May 1, 2015
Executives
Dustin Stilwell - Head-Investor Relations Jonathan D. Rich - Chairman & Chief Executive Officer Mark W.
Miles - Chief Financial Officer
Analysts
Ghansham Panjabi - Robert W. Baird & Co., Inc.
(Broker) Scott Louis Gaffner - Barclays Capital, Inc. Alex Ovshey - Goldman Sachs & Co.
George Livadas - BMO Capital Markets (United States) Al Kabili - Macquarie Capital (USA), Inc. Gabe S.
Hajde - Wells Fargo Securities LLC Debbie A. Jones - Deutsche Bank Securities, Inc.
George L. Staphos - Bank of America Merrill Lynch Anthony Pettinari - Citigroup Global Markets, Inc.
(Broker)
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Berry Plastics Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr.
Dustin Stilwell. Sir, please begin.
Dustin Stilwell - Head-Investor Relations
Good morning, everyone. Thank you for joining us and welcome to Berry Plastics second quarter fiscal 2015 earnings call.
Throughout this call, we will refer to the second fiscal quarter as the March 2015 quarter. Joining me today from the company, I have our Chairman and Chief Executive Officer, Jon Rich; and our Chief Financial Officer, Mark Miles.
During this call, we will be discussing some non-GAAP financial measures, including operating EBITDA, adjusted EBITDA, and adjusted free cash flow. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and our public filings.
An archived audio replay of this conference will also be available on the company's website. We would like to make it clear that certain statements made today may be forward-looking statements.
These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including but not limited to, those described in the company's annual report on Form 10-K and other filings with the SEC. Therefore, the actual results of the operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements.
Now, I'd like to turn the call over to Berry's Chairman and CEO, Jon Rich.
Jonathan D. Rich - Chairman & Chief Executive Officer
Thank you, Dustin. Good morning, everyone, and thank you for joining us.
Today, we will review our financial performance for the March 2015 ending quarter, provide an update on the overall market and business conditions we are seeing and give you an update on our guidance for the remainder of our 2015 fiscal year. First, reviewing our March ending quarterly financial results, revenue increased by 1% over the prior year quarter to $1.224 billion, generating operating EBITDA of $210 million, both records for any March quarter in the company's history.
Operating EBITDA improved by $19 million or 10% over the same prior year quarter, primarily as a result of lower raw material costs, improved operational productivity and cost savings from our previously-announced restructuring activities, contributions and synergies from recent acquisitions and positive impact from the general price increases implemented in 2014, all partially offset by weak customer demand. All four of our reporting segments increased operating EBITDA in the March quarter over the prior year.
Operating EBITDA margins increased to 17.2% in the quarter compared to 15.8% in the same prior year period. For the March 2015 quarter, adjusted net income per diluted share was $0.42, with adjusted free cash flow for the quarter and the full last year of $71 million and $304 million, respectively.
Mark will provide more details on our financial results momentarily. The strong results that Berry delivered in the quarter were enabled by lower raw material costs for plastic resin in response to dramatically lower oil prices that began moving down in October 2014.
Through the March quarter, polyethylene has declined 18% from the October 2014 peak price, while polypropylene has moved lower, nearly 26%. For the second consecutive quarter, we experienced a positive relationship on a year-over-year basis between selling prices and raw material costs.
While oil prices remain low, they are up nearly 25% from the bottom established in the middle of March. Simultaneously, our resin suppliers have taken the opportunity to expand margins during this period of falling prices For the March ending quarter, we continued to realize the benefits from our 2014 restructuring plan and our ongoing efforts to lower our costs through improved operational productivity.
During the quarter, we recognized another $5 million from our 2014 restructuring plan, leaving us with approximately $10 million to be recognized in the second half of fiscal 2015. Next, I'd like to comment on what we're seeing regarding volumes and demand for packaged goods.
Our business continued to experience soft overall demand during the first three months of 2015, similar to the trends we have now seen for several quarters. On a pro forma basis for acquisitions, pounds sold were 3% lower in the March quarter versus the prior year.
As we've stated in previous calls, we typically experience about a 0.5% to 1% reduction in volume per year, due to light-weighting and product redesign, which ultimately provides benefits to our customers and to Berry. Our volume in the quarter mirrored what many of our customers have described in their conference calls.
And additionally, there was undoubtedly some inventory destocking in anticipation of lower costs due to resin reductions. In aggregate, we believe we are maintaining our share in the marketplace.
And now, I'll turn the call over to Mark, who will review Berry's financial results in more detail. And then, I'll come back to provide an update on our strategies, new products and discuss our view on the second half of fiscal 2015.
Mark?
Mark W. Miles - Chief Financial Officer
Thank you, Jon, and good morning, everyone. Net sales for the quarter were $1.224 billion compared to $1.210 billion for the March 2014 quarter.
This 1% increase was primarily attributed to revenue from our acquisition of the Healthcare Containers and Closures business purchased from Rexam in June 2014, partially offset by weak demand and a 1% negative impact from changes in currency exchange rates. Combined net sales in our two Rigid divisions increased by 3%, when compared to the March 2014 quarter.
The addition of the U.S. portion of the Healthcare Containers and Closures business purchased from Rexam contributed 7% to Rigid sales, which was partially offset by a 3% reduction in base volumes from weak demand, and a 1% reduction in selling prices due to the pass-through of lower resin cost.
Combined net sales for our Flexible businesses consisting of our Engineered Materials and Flexible Packaging segments were essentially flat versus the prior year quarter. The Flexible businesses achieved revenue increases of 5% from the acquisition of Rexam's Healthcare Containers and Closures operations outside of the United States, and a 1% increase in net selling price.
These increases were offset by soft customer demand of approximately 4% from the base business, and a 2% negative impact from changes in currency exchange rates. Operating EBITDA was $210 million for the March 2015 quarter compared to a $191 million in the prior year quarter.
This $19 million or 10% increase in operating EBITDA included a recovery in the relationship between selling prices and raw material costs of $15 million, net cost reductions and improved productivity in manufacturing of $9 million, as well as the earnings realized from recent acquisitions. These contributions were partially offset by the base volume weakness just mentioned, a negative impact from currency exchange rates and increased investment in SG&A cost and the base business to drive future organic growth.
All four reportable segments achieved higher operating EBITDA in the March 2015 ended quarter over the prior year quarter. Specifically, combined operating EBITDA in our Rigid divisions was up 6% in the quarter over the same period in 2014.
This increase can be attributed to the positive relationship between selling prices and raw material costs, productivity improvements and cost reduction actions taken along with the addition of the U.S. portion of Rexam's Healthcare Containers and Closures business, partially offset by weak demand.
Combined operating EBITDA for our two Flexible segments increased 15% in the quarter over the prior year period, primarily as a result of improvements in manufacturing efficiencies and cost reduction actions. Contributions from businesses acquired in the last 12 months and the positive relationship of net selling prices to raw materials costs partially offset by days sales volume weakness, and negative impact from currency exchange rates and increased investment in SG&A costs in the base business to drive future organic growth.
We are pleased to report that the operating EBITDA margins for our Flexible Packaging segment improved to 14%, an increase of 2.9 margin points from the March 2014 quarter of 11.1%, which is consistent with our previously communicated plan to improve margins in these segments. On the cost side, resin prices have an overall average of approximately a two-month lag to pass through our balance sheet to our income statement.
As such, our March ended quarter was primarily impacted by resin prices from November through January. Average November 2014 through January 2015 resin prices per pound, as reported by published indices for polyethylene were essentially flat versus the prior year period.
And polypropylene prices were approximately 9% lower than the prior year period. We estimate that the year-over-year impact on our income statement related to the contractual pass-through of resin costs was a favorable $8 million for the quarter.
This $8 million impact is included in the overall $15 million improvement of net selling price versus raw material cost relationship I noted earlier. Looking forward to the June quarter, average February 2015 through April 2015 resin price per pound, as reported by published indices for polyethylene and polypropylene were down approximately 15% to 20% over the comparable prior year period.
As a result, we believe that this relationship on our contractual business will continue to be favorable in the June 2015 quarter. Interest expense for the March 2015 quarter was $52 million, which included $2 million of non-cash interest expense, compared to the prior year of $57 million.
As a reminder, Berry has additional opportunities to further reduce interest expense through free cash flow generation applied to debt reduction, as well as the potential refinancing of our nine and three quarters second priority notes, which become callable in January of 2016. To provide some more detail around the refinancing opportunity, the redemption price today on the 9.75% second priority notes would be a premium of approximately $90 million in addition to the accrued interest.
In the current market environment, we estimate that refinancing these notes would provide annual interest expense savings in excess of $30 million. We will continue to monitor the markets and will take actions when and if appropriate.
Adjusted free cash flow, defined as cash from operations, less net spending on property, plant and equipment and payments made under the tax receivable agreement in the March 2015 quarter was $71 million, bringing the company's last four quarters adjusted free cash flow to $304 million. Adjusted free cash flow for the quarter improved $60 million over the prior year quarter, as a result of improved earnings and prudent capital spending.
Going forward, we will continue to focus on maximizing free cash flow alongside investing for future growth. This concludes my financial review and now I'll turn it back to Jon.
Jonathan D. Rich - Chairman & Chief Executive Officer
Thank you, Mark. As we've said during prior conference calls, we continue to focus on our four key strategic initiatives of; first, reducing our debt leverage; second, driving organic growth; third, expanding internationally; and fourth, continuing to execute value-accretive acquisitions have historically brought us success.
Our top priority remains reducing our debt leverage to a goal of two times to four times multiple of adjusted EBITDA. Our plan for fiscal 2015 is to achieve our annual goal of a half turn reduction in leverage.
Through the first two quarters of fiscal 2015, we have reduced our leverage by 0.2 of a turn to a quarter end level of 4.4 times. On the innovation front, we continue to make progress with our commercial introductions of Versalite insulated cups.
We are very excited to have nationally well-known brand such as Dunkin' Donuts, 7-Eleven and Subway using Versalite cups, along with several other regional customers. In addition to already commercial customers, the pipeline of others who are now testing or who have expressed interest in test continues to grow.
With the recent decision to ban expanded polystyrene in New York City, the commercial interest in Versalite technology has certainly escalated. Specifically, in New York, we are working to help customers meet the July 2015 timing of the new regulations in New York City.
To date, the majority of our customers for Versalite cups switched from expanded polystyrene, commonly known as EPS, in response to regulatory requirements or to meet sustainability objectives despite the slightly higher cost they incurred. As we look forward to building higher demand for Versalite in the future, significant opportunities continue to exist by targeting customers who are currently using premium paper cups where a Versalite cup offers greatly improved performance, graphics, and recyclability at a very competitive price.
At the end of 2014, we introduced the first major NuSeal and Barricade product. The all-plastic oval shaped package is being used for dips marketed by PepsiCo, under the name Tostitos dip-etizers.
The product was launched in time for the football playoffs and consumer response in the quarter exceeded our initial estimates. Frito continues to support dip-etizers with a TV advertising campaign.
We also still anticipate entering together with a major customer the attractive market for pet foods with a NuSeal and Barricade package. The current timing for the launch is January 2016.
In March of this year, Berry received and installed the first production equipment for our new line of cubic non-round packages that will be marketed with iconic high-definition graphics. This new line of packages addresses the growing demand from retailers for packages that will stack more efficiently on shelves, improving stocking levels, and increasing utilization of fixed retail assets.
Berry's proprietary technology will allow customers to meet retailers' expectations without the high costs associated with in-mold or other labeling processes. It will also facilitate lower working capital and give customers the option to easily and quickly change graphics and messages to consumers.
We expect to be commercial with cubic packages before the end of the year. Berry Plastics recently introduced an exclusive partnership with Home Depot, a high-performance heavy-duty adhesive tape product under the IRONFORCE brand.
IRONFORCE is designed to deliver a premium quality product, servicing the needs of both contractors as well as the do-it-yourself consumer. By positioning the product in the plumbing aisle, IRONFORCE is designed to capture new share of consumer spend and grow the overall category space.
As we look ahead to the June-ending quarter and the remainder of the year, we should continue to realize the benefit from lower resin costs and volume should improve sequentially, consistent with the normal seasonality of our business. As you will recall during our November 21, 2014 conference call, we provided fiscal 2015 adjusted free cash flow guidance of approximately $320 million.
This estimate assumes flat plastic resin costs and flat sales volume assumptions. Our capital investment plan for fiscal 2015 was approximately $230 million.
With half the year behind us, we are increasing our adjusted free cash flow guidance for fiscal 2015 by almost 10% to $350 million. This guidance assumes we will have a source of cash from working capital of approximately $25 million as a result of lower raw material costs and a $10 million reduction in our capital investment plan down to $220 million, as a result of our decision to defer capital expenditures.
Cash interests and other cash costs will remain unchanged at $205 million and $50 million, respectively. In making this adjustment to our guidance, we have taken a conservative perspective to the range of outcomes we have estimated for the final half of fiscal 2015.
We will further review and communicate any changes to our guidance at the conference call following the June ending quarter. Finally, Berry will continue to take the necessary proactive steps to remain competitive and a leader in the plastics packaging space through a relentless focus on building and strengthening our competitive advantages.
I am confident that the people at Berry will continue to drive our results and achieve our goals. I thank you for your continued interest in Berry Plastics.
And now, we're ready to answer your questions.
Operator
Our first question or comment comes from the line of Ghansham Panjabi from Baird. Your line is open.
Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)
Hey, guys, good morning. First off, on the inventory correction you referenced, Jon, was that at any particular market from your customer standpoint?
How much do you think it cost you in terms of volumes for the second quarter? And does that mean that volumes are rebounding now, apart from just a normal seasonality in April?
Thanks.
Jonathan D. Rich - Chairman & Chief Executive Officer
So, as always, it's difficult for us to see specific transparency to inventory levels at most of our direct customers. The feedback that we've got through our distribution channel customers suggest that they were certainly waiting to take advantage of lower raw material costs as resin prices fell through the period.
I, unfortunately, can't give you a specific analytical number as to what that contribution was to the total, but based on our conversations with distributors, we felt it was a meaningful part of the demand profile in the March ending quarter.
Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)
And in terms of April?
Jonathan D. Rich - Chairman & Chief Executive Officer
April, again, I think what we're seeing there is, as I stated, a normal increase in demand, as we see every year based on seasonality. But I wouldn't say that we've seen any significant change due to changes in consumer behavior.
Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)
Okay. And then, just to clarify, so you're assuming flat resin cost for the back half of the year relative to where the March quarter ended.
Is that sort of your internal expectation or are you just saying that you don't know what's going to happen and that's basically your assumption for guidance? Thanks so much.
Jonathan D. Rich - Chairman & Chief Executive Officer
Yeah. Ghansham, I think, as always, we don't have a very clear crystal ball to forecasting where oil prices and resin prices are going to go.
So as a matter of standard practice, we take that approach.
Ghansham Panjabi - Robert W. Baird & Co., Inc. (Broker)
Okay. Thanks for clarifying.
Operator
Thank you. Our next question or comment comes from the line of Scott Gaffner from Barclays.
Your line is open.
Scott Louis Gaffner - Barclays Capital, Inc.
Thank you. Good morning.
Jon, I just wanted to follow up on the guidance. In your prepared commentary, you said you were taking a conservative view for the second half of the year.
And I was just hoping maybe you could flesh that out a little bit. Is it around volumes you're taking conservative view, around lower raw material prices or maybe on the cost side, anything you could help us think about?
Jonathan D. Rich - Chairman & Chief Executive Officer
I think as we stated, our volume assumptions have been flat volume throughout the year. We continue to use that in our modeling.
I think the conservatism continues to come in terms of where we think our cost structure will be and also the progress we can make in working capital. Perhaps, Mark, do you have something to add to that?
Mark W. Miles - Chief Financial Officer
Yeah. No, Scott, I think that's exactly right.
What Jon said, probably the impact of lower resin cost on our working capital could ultimately be more significant than the $25 million we had noted in the forecast.
Scott Louis Gaffner - Barclays Capital, Inc.
Okay. And anything on the working capital, any other levers you can pull other than just having the lower resin come through?
Mark W. Miles - Chief Financial Officer
Yeah. I mean we're continually looking at ways to reduce our working capital.
I wouldn't say there is a step function change. I think we manage it fairly effectively as a company, but we're always looking to make improvement certainly.
Scott Louis Gaffner - Barclays Capital, Inc.
Okay. Thank you.
Operator
Thank you. Our next question or comment comes from the line of George Staphos from Bank of America.
Your line is open.
Unknown Speaker
Hi. Good morning.
This is actually Alex Wong (23:42) sitting in for George. First question on Versalite, can you discuss and update us on the rollout with some of the well-known customers you referenced in your prepared remarks and also update us on the potential qualification for the new second machine vendor?
Jonathan D. Rich - Chairman & Chief Executive Officer
Yeah. So again, two things.
Obviously, we're very pleased with the business relationships that we have with several new customers for Versalite that we mentioned. Demand and interest in Versalite products continues to grow.
And so we're very pleased with the progress that's being made there. The second important thing that happened in the quarter was that we did complete the technical qualification for other capital equipment suppliers.
With that completion, it gives the company the flexibility to add capacity in larger tranches, and so we will proceed as we normally proceed with all other customers and products and try to add capacity in line with demand as we see the orders coming. So that's an important step for us to have the ability to be more flexible in our capacity planning.
Unknown Speaker
Appreciate that. I mean at this point, are you able to update us on the guidance of the one cell per (25:10) quarter capacity.
And then just as tied on and switching gears, there's been announcement on the trade press about our recent closure by a competitor in recycled film plastic cups, just wanted to see if there are any potential implications for Berry? Thanks very much.
Jonathan D. Rich - Chairman & Chief Executive Officer
With regards to the capacity, we now have the ability to add a capacity in larger tranches, as I said before. And so we will have the flexibility to add capacity more nearly to reflect near-term changes in customer demand.
And with regards to competitive products, I'll only say that there are a lot of people out there who make and sell products for the insulated cup market. And we're very excited about how Versalite performs across the spectrum of insulated performance, graphics demonstration of the customers brand and the ease with which Versalite can be recycled.
Operator
Thank you. Our next question or comment comes from the line of Alex Ovshey from Goldman Sachs.
Your line is open.
Alex Ovshey - Goldman Sachs & Co.
Hi. Thank you.
Good morning, everyone. Wanted to ask a question on resin to start with.
So you talked about in the June quarter having an impact, positive impact on the contractual business from the flow-through of lower resin. What about the non-contractual business?
How do you see the June quarter playing out?
Mark W. Miles - Chief Financial Officer
I think, Alex, I mean that will be largely driven by market factors. As you know, the bulk of our resin pounds purchased about three quarters is attached to contractual arrangements on the past-through and as we stated in the prepared remarks that that relationship will continue to be favorable in June.
I would say again relative to the minority portion it'll be driven by market factors. But overall, we did have a favorable relationship of $15 million in the March quarter.
So, it was positive on both accounts.
Alex Ovshey - Goldman Sachs & Co.
Okay, got it, Mark. And then just two questions on Versalite.
So you talked about Dunkin' and Subway, and so where are they in terms of the process of qualifying and using Versalite, are they still in the testing mode or can we say that they now have been converted to more longer term customers? And then just to follow on is, is there any way to be able to really quantify what New York City banning foam would mean for Versalite demand over time?
Jonathan D. Rich - Chairman & Chief Executive Officer
With regards to your first question, Dunkin', 7-Eleven, and Subway, and several other important regional customers are all now fully qualified commercial customers. So they're past the testing phase.
And there is a pipeline of other customers following behind, and as they become commercially qualified, and we pass the testing, we'll comment on them. With regards to the demand profile and the growth perspective of Versalite, as I've done in the past, I'm going to leave that to our individual customers to talk about their specific plans and again, we continue to be very pleased with the business relationships that we have with all of them.
Alex Ovshey - Goldman Sachs & Co.
Okay. Thanks, Jon.
Appreciate it.
Operator
Thank you. Our next question or comment comes from the line of George Livadas from BMO Capital Markets.
Your line is open.
George Livadas - BMO Capital Markets (United States)
Good morning. I was wondering if you could talk a little bit about the reduction to your CapEx target for the year, given some of the news around Versalite, we might have expected this to potentially go higher even?
Jonathan D. Rich - Chairman & Chief Executive Officer
Yeah, happy to. The announced reductions have nothing to do with the investments in Versalite.
When we think about the overall demand for food packaged products that we've seen in the first two fiscal quarters of the year, wherein our operating plan, we had assumed that that would be flat to the prior year. In the first two fiscal quarters, we've had negative demand as reported by Nielsen survey and many others.
We simply adjusted our CapEx for the fiscal year to reflect that drop in demand in the first half of the year. And if we see an increase, we will take steps appropriately and communicate those as we see them.
George Livadas - BMO Capital Markets (United States)
Great. Thank you.
Operator
Thank you. Our next question or comment comes from the line of Al Kabili from Macquarie.
Your line is open.
Al Kabili - Macquarie Capital (USA), Inc.
Hi. Thanks.
Good morning. I guess, Jon, on the volume trends in the Rigid business, were there any categories that were notably better or worse than the company average?
Jonathan D. Rich - Chairman & Chief Executive Officer
We certainly saw a significant improvement in healthcare in the quarter. I think that's probably consistent with the flu and cold season that occurred over the winter.
We saw some improvements in personal care. There are pockets of places like some of our spirits customers and so forth.
So, we certainly have categories and specific customers that are growing. Because of the breadth and scale of Berry, overall, we tend to look like the market in total.
Al Kabili - Macquarie Capital (USA), Inc.
Yeah. Understood, okay.
And along those lines, I think you'd mentioned the season that you're seeing the normal seasonal pickup in April. The outlook, you're thinking kind of flattish volumes and the outlook year-on-year, we were down a little bit year-on-year kind of the first half of the fiscal year so that either that implies you do see underlying trends getting a little bit better or maybe the comps just getting a little bit easier and I was wondering if you could just help us parse through that?
Jonathan D. Rich - Chairman & Chief Executive Officer
I think it's a combination of both of those two factors. So, always see volumes increase in the June quarter.
A lot of that's driven by our restaurant service businesses where you see a pickup in demand in the spring and the summer. And again, we would describe the volume in the first two fiscal quarters as being softer than we had anticipated.
For a lot of reasons that other people have discussed, we still anticipate some modest improvement in consumer demand as they continue to see lower gasoline prices, unemployment drops, and so forth.
Al Kabili - Macquarie Capital (USA), Inc.
Okay. And then final follow-on to that is...
Jonathan D. Rich - Chairman & Chief Executive Officer
(32:20) recovery, but we think it should return to something better than the first half.
Al Kabili - Macquarie Capital (USA), Inc.
Okay. Okay.
Thanks for that. And the follow-on to that and understanding product cycles can be long, but with the lower resin prices, are you seeing any increased inquiry for substitution to plastics from other substrates?
Mark W. Miles - Chief Financial Officer
Good morning, Al. It's Mark.
Yeah, we certainly have seen some modest pick-up in people interested in plastic, resins, as you mentioned, converting from other substrates such as glass and paper.
Al Kabili - Macquarie Capital (USA), Inc.
Okay. Good.
Thanks. Good luck.
Operator
Thank you. Our next question or comment comes from the line of Chris Manuel from Wells Fargo.
Your line is open.
Gabe S. Hajde - Wells Fargo Securities LLC
Good morning, gentlemen. This is actually Gabe.
One question on Versalite, Jon, can you remind us how many lines you anticipate to have up and running? I seem to remember 1 billion or 1.2 billion by the end of the calendar year.
How many lines that Madisonville, Kentucky facility can hold and then what type of investment might be necessary to move on to the next scale if another big customer signs up?
Jonathan D. Rich - Chairman & Chief Executive Officer
Yeah. And I think you have the correct number.
We've quoted a 1 billion to 1.2 billion cups at the end of the year. A cell can produce 300 million cups and we've said before that that investment is about $17 million.
Gabe S. Hajde - Wells Fargo Securities LLC
And how many...
Jonathan D. Rich - Chairman & Chief Executive Officer
With regards to the footprint at Madisonville, so the first phase of the building is now full. We're currently evaluating whether to expand there, but we're also communicating and having dialogues with our customers about making sure that we put capacity that's in a geographically near location to our customers' distribution centers.
So, we're evaluating that as we speak.
Gabe S. Hajde - Wells Fargo Securities LLC
Okay. And then one sort of bigger picture question, I mean, if the weakness in the grocery store continues at – the first part of that question, I guess, is do you see some sort of demographic impact or maybe folks eating out more and does that hurt or help your business more or less and maybe it's a generational thing or something like that.
What type of an adjustment would that necessitate in your business in terms of restructuring? I mean, can you give us a sense there?
Jonathan D. Rich - Chairman & Chief Executive Officer
I think, again, what we have seen is, again, as reported by several others, but commonly tracked in the Nielsen survey, we've seen certain grocery categories have been weak for several quarters in a row now. I would say that Berry plays in both the grocery channels and the foodservice channel.
So, we participate in both. I'd say that we have a larger impact to the grocery channel than foodservice.
There has been a slow and continuous trend towards people eating out more. There has also been a continuous trend towards people looking at healthy food choices.
We recognize all of those. We have a very strong marketing and R&D function here at Berry.
And we're making sure that we're focused on both growing categories and growing customers. And we'll take the appropriate steps as those changes continue to exist.
I still believe the major factor continues to be the fact that the consumer is still struggling through the recovery, even though unemployment rates have come down, and now they're getting the benefit of lower gasoline prices. There is also just a lot of items pulling on customers' pocketbooks like that they didn't have in the future, in the past (36:21) like electronic costs and so forth.
So there is just a lot pulling on the consumer's pocketbook and we haven't seen the recovery that we fully need yet.
Gabe S. Hajde - Wells Fargo Securities LLC
Thank you, Jon. I'll hop back in.
Operator
Thank you. Our next question or comment comes from the line of Debbie Jones from Deutsche Bank.
Your line is open.
Debbie A. Jones - Deutsche Bank Securities, Inc.
Good morning. You mentioned some of the new product development aside from Versalite, that will roll through, such as cubics and I think IRONFORCE.
Should we expect this to improve volumes for Berry or will this just kind of cannibalize some of your existing volume with the possibility of the higher margin contributions?
Jonathan D. Rich - Chairman & Chief Executive Officer
It will certainly lead to higher margin contributions, as we target 20% plus margins on new products. With regards to the net growth, again, we're very excited about our new product growth, but we also need to see the demand for the base business come back to something that looks like more to like GDP rates with simply thinking about the scale of Berry, while our innovation contributions continue to grow, we certainly need our base business to stabilize as well.
Debbie A. Jones - Deutsche Bank Securities, Inc.
And I guess my second question, you don't normally highlight a lot of kind of the new product developments in Engineered Materials. So I was just wondering if you could talk about what you are most excited about in that business going forward.
Jonathan D. Rich - Chairman & Chief Executive Officer
Our Engineered Materials business has had several really good performance quarters in a row as has our Flexible Packaging businesses. So both our Flexible businesses continue to do well.
In that space, we're very excited about engineered tapes. Berry is one of the leaders in engineered tapes, duct tapes both for construction, automotive and retail consumers.
We also have a very, very nice pipe maintenance business that we call Sealed for Life in that business. And despite lower oil prices, we're continuing to see good demand as we look at maintenance projects for water pipelines around the world and so forth.
And it is really the most global business that Berry has. So within our Engineered Materials businesses, we have a number of very attractive spaces that continue to grow.
Debbie A. Jones - Deutsche Bank Securities, Inc.
Okay, great. Thanks a lot.
I'll turn it over.
Operator
Thank you. We have a follow-up question from George Staphos from Bank of America.
Your line is open.
George L. Staphos - Bank of America Merrill Lynch
Thanks for taking the follow-ups. Two quick ones.
One, just to clarify, you mentioned earlier that Dunkin', 7-Eleven and Subway are now fully commercial customers past the testing phase. Is the right way to interpret that that these are kind of under long-term contracts similar to your kind of base or your other business?
And then, the second question being as you're evaluating footprint for Versalite in the new lines, is there something unique about setting up these lines in other manufacturing sites or is it pretty easily compatible to be putting new lines elsewhere outside of Kentucky. Thank you.
Jonathan D. Rich - Chairman & Chief Executive Officer
With regards to your first question, as we do with our other drink cups customers, we typically have longer term contractual relationships with those customers and that's the way we're rolling out the Versalite product. With regards to your second question, Versalite is not a particularly asset intensive kind of manufacturing process.
So, you can generally relocate manufacturing such as the standard building sites.
George L. Staphos - Bank of America Merrill Lynch
Thanks very much.
Operator
Thank you. Our next question or comment is a follow-up from Mr.
Chris Manuel from Wells Fargo. Your line is open.
Gabe S. Hajde - Wells Fargo Securities LLC
Good morning again, gentlemen. A couple of quick questions for you.
First, the Versalite profitability run. I think last quarter you explained how it's still in the process of coming up to speed.
When would we start to see that trend in the quarter? I think you mentioned earlier that you've got some more folks qualified now to make machinery and such, might we start to see that become an EBIT contributor and I see the contributor at the rate you've talked about for new products, 20%-ish over the next quarter or two.
How is that path coming along?
Jonathan D. Rich - Chairman & Chief Executive Officer
As we continue to grow in scale, our cost structure is improving. We're sort of along the path that we had hoped to be on.
But I would say that we're not at the target margins that we ultimately will be on as we achieve scale. We kind of look at that on a sell-by-sell basis and so I would just describe it as we're on track with where we had hoped to be, still have some room to go.
But on a year-over-year basis, it should be a positive contributor.
Gabe S. Hajde - Wells Fargo Securities LLC
Okay. That's helpful.
Last question for Mark. I was looking through some recent filings and wanted to kind of enquire about the status of where everything's at with the SEC and discussion and investigation.
Has everything been resolved? Is there any other changes you envision regarding financial disclosures with breaking out charges or things or can you maybe give us a status as to where things are with that, what might or might not change and make sure everything is completed as we sit here today?
Mark W. Miles - Chief Financial Officer
Sure, sure, Chris. So, our fiscal 2014 10-K and proxy were selected for just a periodic review by the SEC, which is standard protocol.
And then, we're – we have completed that review and there will be no significant changes in terms of the format or anything relative to our filings and it is completed.
Gabe S. Hajde - Wells Fargo Securities LLC
Okay. Thank you.
Operator
Thank you. Our next question or comment comes from the line of Anthony Pettinari from Citi.
Your line is open.
Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)
Good morning. Apologies, if this was covered before, but on the cash flow statement, you have other non-cash items in the first half of the year, it was $38 million.
I was wondering if you could help parse that out and if there's any kind of way to think about those non-cash items in the second half of the year?
Mark W. Miles - Chief Financial Officer
I'll just get back to you on that, okay, so that we give you a complete answer. We'll follow up with you separately, Anthony, okay?
Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)
Okay. Thank you.
Operator
Thank you. Our next question or comment is a follow-up from Alex Ovshey from Goldman Sachs.
Your line is open.
Alex Ovshey - Goldman Sachs & Co.
Thanks. Just a quick question on the debt refi.
Mark, I think you said that the potential interest expense savings would be $30 million. Can you provide a little more color around what that would imply for a range of interest or cost of – actual cost of debt on a percentage basis?
And then would it be fair to assume that you wouldn't need to refi the entire $800 million, given the very robust free cash flow part of the debt could just be paid down with the cash flow and so the ultimate incremental debt that that gets refi'ed would be a smaller portion of the $800 million?
Mark W. Miles - Chief Financial Officer
Sure, sure, yes. So, the interest expense – the annual interest expense on the existing notes is $78 million.
If you just simplistically say you're going to refinance that $800 million plus a $100 million for the breakage costs and the new debt issuance cost, so you say you're going to finance $900 million. The market today would be somewhere in the 5% range.
So if you just again take a simplistic view and say you're going to refinance everything with similar type debt that would lead you to $45 million of new interest cost, which would give you a $33 million annual savings. And so the prepared remarks just referenced over $30 million and you are correct and that you could take part of that and use existing liquidity to even make that savings greater than that, but that was kind of a simplistic way of thinking about it, Alex.
Alex Ovshey - Goldman Sachs & Co.
Great. Thank you for that clarity, Mark.
Operator
Thank you. I'm showing no additional audio questions in the queue at this time.
I'll turn the conference back over to management for any closing remarks.
Jonathan D. Rich - Chairman & Chief Executive Officer
We certainly thank you for joining us on today's call and we look forward to talking to you again at the end of the June quarter. Thanks for your continued interest in Berry Plastics.
Mark W. Miles - Chief Financial Officer
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.
You may now disconnect. Everyone, have a wonderful day.