Feb 3, 2017
Executives
Dustin Stilwell - Berry Plastics Group, Inc. Thomas E.
Salmon - Berry Plastics Group, Inc. Mark W.
Miles - Berry Plastics Group, Inc.
Analysts
Philip Ng - Jefferies LLC Victoria Madsen - Bank of America Merrill Lynch Kia Pourkiani - Goldman Sachs & Co. Jason A.
Freuchtel - SunTrust Robinson Humphrey, Inc. Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
Mehul M. Dalia - Robert W.
Baird & Co., Arun Viswanathan - RBC Capital Markets LLC Scott L. Gaffner - Barclays Capital, Inc.
Tyler J. Langton - JPMorgan Securities LLC Anojja Shah - BMO Capital Markets (United States) Debbie A.
Jones - Deutsche Bank Securities, Inc. Daniel Moran - Macquarie Capital (USA), Inc.
Chris D. Manuel - Wells Fargo Securities LLC George Leon Staphos - Bank of America Merrill Lynch
Operator
Good day, ladies and gentlemen, and 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. I would now like to introduce your host for this conference call Mr.
Dustin Stilwell. You may begin, sir.
Dustin Stilwell - Berry Plastics Group, Inc.
Good morning, everyone. Thank you for joining us, and welcome to Berry's first fiscal quarter 2017 earnings call.
Throughout this call, we will refer to the first fiscal quarter as the December 2016 quarter. Before we begin our call, I would like to note that on our website at berryplastics.com, as before, we have provided a slide presentation to help you guide our discussion today.
Joining me from the company, I have Berry's Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. As referenced on slide 2, during this call, we will be discussing some non-GAAP financial measures, including operating EBITDA, adjusted EBITDA, adjusted net income, and adjusted free cash flow.
The more directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and Investor Presentation on our website. An archived audio replay of this conference will also be available.
We would like to make it clear that certain statements made today may be forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risk, including but not limited to those described in our earnings release, Annual Report on Form 10-K and other filings with the SEC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And now, I would like to turn the call over to Berry's CEO, Tom Salmon.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you, Dustin, and good morning, everyone. This morning we have several topics to cover with you including our first quarter results and update on the AEP acquisition, our perspective on the overall market conditions and our expectations for the remainder of fiscal 2017.
Afterwards, Mark, Dustin and I will be happy to answer any questions you have. I would like to begin this morning by thanking the Board of Directors for their support as I embark on my new position as CEO of Berry.
I look forward to working with our customers, suppliers, investors and employees in this role. Also, I want to congratulate Jon on his retirement as CEO.
I look forward to working closely with him as he transitions to his new job as Executive Chairman. Berry has a strong leadership team in place including Jean-Marc Galvez, whom we promoted in December to the position that I previously held as President of Consumer Packaging.
I want to also welcome our employees and shareholders from the recently closed AEP acquisition and I look forward to meeting and working with each and every one of you. The future is extremely bright for Berry and I'm excited to get started as CEO.
I look forward to many opportunities in the future to communicate our strategy, execution plans and accomplishments with you. Now, turning to our results.
I'm very pleased to report that Berry had a solid start to our fiscal year. We had a significant amount of activity during the quarter as we worked to complete the acquisition of AEP Industries, which was closed on January 20.
And as Mark will describe, we also completed the refinancing of a term loan in January to further reduce our interest cost. Turning to Berry's specific results for the first fiscal quarter, starting on slide 3.
It is important to remember that our prior year December 2015 quarter contained an extra week compared to Berry's current December 2016 quarter. Revenue for the first fiscal quarter was $1.502 billion, essentially flat year-over-year, normalizing for the extra days.
Operating EBITDA was a record for any December quarterly period in the company's history, coming in at $277 million, an increase over the prior year quarter despite fewer days of operations. Our operating EBITDA margins were up 130 basis points to 18.4%.
Adjusted net income was $0.50 per diluted share compared to $0.35 in the first fiscal quarter of 2016. Mark will provide more detail on our financial results momentarily.
Please note that when Mark and I discuss volumes today, we will normalize the data by utilizing average volume per day versus the prior year as the metric. On a normalized basis, total volumes were flat versus the prior year period, with our Health, Hygiene and Specialties division recording organic volume growth of 3%.
As a reminder, we continually work with our customer to lightweight and redesign our products which reduces our reported volumes by about 1% annually. These actions are generally net positive to our earnings.
Turning to our division's results. Our HH&S division grew organic volumes by 3% recording growth in all three product category of Health, Hygiene and Specialty with healthcare-related products such as components for medical masks and gowns providing the highest growth rate.
Geographically, the division's strongest growth for the quarter came from the Asia region. Normalized volumes in our Engineered Materials business were flat in the quarter.
Now, looking at our Consumer Packaging segment. Consumer demand for packaged products in the United States as measured by Scanner survey data at grocery stores was soft again with volume being down year-over-year for our overlapping food and non-food categories.
Scanner data for health and personal care products declined more than food, while traffic at restaurant lagged grocery volumes. Similar to the weak reported retail demand, Consumer Packagings' normalized volumes were 3% lower than the same period in 2015.
Now, I'll turn the call over to Mark who'll review Berry's quarterly financial results in more detail and discuss our financial outlook for fiscal 2017. Mark?
Mark W. Miles - Berry Plastics Group, Inc.
Thank you, Tom, and good morning everyone. I would like to refer everyone to slide 4 now.
As Tom previously mentioned, Berry posted net sales for the December 2016 ending quarter of $1.502 billion, which was essentially flat year-over-year on a normalized basis when factoring in the additional calendar days in the prior year quarter. Berry operates on a 52-week calendar and accordingly about every six years, the fiscal year contains 53 weeks, as fiscal 2016 did.
On bridging revenue on a normalized basis, lower selling prices and mix resulted in less than 1% reductions in net sales in addition to a small unfavorable impact from currency translation. From an earnings perspective, we achieved operating EBITDA of $277 million, which is a record for any December ended quarter in the company's history.
For December 2015 quarter included $17 million of operating EBITDA as a result of the additional days of operation and $7 million of favorable resin timing lag versus an unfavorable lag of $5 million this year. Adjusting for the extra calendar days in the resin lag timing, operating EBITDA improved nearly $30 million on a year-over-year basis.
Product mix and price cost spread including synergies from the Avintiv acquisition contributed $16 million, which netted $4 million after including the $12 million negative impact from the year-over-year change in timing on contractual resin cost pass-through just mentioned. Lower SG&A cost added another $9 million to the earnings growth, primarily from cost synergies resulting from the Avintiv acquisition and related reorganization.
Net productivity improvement in manufacturing provided another $2 million to our earnings along with the small favorable impact from currency. Operating EBITDA margins were 18.4% for the quarter, which was 130 basis points higher than the prior year period.
Looking at the results of our operating segments, starting on slide 5, our Health, Hygiene and Specialties division generated net sales of $570 million in the quarter compared to $600 million in the December 2015 quarter. The decrease was primarily attributed to a negative impact of $26 million related to the additional calendar days in the December 2015 quarter, a decrease of selling prices, including the pass-through of plastic resin costs, and a 1% unfavorable impact from currency translation, partially offset by the 3% increase in organic sales volumes.
Our HH&S division recorded $110 million of operating EBITDA in the quarter compared to $104 million in the prior year quarter, and was $10 million or 10% over the prior year normalized quarter. Operating EBITDA margins of 19.3% was an improvement of over 200 basis points.
The increase in operating EBITDA was primarily a result of the 3% increase in organic sales volumes, $4 million of net productivity improvements in manufacturing and a $3 million dollar decrease in selling, general and administrative expenses. Next, as noted on slide 6, net sales in our Consumer Packaging division decreased by 9% compared to the prior year period.
The decrease was primarily attributed to a $43 million negative impact from the additional calendar days in the December 2015 quarter and a 3% reduction in organic sales volumes, partially offset by a 1% increase in net selling prices. The division achieved $97 million of operating EBITDA compared to a $107 million in the December 2015 quarter, which included $8 million of operating EBITDA as a result of the additional week of operations.
Normalized for the extra days and a $5 million negative year-over-year change on resin pass-through timing, operating EBITDA increased $3 million, or 3%, from the prior year with a $4 million decrease in selling, general and administrative costs offset by a $3 million negative impact from organic volumes and $3 million from increased manufacturing costs primarily related to plant consolidation activities. Turning to slide 7, net sales in our Engineered Materials division for the quarter were $383 million compared to $408 million in the prior year quarter.
The decrease was primarily attributed to a negative impact of $29 million related to the additional calendar days in the December 2015 quarter partially offset by a 2% increase in net selling prices. Operating EBITDA for our Engineered Materials division was $70 million, an increase of 8% over the prior year quarter and an increase of $10 million, or 17%, over the prior year normalized quarter.
The increase was primarily attributed to a $6 million improvement in the relationship of net selling price to raw material costs and a $2 million decrease in selling, general and administrative expenses. Operating EBITDA margins increased over 240 basis points to 18.3%.
Slide 8 provides a summary of our income statement for the December quarter. Operating income for the quarter increased 70% to $146 million when compared to the $86 million in the prior year period, and over 90% when compared to the normalized prior year period.
This $60 million increase primarily resulted from a $40 million decrease in business integration costs due to the Avintiv acquisition in the prior year quarter, and a $12 million decrease in depreciation and amortization expense, primarily driven by reduced capital spending and the finalization of Avintiv purchase accounting in fiscal 2016. Interest expense was $68 million for the December 2016 quarter.
The $7 million decrease from the prior year quarter is a result of fewer calendar days and interest savings from free cash flow used to reduce debt and the term loan refinancing completed in the June 2016 quarter. Subsequent to the December 2016 quarter end, we completed two financing activities.
As part of the AEP acquisition financing, we closed on a new $500 million term loan due 2024 at LIBOR plus 2.5%. Additionally, we refinanced our $1.9 billion term loan, reducing the LIBOR spread from 2.75% to 2.5%.
Our expected annual cash interest expense for fiscal year 2017 is $275 million, which includes the most recent financing for the AEP acquisition and term loan refinancing as well as the continued utilization of free cash to pay down debt throughout the year. As part of our commitment to apply free cash flow to reduce debt, we plan to make a voluntary $200 million early principal payment on our term loan borrowings next week.
Our effective tax rate was 35% for the quarter. As a reminder, the company has a pre-IPO tax receivable agreement.
Under this arrangement, the company remits 85% of its usage of pre-IPO NOLs to shareholders of record immediately prior to our IPO. From a free cash flow perspective, the company is essentially a cash taxpayer with a 15% discount.
After utilization of the pre-IPO NOLs covered by the agreement, we will then be able to utilize the approximate $500 million of federal NOLS acquired in the Avintiv acquisition. During the quarter, we made our annual payment under this agreement, which was $60 million.
This payment is made once per year in the first fiscal quarter. After making this payment, we have $114 million remaining on the tax receivable agreement to be paid in subsequent years.
We estimate that we will pay approximately $100 million in the first quarter of fiscal 2018 and will start utilizing the NOLs from the Avintiv acquisition to offset cash taxes. We believe that we will utilize approximately half of the Avintiv acquired NOLs over the next five years.
Our expected fiscal 2017 effective tax rate for income statement purposes remains at 32%. Net income for the quarter increased to $51 million compared to $4 million in the prior year period.
Adjusted net income per diluted share increased to $0.50 in the current quarter, a 43% improvement from the December 2015 quarter of $0.35. Next, on slide 9, the company generated $143 million of cash flow from operations in the quarter, down $48 million from the prior year primarily due to timing on working capital.
Our adjusted free cash flow defined as cash from operations less net spending on PP&E and payments made under the tax receivable agreement was $492 million for the four quarters ended December, 2016. Using our market capitalization as of the end of the year, our last four quarters adjusted free cash flow of $492 million represents an adjusted free cash flow yield of over 8%.
Our financial guidance including our underlying assumptions for fiscal year 2017 is shown on slide 10. Note our guidance includes the recent AEP transaction close on January 20.
We are reaffirming our fiscal 2017 adjusted free cash flow at $550 million, which includes $925 million of cash flow from operations partially offset by net capital expenditures of $315 million and the $60 million tax receivable payment that was made in the first fiscal quarter. Within our guidance for cash flow from operations, we are assuming other cash taxes primarily related to international jurisdiction of $80 million and other cash uses of $60 million primarily related to items such as acquisition, integration expenses, and synergy realization costs associated with Avintiv and AEP.
This concludes my financial review and now I will turn it back to Tom.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you, Mark. As we've stated before, we will continue to focus on our top priority reducing our leverage ratio through our predictable and strong free cash flow.
At the end of December quarter, our leverage was 4.4 times. Our plan for fiscal year 2017 remained unchanged, to achieve a target leverage ratio below 4 times.
We continue to forecast that we will reach this level on or before the end of September 2017. As mentioned earlier, we completed our previously announced acquisition of AEP on January 20.
We issued 6.5 million common shares and paid $297 million as merger consideration in exchange for all of the outstanding equity of AEP. Additionally, we paid $164 million to retire outstanding AEP debt.
But financed the cash consideration of the acquisition with a new $500 million seven-year term loan. AEP recently reported fiscal year ending October 31, 2016 results.
Net sales were $1.1 billion including a 3% increase in organic volumes, and adjusted EBITDA increased 48% to $113 million. The combination of AEP with Berry's Engineered Materials division offers the opportunity for significant value creation for Berry and AEP shareholders.
Our expectation is to realize at least $50 million of annual cost synergies within the first two years. We are optimistic two weeks into the integration and as we identify additional synergy opportunities, we will continue to communicate those in future calls.
With respect to guidance for fiscal 2017, weakness in the euro versus the dollar and resin cost increases in Europe could create headwind in our HH&S division for the March 2017 quarter. Additionally, the sharp increase in the value of the Brazilian real along with market pressure in South America stemming from challenges in Venezuela could also negatively impact HH&S in Q2.
These external headwinds in HH&S could put some pressure on the base Berry fiscal Q2 earnings versus the March 2016 quarter, excluding the contributions from the AEP acquisition. For the full fiscal year, we expect a stronger second half of 2017 as a result of synergies related to AEP and other business improvement that will offset the fiscal Q2 headwinds.
As a result, we are reaffirming our full year adjusted free cash flow target of $550 million, including the impact of the acquisition of AEP that closed on January 20. And we expect our quarterly earnings in fiscal 2017 adjusted for acquisitions to follow our normal historical trend of strongest to weakest earnings quarters being first June, second September, followed by March with the December quarter that we just completed being the weakest.
Finally, Berry will continue to take the necessary proactive steps to remain competitive and a leader in the market where we participate through a relentless focus on building and strengthening our competitive advantage. I'm confident that the people of Berry will continue to drive our results and achieve our goals.
I thank you for your continued interest in Berry, and at this time, Mark and I will be glad to answer any of your questions. Operator?
Operator
Our first question comes from Phil Ng with Jefferies.
Philip Ng - Jefferies LLC
Hey guys. Engineered Materials had – has a little more exposure on a cyclical side.
With the new administration in place, how are you thinking about your growth outlook in that business as well as AEP? And I think you kept volumes pretty much consistent with how you thought about things in the last quarter?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah. This is Tom.
They remain consistent. As we understand more the specifics, the some of the policies coming from the new administration, obviously, we'll have greater clarity to the impact.
I think an important note in that business, most of what we do internationally, we serve local market, and it's only about 1% of our overall business. So, should not have too significant of an impact.
Philip Ng - Jefferies LLC
Okay. That's helpful.
And then, from a procurement savings standpoint, which is a meaningful component to your synergy capture for AEP, but with some of the – just due to the timing of the close, will that impact your billing, kind of leverage that cost savings in 2017? I'm just curious to get your view on the resin market broadly, it seems like the market tightened up a little bit in terms of your ability kind of leverage your scale.
Thanks, and good luck in the quarter.
Thomas E. Salmon - Berry Plastics Group, Inc.
We'll just – we'll answer two sides. I'll answer the first part.
In terms of resin market, clearly, we have seen some recent resin increases that could put modest short-term pressure on the end of Q2 and beginning of Q3. However, we do expect that overall prices in fiscal 2017 to be very similar with what we saw in fiscal 2016.
Mark?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. With respect, Phil, to your first question, no, that there's not a limiting factor based on the timing.
There's no contractual relationships that would limit our ability to achieve synergies in 2017.
Philip Ng - Jefferies LLC
Okay. Great.
Thanks.
Operator
Our next question comes from George Staphos with Bank of America Merrill Lynch.
Victoria Madsen - Bank of America Merrill Lynch
Actually, Victoria Madsen sitting in for George Staphos. How are you today, Tom, Mark, Dustin?
Thomas E. Salmon - Berry Plastics Group, Inc.
Pretty well. Thank you.
Mark W. Miles - Berry Plastics Group, Inc.
Good. Thank you.
Victoria Madsen - Bank of America Merrill Lynch
So, I have two questions for you. One, recently, over the past couple of weeks, we've seen a pick-up in foodservice paperboard.
Has Berry seen that also in plastics or do you think that paper is taking share?
Thomas E. Salmon - Berry Plastics Group, Inc.
I wouldn't necessarily say that paper is taking share. Clearly, I think as Berry – it's a little too soon to predict any type of overall victory.
We are very short cycle company in terms of visibility to demand and we continue to manufacturing products that people buy every day. But at this point, I think, it's a little too soon to make that call.
Victoria Madsen - Bank of America Merrill Lynch
Okay. Got it.
Thank you. And do you have any new developments with Versalite in terms of commercialization at some of the larger customers that you've discussed previously?
Thomas E. Salmon - Berry Plastics Group, Inc.
Nothing different than what we've discussed at our previous call.
Victoria Madsen - Bank of America Merrill Lynch
Okay. Okay.
Got it. Thank you.
Operator
Our next question comes from Brian Maguire with Goldman Sachs.
Kia Pourkiani - Goldman Sachs & Co.
Good morning. This is actually Kia Pourkiani sitting in for Brian.
How are you guys doing today?
Thomas E. Salmon - Berry Plastics Group, Inc.
Doing well. Good morning.
Mark W. Miles - Berry Plastics Group, Inc.
Good. Thank you.
Kia Pourkiani - Goldman Sachs & Co.
And so, my first question is just on working capital. So, if I'm not mistaken, you seem to have updated the working capital portion of your free cash flow guide.
I was wondering what's driving that there.
Mark W. Miles - Berry Plastics Group, Inc.
Yeah, sure. There's no change to our working capital assumption for the year.
We had projected flat originally on our last call and we continue to project flat for all of fiscal 2017.
Kia Pourkiani - Goldman Sachs & Co.
Got it. Okay.
And then on your AEP acquisition, so you closed 10 days earlier than you expected. I was wondering what have been the key learnings so far, and have you found any opportunities for some potential upside to the $50 million synergy target there?
Thomas E. Salmon - Berry Plastics Group, Inc.
Well, first, listen, yes, we're only two weeks into the acquisition, but we continue to be very, very excited about the company and the opportunity that it presents for Engineered Materials business. Clearly, we are in the process right now of meeting people, engaging with the workforce.
And as we have more detail to provide additional guidance, we'll do that on subsequent calls.
Kia Pourkiani - Goldman Sachs & Co.
Great. Thank you, gentlemen.
Operator
Our next question comes from Jason Freuchtel with SunTrust.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Hi. Good morning.
Thomas E. Salmon - Berry Plastics Group, Inc.
Good morning.
Mark W. Miles - Berry Plastics Group, Inc.
Good morning, Jason.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Can you comment on how you derive the impact of volumes from the one fewer week in December? Did you track the volumes that were completed during the last week of December 2015 and compare them to December 2016?
Or did you utilize some sort of allocation methodology over the course of the quarter or month? I'm just trying to get some sense of volume trends during the quarter as well as December.
Mark W. Miles - Berry Plastics Group, Inc.
Sure. It was an overall average per day over the entire period for both periods.
There was a slight difference you'll see between the three segments and now because of Avintiv was purchased right after the beginning of the quarter in the last fiscal year.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Okay. How much – do you have a sense for how much of your quarterly sales you did experience during the last week of the year?
Were the sales spread out pretty evenly?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. I mean, December is typically our weakest quarter due to the holidays or excuse me, weakest month of the quarter due to the holidays.
But in terms of the holiday timing, they were pretty much the same year-over-year with one exception, New Year's Day flipped, but that wouldn't have been a significant impact, which is why we just used an overall average.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Okay. And then going into fiscal 2018, should we assume that there should be additional days relative to fiscal 2017?
Mark W. Miles - Berry Plastics Group, Inc.
No. It would be the same.
That's fiscal 2017. The phenomenon we had in fiscal 2016 is about once every six years.
And it's just a mathematical problem because we operate on a 52-week calendar year, which is 364 days versus the 365 and a quarter day calendar when you consider leap year.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Understood. And lastly, can you remind us how much polypropylene and polyethylene you purchased on a pro forma basis for the two recent acquisitions?
And with that, do you have a sense for how much lower an average price Berry purchased polyethylene relative to AEP?
Thomas E. Salmon - Berry Plastics Group, Inc.
We – obviously, we're not going to comment relative to procurement and the differential in our price versus AEP. It will be a component of the overall synergies that we'll report on as we have more detail, perhaps the next call.
Mark W. Miles - Berry Plastics Group, Inc.
We purchase roughly 4.5 billion pounds annually, including AEP, and it's roughly half and half between polyethylene and polypropylene. And AEP is predominantly – that business is predominantly polyethylene.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Okay. Great.
Thank you.
Operator
Our next question comes from Adam Josephson with KeyBanc Capital Markets.
Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
Thanks. Good morning.
Tom, congratulations and best of luck in your new role.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you.
Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
Just one question about volume. So, volume was flat in fiscal 1Q.
I think, Tom, you mentioned some market pressure in South America that could affect HHS (sic) [HH&S] in the second quarter. Can you just talk about what gives you confidence in maintaining the organic volume guidance for the year?
Thomas E. Salmon - Berry Plastics Group, Inc.
Listen, I think, first and foremost, we're only one quarter into our fiscal year. And what we're seeing, as noted, we do have some near-term pressure in South America.
It only represents about 5% of our total net sales. So, at this stage, we still remain confident in our outlook.
And as always, if, for whatever reason, we see a change in demand for the overall business, we'll take the necessary steps to ultimately hit our free cash flow and earnings target, as necessary. But right now, again, we're one quarter into it; no need to change the outlook.
Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
And just one on CP volume, it was down 3% in the quarter. You're guiding to down 1% for the year.
Is there any particular reason why you're expecting an acceleration throughout the year?
Thomas E. Salmon - Berry Plastics Group, Inc.
It's a good question. And, clearly, the customer demand continues to be weak.
The food volume demand for December quarter close, health and personal care restaurant traffic were all very significantly low. So, for CP, we just need a general improvement in consumer incomes and consumer demand and preference.
And we'll, as accordingly, should we not see that type of improvement, we'll take the necessary rightsizing steps for our assets, as we always do, to be ready for the consumer turnaround. I'm very excited, also, with the addition of Jean-Marc Galvez, who will be leading the Consumer Packaging segment.
And we continue to remain committed to growing this business not only domestically, but also exploring possibilities internationally.
Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
Thanks, Tom. And just, Mark, one on – just one accounting question.
It looks like you're excluding stock-based comp from operating EBITDA. Have you been doing that previously?
I couldn't find it previously.
Mark W. Miles - Berry Plastics Group, Inc.
Yes, we have. Adam, that's been a consistent practice for many, many, many years.
Adam Jesse Josephson - KeyBanc Capital Markets, Inc.
Okay. All right.
Thanks very much. Best of luck.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you.
Mark W. Miles - Berry Plastics Group, Inc.
Thanks, Adam.
Operator
Our next question comes from Ghansham Panjabi with Robert W. Baird.
Mehul M. Dalia - Robert W. Baird & Co.,
Hi, good morning. It's actually Mehul Dalia sitting in for Ghansham.
How are you doing?
Thomas E. Salmon - Berry Plastics Group, Inc.
Good morning.
Mark W. Miles - Berry Plastics Group, Inc.
Good.
Mehul M. Dalia - Robert W. Baird & Co.,
One of the large petrochemical producers reported this morning and commented that capacity delays have improved industry supply and demand dynamics for ethylene and, also, derivatives, which include PE resin. How we should we think about raw material risk for Berry at this point relative to all your various portfolio changes, Avintiv, AEP, et cetera?
And also, if you could touch on some level of working capital sensitivity, that'd be great.
Thomas E. Salmon - Berry Plastics Group, Inc.
Well, first and foremost, let me say, predicting the resin market is very difficult, but we're still optimistic relative to the supply/demand, and that dynamic and its impact for converters. There may be ebbs and flows in terms of timing of some of the capacity expansion.
But I think overall, it's a very favorable supply/demand dynamic for conversion.
Mark W. Miles - Berry Plastics Group, Inc.
In terms of the question on sensitivity, it's roughly $5 million per $0.01. We need to update that for the AEP acquisition, but that was the view pre-AEP.
So, it may move slightly due to AEP, but roughly $5 million per $0.01. And that would assume all grades of resin change by a $0.01.
Mehul M. Dalia - Robert W. Baird & Co.,
Okay, great. And then, can you talk about your debt structure?
How much of Berry's debt profile is variable? How much is hedged in, and what's the sensitivity towards interest rate changes on the P&L?
Mark W. Miles - Berry Plastics Group, Inc.
Sure. Yeah.
Our net – our debt is about two-thirds fixed and about one-third variable. And so, roughly, we have $2 billion of debt that is variable.
So, whatever interest rate assumption change you want to make, you can multiply that times $2 billion. That would be the (33:09).
Mehul M. Dalia - Robert W. Baird & Co.,
Got it. Thank you.
Operator
Our next question comes from Arun Viswanathan with RBC Capital Markets.
Arun Viswanathan - RBC Capital Markets LLC
Great. Thank you.
Good morning. Just a question on HH&S.
There did appear to be a slight improvement sequentially from the last couple of quarters on volumes. Is that a fair characterization?
Do you expect that to continue? I know you have some headwinds in Q2, but was there any noticeable incremental improvement sequentially in HH&S?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yes, there was. And I think overall, HH&S business, it continues to be a business we're very pleased with.
It's given us access to markets, people and geographies that, frankly we otherwise wouldn't have had. The headwinds are really not volume related or currency – resins, I should say.
Arun Viswanathan - RBC Capital Markets LLC
Okay. Great.
And then, similarly, I know Consumer Packaging is facing kind of structural headwinds away from processed food and so on, but is there anything you guys could do to kind of mitigate that exposure, any new markets that you're going after or any other categories that are actually performing better than what we've seen?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah, I'll say, really, three things: innovation, channels to market, and customers are areas that we focused on. And with Jean-Marc Galvez coming in as the new leader of the business, we've given him a white sheet of paper, ultimately, to make certain that we're deploying our resources towards the highest growth areas within that segment.
We still believe it's a good segment. It's a segment that has potential, given that these are products that people buy every day.
And ultimately, to your point, we continue to make choices relative to how we can reduce our capital intensity and where we redeploy capital. We redeploy the capital towards the higher growth areas that have either intellectual property or stronger commercial differentiation that we can value from on a long haul.
This is something that we do on an everyday basis in terms of makings those types of trade-offs and decisions. And, I think, equally important as we do our diligence relative to globalized net business, and I – we're going to be very prudent in that analysis, it presents a huge opportunity for us because we're completely under indexed from international perspective, less than 1% of total net sales for the Consumer Packaging business are currently in China, for example.
So, big opportunity for us potentially.
Arun Viswanathan - RBC Capital Markets LLC
Great. Thanks.
And just on the synergies at both Avintiv and AEP, I know it's early for AEP, but are you kind of at your full run rate for Avintiv, and do you expect to see upside on AEP?
Thomas E. Salmon - Berry Plastics Group, Inc.
Listen, it's just our practice in terms of synergy targets is typically very conservative and realizable. Just as a perspective, we generally average about 5% of the acquired company's net sale and cost synergies.
And we'll continue adjust or we project those expectations as we delve deeper into the business. And, again, we're very optimistic that AEP is a great fit for the Engineered Materials business and Berry Plastics shareholders.
Arun Viswanathan - RBC Capital Markets LLC
And then – and one more (36:39) if I can. The M&A environment looks like it has picked up a little bit recently, there's been some transactions in packaging.
I know you're going through your own large transaction here, but maybe you can just comment on what you're seeing and if you would participate if you see anything interesting. Thanks.
Thomas E. Salmon - Berry Plastics Group, Inc.
Yes. Listen, we're always familiar with businesses and companies that are for sale.
But again, I want to remind everyone that we remain committed to executing on our strategy of getting our net debt to adjusted EBITDA to below 4 times. But we'll continue to take up – into account opportunities, but understand the prevailing objective is to drive that leverage to below 4 times.
Arun Viswanathan - RBC Capital Markets LLC
Thank you.
Operator
Our next question comes from Scott Gaffner with Barclays.
Scott L. Gaffner - Barclays Capital, Inc.
Thanks. Good morning, guys.
Tom, congrats on making it official earlier this week.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you.
Scott L. Gaffner - Barclays Capital, Inc.
I guess my question is really you mentioned just right at the end of your prepared remarks some comment on the second quarter. And I just want to make sure I understood it correctly.
It sounded like you were saying that the base Berry business EBITDA will actually be down or flat year-over-year ex-AEPI, if you could just sort of walk through what the comments were there.
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. Good morning, Scott.
Yeah, no, we're not providing quarterly guidance. That's a practice that we're not looking to do.
So, in terms of specifics, we just wanted to highlight a couple of things, as we get further into the Avintiv business, it's certainly new for our investors, having only owned it for a year. And just some of the international things that were going on in the market that didn't impact Berry in the past, such as the euro, which is – again, it's relatively de minimis from the grand scheme of things.
For every 1% move in the euro, it's about a $1 million earnings impact to Berry, and then the challenges in South America, again, representing only 5% of our business.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. But did you make a comment on the base Berry business?
I thought I heard something right at the end of the prepared remarks.
Thomas E. Salmon - Berry Plastics Group, Inc.
Oh, we were just pointing out that those two things would – could have an impact on our Q2 base Berry earnings, excluding AEP.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. Well, I guess, I'm just trying to figure out what that means when you say could have an impact.
Obviously, they're negatives, but you're just trying to lower expectations there? I mean, I'm just trying to figure out what means.
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. We're one month into the quarter, Scott, so the euro changes on a – it's a dynamic currency that changes regularly.
And so, it's just, again, something new to highlight that people should be cognizant of.
Thomas E. Salmon - Berry Plastics Group, Inc.
I mean, to the extent that certain things that, as Mark said, are out of our control, we're making you aware, we're going to do everything in our power to offset any deviation that could potentially create, but we're just highlighting the fact that it's been something new, as Mark said, with Avintiv that hasn't typically been a component of Berry called in the past given the international presence.
Scott L. Gaffner - Barclays Capital, Inc.
Sure. That's fair.
The D&A for the full year, Mark, can you highlight what that should be now including AEPI and maybe if there's any variance by quarter just so we end up modeling that correctly.
Mark W. Miles - Berry Plastics Group, Inc.
We, obviously, we still need to finalize the purchase accounting for AEP and we'll keep you apprised as those things develop. The D portion of that is roughly two-thirds-ish, 70% or so and roughly $600 million in the aggregate.
And, Mike (sic) [Scott], that's an annualized number. So, obviously, you would need to take a full year into account for the third and fourth quarter, but only part of that as AEP only be in our results next quarter for two-thirds.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. And the $120 million of D&A in the first quarter, was that impacted by the one fewer weeks or?
Mark W. Miles - Berry Plastics Group, Inc.
Yes, it was in the year-over-year comparison, absolutely.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. Last one for me.
Tom, just now that you're in the CEO role and I realized you were COO at the time the guidance was originally formulated. But could you give us some sense as to your view on guidance?
I mean, every CEO seems to have a little bit of a different view. I mean, do you feel like normally being conservative, stretch targets, I mean, how do you feel about the overall methodology towards guidance on a go-forward basis?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah. I think we'll see the deviation, but overall the guidance as we just did in this call reaffirming our 2017 full-year guidance for both free cash and earnings on top.
Scott L. Gaffner - Barclays Capital, Inc.
Thanks, guys.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thanks, Scott.
Operator
Our next question comes from Tyler Langton with JPMorgan.
Tyler J. Langton - JPMorgan Securities LLC
Hey. Good morning.
Thanks. I just had a question on, I guess, consumer.
I mean, I guess, you previously talked about potentials and benefits from this cross-selling to Avintiv's customer base. Is that an opportunity you see in 2017 or is that really more something that you could get benefit from in 2018?
Thomas E. Salmon - Berry Plastics Group, Inc.
It's an ongoing process where we're – literally, this week I won't mention the customer, there was an HH&S customer here at our corporate headquarters. And that was ultimately working on package configuration that we previously did not have visibility to.
So, it happens on a daily basis, and certainly as something becomes notable that we can carve out, that opportunity in totality, we'll share as needed. But it's an ongoing process, and we continue to be excited about the prospects both in 2017 and beyond.
Tyler J. Langton - JPMorgan Securities LLC
Great. Thanks.
And then, just within HH&S, I know Specialties, especially in Europe, had been sort of a drag in the past. It sounds like, I guess, that business is doing better.
I mean, see, those pressures as you were sort of exiting some unprofitable business, is that kind of largely behind you now and, I guess, what kind of growth do you expect on the Specialties side within HH&S?
Thomas E. Salmon - Berry Plastics Group, Inc.
I'm sorry. Could you repeat the question?
Were you asking about Europe's Specialties or the aggregate Specialties?
Tyler J. Langton - JPMorgan Securities LLC
I guess, both. My guess, my sense was that sort of in the past it was Europe, as you were exiting some business in Europe with Specialties, that was sort of had been a drag on sort of Specialties and sort of the segment as a whole.
And, I guess, just trying to get a sense of that sort of largely sort of behind you now?
Mark W. Miles - Berry Plastics Group, Inc.
Oh, yes. It is.
We had – well, I think there may be a little tail in the March quarter relative to that, exiting a business in Europe in the Specialties segment. But after the March 2017 quarter, we'll have fully lapped that.
Thomas E. Salmon - Berry Plastics Group, Inc.
And I think there's a product mix component to the specialty business. Half of it I would describe as more commoditized; and the other side, it's very profitable and I would call it more technology-oriented.
So, I just want to make sure there was some clarification there.
Tyler J. Langton - JPMorgan Securities LLC
Okay. Appreciate it.
Thanks.
Operator
Our next question comes from Anojja Shah with BMO Capital Markets.
Anojja Shah - BMO Capital Markets (United States)
Good morning. You guys talked...
Thomas E. Salmon - Berry Plastics Group, Inc.
Good morning.
Anojja Shah - BMO Capital Markets (United States)
Good morning. You had talked in the past about new products in consumer products, but you weren't willing to share any details yet.
Is there anything you can share at this point?
Thomas E. Salmon - Berry Plastics Group, Inc.
That doesn't and that hasn't changed. Innovation continues to be very important to us, and I will – until we ultimately have intellectual property finalized, consumer agreements completed, and/or the formal commercialization, I don't want to be premature.
So, as we have information, I will anxiously present it in an upcoming call, I assure you.
Anojja Shah - BMO Capital Markets (United States)
Okay.
Thomas E. Salmon - Berry Plastics Group, Inc.
But it is a continued area of focus for sure.
Anojja Shah - BMO Capital Markets (United States)
Okay. Fair enough.
And then, I know it's a bit premature to talk about M&A, but you guys are getting pretty close to your target range. Are there any particular areas of interest that you're thinking about?
Thomas E. Salmon - Berry Plastics Group, Inc.
Well, I will say this, that Berry is a very diverse company between its three operating divisions, and we are very fortunate to have complete visibility to opportunities in each of those respective spaces. As we evaluate those, we make certain that it meets our internal and external objectives in terms of our historical, I guess, execution that we've demonstrated in acquisition.
So, we're very prudent. But, again, our number one goal right now is to keep the leverage at four or below.
We believe that's the leverage range that we can consistently operate at in the near future.
Anojja Shah - BMO Capital Markets (United States)
All right. Thank you very much.
Operator
Our next question comes from Debbie Jones of Deutsche Bank.
Debbie A. Jones - Deutsche Bank Securities, Inc.
Good morning. I don't know if this is addressed, but if so, I apologize.
The $3 million headwind in consumer operations, what was that related to?
Mark W. Miles - Berry Plastics Group, Inc.
Sure. It was negative manufacturing $3 million due to plant reorganization activities we have, moving business around to optimize footprint.
Debbie A. Jones - Deutsche Bank Securities, Inc.
And is that over with this quarter?
Mark W. Miles - Berry Plastics Group, Inc.
No. There's still a little bit of activity on that.
I would tell you it's declining, but that could continue here as the next couple of quarters unfold. But, again, it's declining.
Debbie A. Jones - Deutsche Bank Securities, Inc.
Okay. And my second question, I might have misheard this but when you were talking about the TRA you mentioned $100 million payment.
Were you referring to next year, and then the idea being the following year you could start using the Avintiv NOLs?
Mark W. Miles - Berry Plastics Group, Inc.
Yes. So, right now, our current look is that there will be a $100 million payment due in fiscal 2018 relative to the TRA and that would leave a balance of like $14 million, very, very small number which primarily relates to international jurisdictions and some state NOLs.
But again, not material.
Debbie A. Jones - Deutsche Bank Securities, Inc.
And I haven't seen anything out there, but is there anything about the new administration's tax policies that would prevent or help you in kind of utilization of the NOLs?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. I mean, we're continuing to look at that.
Right now, we don't see anything that's a significant impact to us. There's things that benefit us, and things that go the other way; but, net-net, based on the work done to-date, nothing material.
But again, we're continuing to evaluate it and watch it as it unfolds.
Debbie A. Jones - Deutsche Bank Securities, Inc.
Okay. Great.
Thank you.
Operator
Our next question comes from Danny Moran with Macquarie.
Daniel Moran - Macquarie Capital (USA), Inc.
Hi. Good morning.
Thanks for taking my questions. Just on your base business guidance for fiscal 2Q, is there any way to give more detail?
Should segment volumes be similar to your full year guidance? And then, are you expecting any temporary resin headwinds in there?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. I mean, volumes, again, we're not giving quarterly guidance.
We're reconfirming our annual targets that we gave on the last call, really, in all respects in terms of volumes as well as cash flow and all of the detailed earnings components that we provided guidance on. With respect to resin, I wouldn't expect it to be a material result.
We've really, just as a reminder, done a nice job of minimizing the lag impact. It's plus or minus $1 million or $2 million every quarter of – $5 million plus or minus $1 million or $2 million every quarter.
Thomas E. Salmon - Berry Plastics Group, Inc.
And in the aggregate, we – again, we believe that overall prices for fiscal 2017 will be very similar to fiscal 2016.
Daniel Moran - Macquarie Capital (USA), Inc.
Okay. Great.
And then, just on the Avintiv synergies, I know you gave a target of $80 million. How are we tracking – or how much runway is there left to achieve that $80 million there?
Mark W. Miles - Berry Plastics Group, Inc.
We're actually at the full run rate of the $80 million. It's showing up in our results quarterly, now.
And we're obviously continuing to work towards growing that number, but we're at the full run rate of $80 million. And as we have significant changes in that $80 million, we'll communicate those in the future calls.
Daniel Moran - Macquarie Capital (USA), Inc.
Okay. Great.
Thank you. And then, just last one for me, I know you gave the resin sensitivity.
Is there any way to give that – what that flat working capital guidance in fiscal 2017, when resin – or where do you base resin prices off of when you gave that guidance?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. We – again, we expect fiscal 2017 – while there may be some choppiness amongst the months, we don't expect the prices there to be different than fiscal 2016; so, effectively flat year-over-year.
Daniel Moran - Macquarie Capital (USA), Inc.
All right. Great.
Thanks, guys. Good luck in the year.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thank you.
Mark W. Miles - Berry Plastics Group, Inc.
Thank you.
Operator
Our next question comes from Lars Kjellberg with Credit Suisse. Lars, your line is open.
You can ask your question. Did you want me to just go ahead and move on to the next question?
Dustin Stilwell - Berry Plastics Group, Inc.
Yeah. That'll be great.
Operator
All right. Sure.
Thanks. Our next question comes from Chris Manuel with Wells Fargo.
Chris D. Manuel - Wells Fargo Securities LLC
Good morning, and welcome, everyone, to their new roles. I guess there's a new bull on the hill.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thanks, Chris.
Chris D. Manuel - Wells Fargo Securities LLC
I had just kind of two questions. One, I mean, when you look at some of your assumptions on the volume side, they still seem relatively reasonable; although, perhaps in the consumer business maybe it's a little bit of a longer putt right now than it was earlier.
But some of the levers that you've got to pull plus and minus over the balance of the year, volume doesn't come in. Do you still feel that you have some more runway for synergy in Avintiv, even if you're at the full run rate as you sit today?
Do you feel that maybe you have some new products? What are some of the levers you've got to kind of balance that, if you will?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah. It's a good question, but there's always opportunities.
We're a continuous improvement culture, so we're putting a lot of pressure on our teams always to make certain that the processes, the people, the products that we make continue to evolve and get better and drive customer satisfaction at lower cost rates. So, that did not change.
And, clearly, it's a good business. Again, we've been excited by the people, the access to the geographies that we haven't had before and, certainly, some of the cross-selling opportunities.
So, we continue to look at that at all three of our businesses, frankly. And we make certain that we've got cost structures that correlate to the run rate of those respective businesses.
So, that's real time. That's not an annual event.
We'll do that based on what we see in the marketplace relative to demand overall.
Chris D. Manuel - Wells Fargo Securities LLC
All right. My follow-up question is, one of those levers I was thinking about is it's been two, maybe three years, now, since you've gone out and done a significant non-material price raise for different inflation components; things like, I don't know, freight, energy, labor, et cetera.
We're beginning to see chunks of inflation flowing through the system again, both – all those factors, things we just talked about. Are you at a spot?
Is that something that you would consider? Is that a lever that you think you have yet to pull or are you not at a level yet or – have things not moved up to a spot where you need that?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah. We're always focused on making certain we're at market prices.
I mean, that's our game, but we'll certainly take some of your counsel and advisement; appreciate that. But we always focus on where the market is at, and we'll maximize the opportunity to create as much value as we possibly can with the products we sell.
Chris D. Manuel - Wells Fargo Securities LLC
Okay. Thank you, guys.
Thomas E. Salmon - Berry Plastics Group, Inc.
Thanks, Chris.
Operator
Our next question comes from George Staphos with Bank of America.
George Leon Staphos - Bank of America Merrill Lynch
Hi, everyone. Thanks for taking my follow-on.
I'm joining late, so if you've already answered these, just please leave them aside; we can talk about it afterwards. Have you talked with AEP in terms of how you are – now that you've owned it, the synergies may be flowing from different sources or how that you expect that to trend in terms of sources relative to prior deals?
That would be question number one. And then, question number two would be on Consumer with volumes down 3%.
I'm sure that's been a subject of discussion already. Any thoughts in terms of what will ultimately turn that around for you or for the industry?
And I had a couple of follow-ons.
Mark W. Miles - Berry Plastics Group, Inc.
Okay. Good morning, George.
With respect to synergies, obviously, we've done this a few times. And so, we're – I'd say, do a pretty good job of effectively identifying the categories based on our diligence.
And I would say this one is falling in line with our expectations; again, with those categories being procurement-based savings, operations and SG&A. So, I would say, at this point, we remain optimistic, but no surprises in terms of the categorization of the synergies.
George Leon Staphos - Bank of America Merrill Lynch
And Mark, is that the stack order rankings, so you think you're going to get the most out of procurement than I think you said SG&A manufacturing? Is that how we should think about it?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. I mean, this one has a lot of overlap, obviously, and the fact that it's all North America certainly provides a catalyst for higher synergies in some of those categories.
So, I would say it's probably in that order. SG&A and operations could flip-flop as time unfolds.
But, generally speaking, the order I gave is also an order of magnitude.
Thomas E. Salmon - Berry Plastics Group, Inc.
Again, George, as we get deeper into the AEP integration, we will adjust or re-report it as necessary in upcoming call. Relative to CP, first, we're encouraged by the labor report that came out today, because in general we need general improvement in consumer incomes and consumer spending, you know, to drive improvement inside that space.
It's been consistent relative to survey data (55:00). It's been consistent with many of the end users inside that space, and that's obviously a big driver.
George Leon Staphos - Bank of America Merrill Lynch
Okay. Thanks for that, Tom.
There was an earlier question on leverage, and I think the question was getting at when might you look at M&A. You responded you're comfortable in the 4 times leverage ratio.
Not taking away the fact that you can clearly run this business with a lot of leverage, you've done so in the past, what are you building into that 4 times threshold for how the markets view of leverage might change in future years and what kind of cost of capital might be applied to companies? Do you think, as that appetite for leverage in the market changes, might it be time maybe to move the threshold to 3.5, say, I'm just throwing it out there, not because you can't operate at 4 or even 4.5, but just because the market will apply different cost of capital to different companies with different balance sheet structures?
Thomas E. Salmon - Berry Plastics Group, Inc.
We'll continue to evaluate that, George. But the target that we've put out there and frankly been tasked with, whether we think it's the right thing to do is to get to below 4.
Once we're at 4, we'll re-evaluate it based on the external environment in terms of interest rate, if we change that view. But, clearly, we believe this is a level that we can operate and have a lot of flexibility in terms of the strong free cash generation that we, that Berry is known for and that we expect to be able to continue to generate.
George Leon Staphos - Bank of America Merrill Lynch
Okay. I appreciate that, Tom.
Last question if it hasn't already been asked. Have you talked at all about the increase in capacity that we've seen in non-wovens?
Any view, any change in view in terms of how that capacity may or may not be absorbed by the demand outlook that you're seeing? Thanks, and good luck in the quarter.
Thomas E. Salmon - Berry Plastics Group, Inc.
Yes. Not unusual and we continually evaluate supply/demand balance and competitive capacity conditions and market growth rates always.
So, it's not out of the ordinary and it's fairly tight.
George Leon Staphos - Bank of America Merrill Lynch
Well, which fairly type are you, Tom?
Thomas E. Salmon - Berry Plastics Group, Inc.
From a traditional maximum capacity, plus or minus 3%, let's say, versus what they would assume to be optimal run rate inside their sites right now. And there's obviously ebbs and flows in given quarters based on individual capacity expansion inside some competitor sites, but it's not significant right now.
I'll go back, it's fairly tight. It's hard to put a number on this fairly tight.
George Leon Staphos - Bank of America Merrill Lynch
Okay. Thank you very much.
Operator
Our next question comes from Jason Freuchtel with SunTrust.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Hey. Thanks for taking my follow-up.
It seems like there may be a greater emphasis on innovative offerings of Berry now compared to previous years. Should we assume Berry will invest more on R&D spend going forward or kind of maintain a similar low it has the past several years?
Thomas E. Salmon - Berry Plastics Group, Inc.
Listen, we – I look at innovation beyond just product. It's innovating around our people, our products, our processes, the entire contingent.
And Berry has never been shy to spend appropriate amounts for the right opportunity to create the right differentiation with the right customer support. So, it is obviously an area that we spend a lot of time commercially focused on.
And I do – as we have some developments to share relative to progress or maybe on the innovation front, we'll bring those forward in upcoming call, I assure you.
Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.
Okay. Thank you.
Operator
Our next question comes from Scott Gaffner with Barclays.
Scott L. Gaffner - Barclays Capital, Inc.
Thanks. Hey, Tom and Mark.
I hate to come back to this, but I just want to clarify on the second quarter commentaries, especially around HHS (sic) [HH&S], because there does seem to be some confusion. So, on the resin piece, Tom, that you've mentioned, can you – is that specific to the January increase in polypropylene pricing?
And then given your view that resins are going to be flat for the full year, is that something you would expect to get back in HH&S later in the year based on contractual pass-through?
Thomas E. Salmon - Berry Plastics Group, Inc.
Yeah. I think, Scott, you have the – the answer generally is yes for that.
I mean, obviously, those are evolving markets but yes, that's probably is the right way to think about it.
Scott L. Gaffner - Barclays Capital, Inc.
And the pass-through within HH&S, is it terribly dissimilar from the rest of the company?
Thomas E. Salmon - Berry Plastics Group, Inc.
It is not. It is very similar.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. And can you remind us of the geographic breakdown within HH&S.
Is it one specific country that you're focused on as far as the FX impact?
Mark W. Miles - Berry Plastics Group, Inc.
Yeah. Again, in terms of the euro, it's about a $1 million of earnings for every 1% move.
So, if you just look at the year-over-year change in euro and the percentage change you can basically take that times a $1 million and that will give you pretty close to the impact year-over-year on current euro currency changes.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. And I think lastly, what are you using for the euro for the rest of the year?
Mark W. Miles - Berry Plastics Group, Inc.
We haven't disclosed specific guidance with respect to currencies. I would say in general we have a pretty similar outlook in 2017 and 2016, not significantly different.
Scott L. Gaffner - Barclays Capital, Inc.
Okay. I appreciate it.
Operator
And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.
Thomas E. Salmon - Berry Plastics Group, Inc.
Just want to thank you all for the joining us for our conference call here. We look forward to speaking on the upcoming call.
Take care.
Operator
Ladies and gentlemen, that does conclude today's presentation. You may now disconnect and have a wonderful day.