene $0.18(ph)lower. Due to the timing of these decreases passing through our inventory, we expect the majority of the benefits of these lower costs will positively impact the March 2019 quarter. As we are only one quarter in our fiscal year and predicting resin market cycles can be very difficult, we have opted to keep our guidance unchanged.

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

Thomas E. Salmon -- Chief Executive Officer & Chairman

Thank you, Mark. As we look forward strategically, and as that reflect on two years as Berry's CEO, I'm committed to continue to do what Berry does well. Manufacture products within stable end-markets, grow our business organically, leverage our scale advantage, locate and integrate accretive acquisitions and generate consistent dependable free cash flow, while maintaining a strong balance sheet as a leading global supplier of broad range of innovative non-woven, flexible, and rigid products. Our acquisition pipeline continues to be very robust with global opportunities in each of our three segments. We feel there is and will be ample opportunity to continue to find accretive acquisitions, while applying our proven conservative and disciplined approach.

Our successful track record and strategy to uncover and acquire businesses with light materials along with our ability to successfully integrate these businesses in a timely manner and efficiently realize maximum synergy is a core competency of Berry. We will work to identify the best people and best practices of each acquired business and apply those resources and practices to the entire enterprise. Furthermore, we will continue to work diligently across all our businesses to grow organically, and have been able to demonstrate organic volume growth by providing advantaged products in targeted markets. Our record level of expected capital expenditure for 2019 is evidenced to our commitment and focus on organic growth to drive further market value for Berry.

Within Consumer Packaging, our value proposition and recent success around connectivity, sustainability, and cost innovation has led to innovative packaging solutions, which addressed unmet need. Our investments in advantaged products, such as our new polypropylene drink cup and lid and our focus on faster growing end markets have proven successful. Our drink cup offering provides a fully recyclable patented design that maintains rigidity, provides clarity for the customers' product and reduces waste. Other new products we highlighted on our last call are all progressing as planned, including Verdant, a unique range of post-consumer recycled products for the beauty and personal care markets. Embark, a new range of child-resistant containers for the growing legalized cannabis market. And lastly, our partnership with Digimarc, which provides printing on our rigid products allowing consumer interactions through the use of their smartphones. We continue to look for opportunities where we can provide advantaged products in targeted markets.

Similarly, within our Health, Hygiene & Specialties division, our previously announced investments in China in a state-of-the-art technology for premium hygiene air filtration applications, along with our North American investment in our proprietary Spinlace technology for the wipes market, all remain on target. These capital expenditures reinforce our commitment to invest in a growth region and segments to further strengthen our leadership position and provide additional momentum for sustainable growth in these global markets. Also, we're well positioned with our asset base and product solutions related to discretion and comfort, which was augmented by our recently completed acquisition of Clopay to build on our leading market share positions in a faster growing incontinence space.

Within Engineered Materials, the converter space continues to deliver excellent results, operating at high utilization rates across the board, with our e-commerce segment delivering the strongest performance. We're utilizing our new film technology in flexible packaging and recent investments in value-added multi-layer films to support growth and expand our e-commerce offering. Our previously announced acquisition of Laddawn continues to inspire new way to look at our core business as a vehicle to enhance growth and our customer experience. We are migrating more Berry products to the Laddawn e-commerce platform with the recent launch of our Chicopee wipers in the March quarter, and look forward to adding additional Berry products in the near future.

Berry will continue to make the necessary investments to ensure we maintain our low-cost leadership position and invest in market segments and regions that will deliver the fastest growth for our company. We're very proud of the stability of our performance at Berry regardless of the economic environment. Our team is wholly committed to building on our already leading manufacturing capability know-how with further advancement in automation, material science and capacity advances. All of these to support our commitment to find ways to deliver reliable, consistent and profitable growth and innovation in each of our businesses.

And finally, Berry will continue to take the steps necessary to remain a leader in the markets where we participate through relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. The management of Berry continues to be laser-focused on finding ways to extract more value for our shareholders by reinvesting in our leading low-cost position, leveraging our resources around the businesses with the greatest opportunity to grow and create value for our customers, continue pursue accretive M&A in fragmented markets, all while doing our part to protect our environment. Cornerstone to Berry's success is our people, and our objective is to remain an employer of choice in all geographies, given the tightness in the labor manufacturing companies are facing around the world. I'm confident that Berry and the people at 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 will be glad to answer any of your questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Ghansham Panjabi from Baird. Please go ahead.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Hi, everyone. Good morning.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Morning.

Mark W. Miles -- Chief Financial Officer

Hi, Ghansham.

Ghansham Panjabi -- Robert W. Baird -- Analyst

I guess, first off, I mean, resin prices did collapse pretty significantly in the fourth quarter. Did you see any sort of ordering pattern shifts that customers were delaying orders into the following quarter. And if so, can you kind of quantify that and give us a sense as to how volumes are tracking across your three segments so far in the current quarter?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Thanks, Ghansham. I think most pronounced was probably our Engineered Materials business, which is predominantly a distribution-driven business, where in the December month, we saw some softness in demand with the anticipation of PE prices falling. And so, we do believe there was some destocking during the quarter. And again, it's typically, if that impacts us in a quarter, it will be in one month time only. Relative to demand across all three spaces, as predicted and as budgeted, we spend a lot of time in Engineered Materials focused on qualifying alternate raw materials and new raw materials ultimately to maintain our low-cost position, that's ostensibly behind us now as we migrate into Q2, and we're making good improvement on a year-over-year basis and going into quarter two. Relative to HHS, we saw 2% organic sales volume growth in the quarter. Two areas, however, I would say were consistent trends for us, which was baby continued to be a bit soft, and certainly inside of our specialty business. We made the volume price trade up, but I am actually very encouraged inside of HHS relative to the kind of partnerships we have and the key end-users inside that space, it's going to position us very well via innovation and via their promotional activities, I think as they recover and improve inside that space as a leader in that particular category, we'll be well benefited. And in Consumer Packaging, it continues to be a strong growth story. We're very pleased with the progress, the investments we made in that space. Clearly, our food service, our healthcare space are both making really strong progress inside that division. And we continue to make really good improvement relative to lag recovery in terms of raw materials in offsetting that -- some of that price pressure and margin pressure we saw in the quarter. So just a quick summary of those three.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Okay. And just as my follow-up. Understanding you're very limited on what you could say about RPC, but can you just sort of give us a sense on the timeline of diligence, it just seems like there's a fair amount of controversy around RPC's true EBITDA. Just curious on whether diligence will be something that will be done in a few weeks or will it stretch longer, keeping in mind that the other parties have spent probably months evaluating RPC? Thanks so much.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Yes. Thanks, Ghansham. As we said in our opening comments, unfortunately, we really can't comment any further or respond to that announcement on the call. But in general and consistent with our statements, in our prepared comments, this is not new to Berry, we will utilize our proven, disciplined approach to complete this due diligent process. And as such as that, we would have other opportunities relative to shareholder value creation, that won't change.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Thanks. Good luck with it.

Operator

Your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Please go ahead.

Molly -- Bank of America Merrill Lynch -- Analyst

Hey, guys. This is actually Molly(ph)sitting in for George. I just had two quick ones on volume. So the first, I'm looking at the Engineered Materials segment. So it was down 3% in the quarter, but the waterfall showed a slight increase to EBITDA of about $2 million. Can you provide a little bit of additional color on kind of what causes this. Is it mix, acquisition effects or something else there? Thanks.

Mark W. Miles -- Chief Financial Officer

Good morning, Molly. Certainly, as we mentioned in the prepared remarks, we continue to work diligently to improve the blends of our raw materials and reducing our costs by qualifying various lower-cost raw materials and encouraged by the progress we're seeing there, the impacts we're having on our profitability.

Molly -- Bank of America Merrill Lynch -- Analyst

Okay. Got it. And then the second question is on HHS volumes. Can you kind of go into a little bit more detail on the 5% volume decline, how that varies by region. Obviously, you mentioned baby diapers were a bit weak, so by product, you kind of went over that, but if you could just go over region, that would be helpful? Thank you.

Thomas E. Salmon -- Chief Executive Officer & Chairman

I'll start back with -- on baby, listen, the specialty business is what we've described and that's everything from the underlayment that goes underneath furniture and things like that, but our specialty category is very transactional, if you will. And during the quarter, we made some conscious decisions relative to price volume trade-off that impacted demand in the quarter. But again, we feel well positioned in the baby care and hygiene space relative to our position with the key end-users in the space that as they show improvement in the category, we'll similarly be benefited in that regard.

Molly -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you. I'll turn it over.

Operator

Your next question comes from the line of Scott Gaffner from Barclays. Your line is open.

Scott Gaffner -- Barclays Capital -- Analyst

Thanks. Good morning, Tom. Good morning, Mark, Dustin. Just a quick follow-up, Tom, on -- you mentioned the acquisition pipeline is robust, kind of just want to focus on North America and some of the emerging markets. I mean, what are you seeing there, I mean, multiples were relatively high in North America for a while. I mean, is it -- are multiples still high, or is nothing available there. And then anything you have on the emerging markets as well?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Just in general, I think we'd say we're seeing a moderation in some of the expectations in terms of around valuation in multiples, certainly from 12 months ago. And I think your -- our speculation as you'll continue to see that moderate overtime -- that will address and fix itself. We're going to continue to take full advantage of what is the attractiveness of this incredibly fragmented space that continues to warrant investment by our suppliers, which we're excited about. And we think we're very well positioned right now, especially with the percent of our business in North America today, and the investments made around polyolefins that positioned Berry very, very well. And I think it's a great statement and testimony to the growth prospects for our industry.

Scott Gaffner -- Barclays Capital -- Analyst

Okay. And then just focusing more on some of the recycled material that you're using, I mean, what percentage of your mix today do you think you could get to recycled material, just based on the current technologies, and which product categories are best suited for using recycled versus virgin resins? Thanks.

Thomas E. Salmon -- Chief Executive Officer & Chairman

It's interesting, Scott. Across our entire product line at Berry. We have an opportunity to offer post-consumer alternative for our customers. And so, that really expands the cross-section of our business, and so we're excited about that. And frankly, the efforts really are focused on making recommendations to our key end-users and making them aware of the variety of post-consumer alternatives that they can consider. And I think that for me is what so exciting about the alliance and plastics waste is, how does the initiative across that value chain exposes more of our market space to the possibility of plastics and the possibility of recycled plastic. So, very pleased and excited to look forward to that. There's good progress being made, and I think the alliance is just one step in that regard. And clearly, I think the categories that we're primarily focused on, which is around prevention, around enhancements of waste infrastructure, innovation by helping create new sustainable technologies and business models to support innovative materials, education and engagement and ultimately, clean-up, I think will demonstrate, on a global basis our ability to make a real impact on plastic waste and really change that narrative, so looking forward to that.

Scott Gaffner -- Barclays Capital -- Analyst

Perfect. Thanks, Tom.

Operator

Your next question comes from the line of Edlain Rodriguez from UBS. Your line is open.

Edlain Rodriguez -- UBS Securities -- Analyst

Thank you. Good morning, guys. Just a follow-up on Health and Hygiene. In specialties, you've talked about that price volume trade-off that you've made this quarter. Is there much of that to be done going forward. And also, I think last quarter, you've talked about repositioning some assets from baby care to adult products, like what's the progress there?

Thomas E. Salmon -- Chief Executive Officer & Chairman

It's a great question. We continue to move on that. The nice piece in terms of the asset mix inside of HHS is pretty fluid. So as we work to create more demand on the adult and cotton side, and we ultimately migrate more of that capacity to support that incremental growth. Inside specialty, it's just as like most specialty businesses, there's a variety of different products. Some are incredibly high-tech, value-add and very strategic. Others are more transactional and more commoditized, if you will. And the choices that we made relative to volume price trade-offs were around more of the commoditized items.

Edlain Rodriguez -- UBS Securities -- Analyst

Okay. And one quick one on Consumer Packaging, like how sustainable is that recent volume growth that we've seen, is it being driven by new customer wins or just improvement in the end markets?

Thomas E. Salmon -- Chief Executive Officer & Chairman

It's predominantly driven by new customer wins and opportunities for Berry to bring innovation and differentiation and find ways to meet unmet need. We've been very focused and methodical in terms of how we invest. Targeted markets with advantaged products, and any opportunity where we have strength in a particular category to utilize that strength to give us exposure to other opportunities, we'll do it. So in food service, where we have strength in cups, we migrate that strength to support innovation and technology around strawless lids, where we have capability and know-how around tamper evident lid, child-resistant lid. We migrate that know-how to support the development of cannabis packaging. We -- that's more of the theme(ph). So, we're very bullish about the growth prospects inside that business, and frankly, in all of our businesses where we believe each of our businesses can be a low-single digit growth business for Berry.

Edlain Rodriguez -- UBS Securities -- Analyst

Okay. Thank you, guys.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks. So I just had a couple of questions on that volume, following up on that. So in HH&S, what are you hearing from your customers on the category. Is there any possibility that you could see some slow improvement as we move through fiscal '19 in the diaper category. And then in EM, you referenced maybe tougher comps resulting in a little bit of a volume shortfall. So, given that you still have some easier comps ahead of you, due to the volume calling, should we expect EM volumes to turn positive later in the year? Thanks.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Related to EM, the team is making good progress. I think you'll see improvement in the EM volume profile versus prior quarter. And what our customers are asking for is they're looking for providers like Berry who can bring them innovation, differentiation, scale, capital investment to support innovation, and customers and companies like ourselves for them that ultimately can deliver kind of quality and service and have the supply chain consistency that they're looking for. And we think Berry is very well suited for that in that regard. They are obviously trying new techniques in terms of marketing, promotion, shelf pricing, as well as different innovative launches that Berry is supporting in kind. And as we see traction and improvement inside the hygiene space, Berry will similarly benefit.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. Thanks.

Operator

Your next question comes from the line of Neel Kumar from Morgan Stanley. Please go ahead.

Neel Kumar -- Morgan Stanley -- Analyst

Hi. Good morning.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Good morning.

Neel Kumar -- Morgan Stanley -- Analyst

In Consumer Packaging, I was wondering if you could just give us some color on the margin decline year-over-year. It seems that price cost is negative, but anything else is driving that decline. And also, just generally, how do your margins in food service products compared to the overall segment margins?

Mark W. Miles -- Chief Financial Officer

Yes. Good morning. Yes, relative to the (inaudible) that margin discussion by product is not something that we're prepared to disclose. Relative to the year-over-year earnings in Consumer Packaging, raw materials didn't drop until the back half of the quarter, and that will certainly benefit us as we go into March, but there is a timing lag in the pass-through of that through our inventories, which again, is the reason you didn't see much of an impact in the December quarter. However, we did see sequential improvement, the year-over-year price cost improved significantly in that business compared to the September quarter. So, we're encouraged by the progress we make as the inflation moderates, and we're recovering price into the market. But it's just a timing lag relative to recovering cost inflation that's occurred, and it's a little more pronounced in Consumer. The agreements -- most of our customer relationships they are covered by agreements, which have timing lag to pass-through of resin and typically don't have pass-throughs on other costs. So you have to wait for those agreements to mature, which again, tend to be longer-term in that business.

Neel Kumar -- Morgan Stanley -- Analyst

That's helpful. And then for my follow-up, I was just wondering if you can give an update on where you were in terms of your initiatives -- the lag in your resin pass-through?

Mark W. Miles -- Chief Financial Officer

Yes. I would say that's an ongoing exercise. Again, as agreements come up, working with customers to reduce that lag to the extent, we're doing that through the negotiation, whether or not it's the frequency of the moves or the timing with which the month it looks at the Embassy, we're working on both those things on an ongoing basis. Plus an ongoing effort of the company to -- although our lag is somewhat modest, we want to continue to improve to reduce that timing lag on our earnings.

Thomas E. Salmon -- Chief Executive Officer & Chairman

And that's a consistent effort across all three of our divisions.

Neel Kumar -- Morgan Stanley -- Analyst

Great. Thanks. That's helpful.

Operator

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

Tyler Langton -- JP Morgan -- Analyst

Good morning. Thank you. Just had a question on price cost, I know it was a positive sort of $3 million spread this quarter, do you still expect to get back roughly half of the $100 million sort of under-recovery that you based on last year, and should that sort of I guess, accelerate throughout the year?

Thomas E. Salmon -- Chief Executive Officer & Chairman

We continue to believe we'll recover at least $50 million during fiscal 2019, and I would say also, we're very pleased with our progress on price recovery during the quarter in general, just coming in positive on price versus cost.

Tyler Langton -- JP Morgan -- Analyst

Got it. Thanks. And then could you just remind us of leverage target. I know you've mentioned you kind of want to stay around 4 times, but I guess, is that something you'd go above for a short period of time, if you had sort of visibility to deleverage, just sort of any color there would be helpful?

Thomas E. Salmon -- Chief Executive Officer & Chairman

As we previously said that we believe we can execute our strategy below 4 times leverage, we're fortunate to participate in what remains a very fragmented plastics packaging market. We evaluate every capital allocation opportunity to maximize shareholder value. Were there a circumstance that would arise that would temporarily take our leverage higher, Berry's strength and dependable cash generation affords us the opportunity to delever quickly, and we are very committed to maintain a strong balance sheet.

Tyler Langton -- JP Morgan -- Analyst

Great. Thanks much.

Operator

Your next question comes from the line of Salvator Tiano from Vertical Research. Your line is open.

Salvator Tiano -- Vertical Research -- Analyst

Hi, guys. I'd like also to talk some of the cost of goods sold, specifically, can you provide us some of the big market soft(ph)inflation you saw this quarter. I assume if resins weren't as pronounced. So this, I think almost $80 million in higher COGS year-on-year, what were the main components?

Mark W. Miles -- Chief Financial Officer

Yes. Resin is about half of our costs, and on a year-over-year basis it's up significantly, again, on a year-over-year basis, again, that will moderate next quarter as we have the benefit of the lower resin prices that occurred in the back half of the calendar quarter, impact the March quarter, but largely driven by resin, certainly, other raw materials as well as normal inflation and costs like healthcare, labor, et cetera, were higher on a year-over-year basis, but significantly overshadowed by the resin year-over-year increased costs.

Salvator Tiano -- Vertical Research -- Analyst

Okay. Perfect. Then just, I know you won't -- as you mentioned you won't discuss RPC, I was just wondering, how do you see generally investing in the European market given, all the proposed regulations restricting use of single-use plastics and some feedback we're being getting from some other companies that even with that regulations many companies focusing on sustainability are just shifting to other formats. What do you think the trade-off by expanding to -- more to Europe there?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Well. Obviously, we're not going to speak relative to that announcement, but I would say in general, we believe that the energy around recyclability, around plastics and its sustainability and how we ultimately create a circular economy is a huge opportunity for a company like Berry Global. We talked about the level of investment that we've made over a long period of time with our engineering, our design capability, our ability to lightweight, our ability to work collaboratively through alliance. Alliance is like the alliance and plastics waste to promote, to ultimately prevent, to innovate, to educate and to clean-up, and we remain very bullish about the substrate and about the opportunity. I mean, if you think of that and take a look, I strongly suggest you do this, take a look on the alliance and plastics waste, look at some of the projects that we'll be focused on inside this arena and this area of conversation. We're working with Circulate Capital as an incubator network to support investment around waste management infrastructure. We're working with the United Nations Environment to raise awareness and engage public sector for local deployment of solutions around waste management infrastructure. We're working with Renew Oceans to capture plastics waste from rivers. We're working on the Ganges river project, which will be begun in 2019 in partnership with National Geographic. We're developing open source data to support investment, maximize the impact of sharing that data across the value chain to make greater strides faster. And the chemical companies and the resin companies are in a better position to talk about it, but there's a tremendous amount of effort right now focused around chemical recycling where you take waste, migrate it to monomer to create polymer, and it's migrating from the lab and ultimately become commercial, and they can walk through the timeline there. But we remain very bullish on the space, bullish on the opportunity, bullish on one of the most flexible, versatile raw material on the planet that has changed people's lives every day. And there continues to be, I think, a tremendous amount of opportunity going forward with it.

Salvator Tiano -- Vertical Research -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of Adam Josephson from KeyBanc Capital Markets. Your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Tom, Mark and Dustin, good morning.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Good morning.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Just one more on the leverage question, I think Tyler asked a little bit ago. Tom, you said a couple of quarters ago that you think your leverage should stay below four, and I thought that meant just remain below four sustainably, and it sounds like what you're saying as well, we're more than comfortable exceeding it for a year or two, and then going below, and then going back up again. What do you think of just staying below four sustainably rather than going up and down and up and down?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Well. Listen, we evaluate every capital allocation in our company on ways that we can maximize shareholder value. And like I just noted that, we continue to believe, based on what we know today, that we can execute that strategy and stay below 4 times. Now were there an opportunity, and as I said, or a circumstance that would arise that would temporarily take it higher, we believe our strength and our dependable cash generation affords us the opportunity to do that and delever quickly, while at the same time creating shareholder value and not losing that commitment on maintaining a strong balance sheet.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. Thank you for that. And just on the recycled resin, someone asked about it earlier. But how feasible do you think it would be to meaningfully increase your usage of recycled resin just given the industry infrastructure or lack thereof that exists today and the cost differences between recycled and virgin resin, because obviously, I imagine your customers do not want to pay more for their packaging than they're paying today.

Thomas E. Salmon -- Chief Executive Officer & Chairman

There is -- it starts with making them aware of what's available and how they ultimately take a look at that consideration in terms of costs, market impact, how it affects their brand. But clearly, the objective of the alliance is to promote, encourage, make people aware of the products that are available to justify investments so that the demand will ultimately support a greater ROIC, and that's what hasn't happened over the years. And the fact that the alliance and plastics waste is across value chain initiative with key end-users being part of that, they have complete line of sight and visibility to that to help pull that along. Historically, I think the efforts have been less successful, because you haven't had the entire value chain represented, which you do now. And I wholly expect that other converters, other end-users, other waste management companies, other recyclers will get engaged and want to be part of this alliance to ultimately, formally, at one day, end plastics wastes in its entirety.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, Tom.

Operator

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

Anojja Shah -- BMO Capital Markets -- Analyst

Hi. Good morning. I just wanted to ask another question about food service, clearly it's doing very well. There's been volume growth for many quarters now, but what steps are you taking to insulate it from increasing concerns around single-serve plastics?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Well. Listen, we -- that space has been a great growth industry. Similarly, we're partnering with the top QSRs in the world. We always focus on multi-generation product plans, ultimately, so that one innovation is replaced by another innovation overtime. And we continue to see strength inside that space. Very pleased with the opportunities that's in front of us, both in terms of the polypropylene drink cup, and it being a platform technology and how we extend that to other end-users, as well as extensions like strawless lids as one example, where our historic capability supported by consumer insights that we actually have product that the markets are looking for right now. Consumers, frankly, prefer a strawless lid over alternative straw solutions. And we have a well-known capability inside that space, and we're excited about some of the prospects that, that can provide longer-term.

Anojja Shah -- BMO Capital Markets -- Analyst

All right. Thank you for that. And then just for my follow-up. Are you seeing more attractive acquisition opportunities in China, given the slowdown that's happening there?

Thomas E. Salmon -- Chief Executive Officer & Chairman

The market and the industry is fragmented around the globe. China is not insulated from that fragmentation as well. And yes, we have line of sight there. There is -- there continues to be opportunities and one of the fastest-growth regions from a volume perspective still in the world. And we'll continue to take and keep an eye on that. Clearly, it's an opportunity where we have a base of business both in terms of our non-woven space, as well as inside Consumer Packaging. And we continue to look for opportunities to grow that business organically, as well as through other investments, should they generate the kind of shareholder value we expect in return.

Anojja Shah -- BMO Capital Markets -- Analyst

Great. Thank you very much.

Operator

Your last question comes from the line of Daniel Rizzo from Jefferies. Your line is open.

Daniel Rizzo -- Jefferies -- Analyst

Good morning, guys. Thank you for taking my question. You mentioned alternative raw materials in Engineered Materials, I was just wondering what exactly you're referring to?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Just in general, we have -- the Engineered Materials business is probably the business inside our portfolio, most impacted by our material science know-how. So, as we ultimately come up with different combinations and formulations to create feature benefits that are unique to the customer or create feature benefits at a lower cost, that's what we're speaking of. And that's a core competency inside that business, and it's something that we're very excited about, because we remain committed to preserving our low-cost provider position inside that space.

Daniel Rizzo -- Jefferies -- Analyst

Okay. And then you also mentioned that hygiene was swapped, I would think that, that's fairly stable. I was wondering -- and are you referring just to the diapers, what are you actually referring to?

Thomas E. Salmon -- Chief Executive Officer & Chairman

Diapers, specifically.

Daniel Rizzo -- Jefferies -- Analyst

Okay. I just want to make sure. Thanks.

Operator

There are no further questions at this time. Presenters, you may continue.

Thomas E. Salmon -- Chief Executive Officer & Chairman

Well. Listen, at this time, I want to thank everyone for your interest in Berry Global. We look forward to talking to you during our next call. Thanks, everybody.

Operator

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

Duration: 53 minutes

Call participants:

Dustin Stilwell -- Head of Investor Relations

Thomas E. Salmon -- Chief Executive Officer & Chairman

Mark W. Miles -- Chief Financial Officer

Ghansham Panjabi -- Robert W. Baird -- Analyst

Molly -- Bank of America Merrill Lynch -- Analyst

Scott Gaffner -- Barclays Capital -- Analyst

Edlain Rodriguez -- UBS Securities -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Tyler Langton -- JP Morgan -- Analyst

Salvator Tiano -- Vertical Research -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Anojja Shah -- BMO Capital Markets -- Analyst

Daniel Rizzo -- Jefferies -- Analyst

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