Berry Global Group Inc (BERY) 2008 Q2 法說會逐字稿

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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to turn the conference over to host, Mark Miles.

Good morning and welcome to Berry Plastic's Earnings Conference Call. Today we have Ira Boots, our Chairman and CEO, as well as Jim Kratochvil, our CFO. During this call we will be discussing some non-GAAP financial measures including bank compliance EBITDA and adjusted EBITDA. 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 public filings. An archived audio replay of this conference will also be available on the Company's website.

During this conference call we may make forward-looking statements within the meaning of Federal Securities laws. Forward-looking statements including statements concerning the Company's plans, objections, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. Actual results in future periods may differ materially from forward-looking statements made today because of a number of risks and uncertainties, including various economic and competitive factors, the Company's ability to pass through raw material price increases to its customers, its ability to service debt, the availability of plastic resin, the impact of changing environmental laws, changes on the level of the Company's capital investment, and the results and integration of acquired business.

Although management believes it has the business strategy and resources needed for improved operations, future revenue and margin trends cannot be reliably predicted. Additional information about factors that could affect the Company's business is set forth in the Company's filings with the Securities and Exchange Commission.

With that, I'd like to turn it over to Mr. Ira Boots, our CEO and Chairman.

Good afternoon. As always, it's a privilege to be with you today and I appreciate you attending. Thank you for joining us today for the Berry Plastics' second quarter 2008 earnings call. Throughout this call, we will refer to the second fiscal quarter as the March quarter.

I would like to begin by providing an overview of the business climate for Berry Plastics during the quarter. Although the recessionary outlook in the United States had a modest impact on our business, the results for the quarter were most affected by substantially higher resin costs realized late in 2007. Cost reduction initiatives which are a major part of our culture at Berry, more than offset non-resin inflation during the quarter.

From a volume perspective, Berry's rigid business continued to see sales growth as compared to the March quarter of 2007. Selling prices were also higher in response to higher resin costs. Sales in the flexible business were also higher, but mainly as a result of passing through material driven price increases to customers.

Flexible volume was lower due to the decline in the housing sector, the discontinuance of certain unprofitable products and the emphasis on account profitability. In spite of lower volume and higher resin costs, the flexible business demonstrated improvement from the prior year, due to improving the operations and realized synergies. We will provide more financial color shortly.

I will also update you on integration efforts to date on both the MAC acquisition acquired in December 2007, and the Captive acquisition which closed in February of this year.

Now I will report the highlights from the quarter. Berry Plastics is pleased to report that our March quarter sales and EBITDA are very close to the estimates we provided in our 8-K a few weeks ago. Sales were $844 million for the quarter, an increase of 14% from the $742 million reported in the March quarter of 2007, including solid organic growth of 3% in the rigid business, while the flexible business reported a volume decline of over 10%.

Adjusted EBITDA, including unrealized synergies for the March quarter was $117 million, reflecting a decline from the $144 million in the March quarter of 2007. This decrease was driven primarily by the relationship of selling prices and raw material costs compared to the prior year quarter, partially offset by the realization of synergies. Specific detail on periodic changes to net sales and adjusted EBITDA will be provided in the financial review.

As mentioned in the 8-K, the company has launched several profit improvement initiatives to offset the impact of higher raw material costs. In addition to raising selling prices associated with increasing resin costs, the company completed a reduction in force, initiated a major material reduction program, committed to a reduction in discretionary spending and announced a general price increase. Throughout the balance of calendar 2008, the company expects a positive impact of over $5 million from the reduction in force and a $10 million improvement from the discretionary spending reduction program.

While we are not yet announcing the financial impact from the material reduction program, this plan includes light-weighting parts, reducing and reusing scrap, and in substituting alternative materials as fillers in the manufacturing process. Significant integration progress has been made with the MAC acquisition, which was acquired in late December 2007. While small, relative to Berry, this business, which is located in Canada and manufacturers closures, is a nice addition to our rigid closed top business. This business operates two facilities in Canada and is on track with our planned synergy realization goals.

On February the 5th of this year, the company completed the acquisition of Captive Plastics, which is a company primarily focused on the manufacturing of blow-molded bottles. With 13 manufacturing locations across the country, the company serves a diverse group of tier-2 and tier-3 customers. This acquisition strongly compliments Berry's base bottle business. Organizational changes are now mainly completed. Phase one of the IT system conversions has started, with the conversion of the general ledger, accounts receivable and accounts payable. This first phase was just completed in the current June quarter. Management is focused on realizing identified synergies, with implementation of programs continuing throughout the year.

Despite the recessionary environment, Berry is continuing to invest in expansion and cost reduction projects. For example, the company is again making a significant investment in cup thermoforming. This business continues to be strong, achieving 40% organic growth during the quarter. The company has also continued to expand our Evansville facility to serve the container thermoforming markets. Prior to this expansion, thermoform capability in the Evansville plant was limited to deep draw polypropylene drink cups and lids.

On the financial front, during the quarter we closed a $520 million bridge loan facility and used the proceeds to finance the purchase price and fees related to the Captive acquisition. We have since replaced this instrument with first priority floating rate senior secured notes with an aggregate principle amount of $680.6 million. The additional proceeds were used to pay down the revolving loan, providing additional liquidity to the company.

Although resin pricing continues to be difficult to forecast, the increasing price of oil as a result of the price increase announcements from all of the major resin producers, in spite of low overall demand. In summary, Berry's management has taken steps to reduce the impact of higher resin prices in the March quarter and is continuing to take actions intended to reduce our costs, raise our prices and lower the amount of resin used in our process. With this I will turn it over to Jim for more details and the financial results. Jim?

Thank you, Ira. I would like to begin by reviewing key March quarter 2008 financial statistics. As Ira mentioned previously, total net sales for the quarter were $844 million compared to $742 million for the March quarter of 2007, an improvement of approximately $102 million. Adjusted EBITDA before unrealized synergies and pro forma adjustments for acquisitions in the March quarter 2008 of $99 million, was $2 million higher than the $97 million in the prior year March quarter. After considering remaining unrealized synergies and the pro forma impact of acquisitions, adjusted EBITDA was $117 million compared to $144 million in the prior year quarter.

Major components of this quarter-on-quarter change include first, the net impact of higher rigid organic volume and lower flexible volume, which reduced EBITDA by $3 million on a net basis. Second, the impact of higher selling prices and higher raw material costs, net of our material savings initiatives, which resulted in an under-recovery of $27 million.

Third, an improvement of $8 million in EBITDA due to higher productivity, lower SG&A costs and the realization of cost reduction initiatives net of other inflation. Fourth, net lower performance of $5 million for the quarter from acquired businesses that realized similar margin pressure from higher resin prices and the sale leaseback expense related to the MAC acquisition. It is also important to note that approximately $15 million of synergies shifted from unrealized to realized during the quarter.

During the March quarter of 2008, the rigid business recorded adjusted EBITDA, including unrealized synergies and pro forma for acquisitions, of approximately $82 million compared to approximately $100 million of adjusted EBITDA for the March quarter of 2007. This business recorded solid organic growth of 3% during the quarter. The open top container division grew base volume by 5%, including a 40% increase in thermoform cup sales.

In rigid closed top, a strong 11% increase in closure sales was offset by lower tube volumes resulting in net flat volume compared to the prior year. From an adjusted EBITDA perspective, the rigid business was highly affected in the quarter by the timing difference or lag between incurring high resin prices in late 2007, and the timing of passing them through to our customers. The opposite situation or a reverse lag, occurred in the March quarter of 2007.

This relationship of selling prices to resin costs in the rigid division in the March 2008 quarter resulted in a net EBITDA shortfall of $20 million compared to the prior year quarter. On a positive note, the rigid business did realize an EBITDA contribution of $2 million from volume and a $5 million improvement in operating productivity and lower general and administrative costs. This was partially offset by $5 million of lower EBITDA from acquisitions and sale leaseback expense.

In summary, the rigid business recorded net lower EBITDA of $18 million for the quarter. The flexible business reported an adjusted EBITDA, including unrealized synergies and pro forma for acquisitions for the March quarter of 2008, of approximately $35 million compared to approximately $44 million of adjusted EBITDA for the March quarter of 2007.

Prices were higher almost $41 million during the quarter, compared to the prior year quarter. Raw materials increased approximately $48 million, resulting in a net EBITDA shortfall of approximately $7 million from the relationship of higher selling prices to resin pass-throughs Sales volume decreased almost 11% die to the continued softness in building products, discontinuance of certain unprofitable products in the coatings division, and more selective quoting due to higher emphasis on product profitability. The net result of lower volumes was a decrease of $5 million in EBITDA for the flexible business.

Operating improvements increased by almost $17 million when including realized synergies of approximately $15 million. The Rollpak acquisition contributed quarter-over-quarter EBITDA growth of $1 million. Overall, the flexible business realized improved EBITDA of $6 million for the quarter in actual performance, but was lower $9 million when considering the $15 million of synergies realized, which were identified in the prior year quarter.

I want to also address the business optimization and restructuring charges of $6.2 million incurred during the quarter. As we have discussed on prior calls, these charges have decreased substantially from the prior sequential quarters. We expect the spending associated with the Covalence merger to continue to moderate as we progress through 2008 and many of our synergy attainment programs are completed.

Liquidity remained high at quarter end and the company had almost $244 million of available borrowing capacity under the company's revolving line of credit. With the completion of the financing Ira mentioned above, the company increased liquidity by another $123 million as the remaining proceeds after repayment of the bridge loan were used to pay-down the outstanding revolver.

The March quarter usually requires the highest use of working capital due to seasonal needs. Higher resin costs have resulted in higher accounts receivable and inventory requirements, which are estimated at over $60 million from a year ago to the increase in resin costs alone. The company is highly focused on reducing working capital in all areas of the business.

Capital spending for the first half of fiscal 2008 was strong compared to the prior year, at $78 million, supporting the many expansion and cost reduction opportunities available to the company. We currently expect total year capital spending for all divisions to be approximately $160 million.

In summary, rapidly rising resin costs in the fourth calendar quarter of 2007, was the major contributor to lower EBITDA in the March quarter of 2008 compared to the March quarter of 2007. The company has responded with several cost improving programs in addition to the existing cost reduction and synergy programs already in place, and is highly focused on managing working capital in this inflationary environment.

This concludes my financial review of the March 2008 quarter, and at this time I would like to turn it over to the operator to entertain questions from the participants. Operator, if you would open the lines?

(OPERATOR INSTRUCTIONS) Bruce Klein from Credit Suisse.

Just on resin, I guess, it sounds like overall I think the hit was $27 million when comparing price versus resin and when you started your other comments for overall EBITDA down 27.

Right.

Maybe just remind us in terms of the timing of when some of the escalators kick in, or maybe what percent of your business has three-month escalators versus one-month escalators, so we can sort of try to figure out whether April might benefit from some of the fact that resins was flat, I guess in January, February, March despite the fact it's up in April and May, because of the time lag?

First of all, 60% of the rigid business is tied into escalator - de-escalator type arrangements. So, basically half of our business, around 65 to 70%ish is tied into escalator-de-escalator arrangements. Of that, the majority -- well over the majority of that is tied into quarterly arrangements. Okay? We have, I would say 2 to 3 -- I think it's 2 major customers that are on trimesters, and 1 major customer that is on twice a year. So, those customers that are trimester, April 1st would be a date, a key date. And then I think June 1st is a date for a major customer that has twice a year.

What was a little bit -- in the past we've mentioned this, but what affected us in particular in the March quarter was that we had a relationship where escalators did not increase to reflect the increases in the fourth quarter in a major way. There were some increases, but not the total impact of those increases in the first quarter. So, it would be 65 to 70%, once again, of half the business, and then of that, there are -- and once again, our largest customer I don't think makes up more than 7% of our business. So, that kind of puts it into perspective.

I'm sorry, Jim, you said 65-70% of half the business. That's the rigid you're talking about?

65 to 70% of the rigid business, that's correct.

Okay. That's helpful. And then, was the cost savings, excluding the impact from resin, did you say, Ira, did you say in the beginning of your comments that cost savings exceeded cost inflation for the March quarter?

In the non-resin side, Bruce.

Okay.

Bruce, to put it in perspective, other than the impact of resin, we would have shown improvement in the business, because a labor inflation, electricity, fray, all those kinds of things, basically through productivity and cost reduction, outside of really the programs, the additional programs that we are now mentioning, we would have improved the business.

Bruce, let me just comment. The business, I can tell you, is operating very well and running very smoothly. It's just simply we're up against this mountain still of resin increases and the pass through associated with and the time lags that are associated with that type of program. So that is the element.

Right, thanks. And then on the volume, I guess, what other than thermoforming which it sounds like it's been going well for quite a while, what else sort of drove the volume improvement in the open top? Is there cross selling or other new products or what sort of drove that?

This is coming from our new product pipeline. I have been speaking of I think for the last 18 months about the depth and the quality of that pipeline that is feeding Berry on the open top business, in from that division in particular. And we continue to see the benefits of the depth of that pipeline and the quality of it. That's where that's coming from.

Bruce, we also see a good -- you know, we talked about investing in non-cup thermoforming. We also see a good growth in dairy, in terms of our thermoforming business.

That's what you noted earlier, the business you're trying to grow?

You know, we have talked about the expansions in Ira's comments.

Right, okay. And lastly, just on the flex side -- the tape side, the top line sounds like housing and (inaudible) some low margin which has been weak. I guess on the bottom line, which has held up better, what do you think has been the biggest help to offsetting the top-line and do you expect that to continue? Is there much more left or not?

Let me break that in two pieces. Our flex and our tapes and coatings, those are two divisions and inside, what we call FTC. The flex side first. They have improved their operations materially during the past year and they're weighing much better today than they have. They've worked hard on their business practices, such as inventory control and the disciplines inside, how they quote business and where they're going there. And we see the benefits of what they're doing. And that is discounting all the synergies that they have put in place.

So they have worked very hard to pull their headcount down with a reduction in force and better management of our direct labor. They are doing a lot of things right on the flex side of the business that's falling to the bottom line for us. And that's in the face of what you just spoke about, the low margin business that we have discarded and some of the weakness in the area. So certainly on the building product side of the business and the storm related emergency type products that we have that simply we have not added an application in probably the last few quarters for those products.

On the tapes and coatings, we've invested in some cost reduction machinery. In particular we're trying to pick off some of that low-hanging fruit that is assisting, and at the same time, they are benefiting by understanding the Berry systems and they are doing a very nice job of reaching up and pulling down some of their costs by utilizing some of what we would call shelf type products inside Berry that they can use and take the benefit and put them back up on the shelf, in terms of management practices and our systems that are available. So they're harvesting some of the low-hanging fruit and doing a good job managing their business. Our operations are running well. We're still -- the headwind is resin.

(OPERATOR INSTRUCTIONS) Matthew [Clavel] from Silver Point Capital.

One question on the synergies. Could you give us a sense of when you would expect them to start kicking in, in terms of the coverage in your (inaudible) I think there is about 55 million left? Do we see that in '08 or do we see that in '09?

The synergies have been kicking in. That's what the $15 million, you know, the 29 I think in total, including Captive and other stuff that we identified. But those are continuing through this year. You know, we still have some plant closings. One in particular in our Sparks facility. We also have a number of projects on the back side of converting all our IT systems over, which are out there. So, they are continuing to ramp up and we are realizing those.

On the Captive and MAC side, those are just starting to kick in. We're just starting to begin to realize those. There really wasn't any realization per see in the first quarter. But those also are starting to kick in at this point in time. So, it'll continue to ramp up. There will be some carryover into '09, but most of those will be realized by the end of the year.

And just in terms of resin prices, you were mentioning that it's a timing issue, so does that mean that we should expect better margins in Q3 and Q4?

Matthew, could you restate that? I'm not sure I understood exactly--?

I was just saying that you mentioned a timing issue in terms of passing on higher resin cost to your customers. So, my question is, should we expect better margins in Q3 and Q4 this year, given that now you've raised prices?

That would be a little bit too much of forward disclosure to be able to speak about margins in Q3-Q4, but historically, I'll speak about timelines associated. When we have resin increases that are announced by the indices and they hit our trigger dates, which are inside the contracts, we have been pretty successful in putting those through. It normally takes 90 to 180 days to fully build the benefit from the majority of that. And that's on the quarterly escalators that Jim spoke about.

We do have some customers, again, that are on biannual and trimester and actually one of them that's on an annual type basis that we won't see benefit until we hit those trigger dates as well. So, historically, again, Berry has been successful in most areas, certainly on the rigid, the old core Berry, on putting through the price increases with resin, but there is a time lag associated, and that time lag runs 90 to 180 days behind.

Okay. And in terms of the flexible and the tapes and coatings business, are you increasing prices there as well?

Yes. The answer is, yes. We have put out a general increase into the marketplace. Let me break that down from a flex and a tapes and coatings. A good portion of our flex business is bid business, and you bit that business on some type of intervals, whether that be 30-days, 60-days, 120-days or some of it annually. But that business there has a different attribute when it comes to price increases, because you just calculate those in when you rebid the business.

The tapes and coating side is more traditional, where we're building a contract and for the most part, we are the incumbents in those particular areas and you're managing your prices through a more traditional resin or cost pass through.

And maybe one last question. What's the percentage of your flexible and taped and cutting cells that goes in construction?

What percentage of tapes and coating sales go into--?

And the flexible cells go into the construction industry? Because you mention, volumes were down substantially because of softness in the construction sector.

I don't know that we've ever really put out that number. I can tell you the areas of our business that are in construction, certainly. We have house wrap business in the coated products. We also have structural board and coated products that go into that. We have in the flexible films we have things like drop cloths that would be used for paint and the do-it-yourself market that goes into that.

And we also have in the tape side of the business we have HBAC, which is into the heating and air conditioning market. They use more of a high-quality tape in that business, which is also suffering with that as well. So those are the main areas of the business. Mark, maybe I'm missing one here, but I think those are the main areas of the business. And that's where we have seen the declines.

Christopher Miller from JP Morgan.

Just wanted to follow up on a couple of points. You mentioned that you had some cost improvement programs you were working on outside of the synergy programs previously announced. If that's the case, is there any additional detail you can give or sense of magnitude, targets of what you're trying to do and kind of timing to achieve those goals?

Ira, if I could take the first two and you take the resin reduction?

That'd be fine, please.

Okay. Basically we announced, first of all, a reduction in force, which was basically completed really at the of the first quarter, beginning of -- I'm sorry, the March quarter beginning of the June quarter. So, that we've announced is a $5 million target for us. We believe that to be fully in place to achieve that. There are a couple of trailing items that are waiting for systems, but overall, that program is in place and anticipates achieving that in the year.

On the discretionary spending, what we have done basically is identified areas where we have the ability to control our spending throughout the entire company and we have basically put hard stops in place. In other words, we're not going to allow spending to be more than specific amounts, so all the division presidents and controllers are well aware of what they're going to have to budget to. It's fairly finite. We track it every month. But basically it is relying on us to go to discretionary spending accounts where we have control and limiting, just capping out what people are allowed to spend this year, which is targeting a $10 million reduction.

Okay, and Ira, if you would finish on the material reduction?

Sure. Our material reduction program, Chris -- first of all, good morning, Chris. This program -- and we are not giving out the financial impact, due to the sensitivity with our competitors and with our customers at this point. But we are reaching in, we are light-weighting our products where we can. And keep in mind that Berry, in a good portion of our cases, have proprietary type products, so we control a lot of the specifications, and so it's easier for us to do than if you're dealing -- as a custom owner. We also are reaching in and reducing and reusing our scrap back into our process. And then lastly, we are substituting some alternative material fillers inside some of the products as well. We're doing everything we can at this point to pull resin out of the products and be able to save that cost at this time. But again, Chris, we're not releasing the financial impact at this point.

That's very helpful. Thank you. I want to follow-up in understanding the dynamics of the pricing in the tapes and coatings in the flexible business, the bidding process, etc. Is there any kind of broad magnitude you can give us for the types of price increases that you're trying to push through there? Is it 2 to 3%? Is it 5 to 7%? Is there any way you can kind of cuff that for us?

I don't know that we can do that in terms of percentage points, because the market's very volatile. We'll see a change from day to day in our wins versus the quoting process. And so, you get a pretty good idea of what's happening inside the marketplace. I will say for the most part, the converters are mostly in the same game. I mean, the resin went up and these people, whether it's Berry or anybody else in the industry, they either have to reflect the price increases in their quarter prices or they're eating those costs. And I can say for the most part, most companies are working hard to be able to put those prices increases through. And that's reflected in some of the numbers that we see on the wins that we have on those quartered projects.

Okay. And then one final question. As we go back to the rigid business and you have the contractual pass throughs, is there any ability over time to reopen those contracts from the standpoint of potentially renegotiate the windows for those resin pass-through? If we are in a new, more volatile resin environment on a go forward basis, is there some juncture where you have an ability to shrink that window from say, 90 to 120 days, down to a monthly pass through? Is that something that would even be considered at this point?

Chris, we could do that. It would take a period of time to be able to clear out all the contracts, but a good portion of those contracts within 12 to 18 months would be changed if that would be our choice. On the flip side, Berry has a lot of stored up energy in the fact of when resin turns down, we have these 90 to 120 day delays on the way down as well. Unfortunately, we've been in an escalating market now for several years and we've not been able to benefit from that stored energy going down. So, if we change to a shorter lag time, we're going to give up some of that stored energy that's behind the company.

Okay, fair enough. Thanks so much for the color. I appreciate it. Good luck to you.

(OPERATOR INSTRUCTIONS) [Avani Doshi] from Barclay's Capital.

One quick question on your adjusted EBITDA, adjustments on your 10-Q. Could you just explain the pro forma synergies, the differential with about 28 million in Q1 '07 versus -- or rather March '07 versus the 13 for this quarter?

Basically what that is, a year ago quarter we identified what our synergies were, hadn't realized any of them yet, basically, on all our acquisitions. And what we're saying here, the reason this number is going down is because there basically were $15 million which are now realized and in our numbers. So, eventually the unrealized synergy number decreases to zero over time, because those synergies have to be realized. Okay? So what we're saying here in the change, is that the 15 million now has become part of our adjusted EBITDA number in terms of realizing it.

Okay. And earlier in the call you had said the resin costs had a net EBITDA shortfall of 20 million, is that correct, out of that 27 million, 20 million was due to--?

Of the 27 million, 20 million is on the rigid side of the business, 7 million is on the flex side of the business. Okay? So we have two distinct businesses here, so the combination of those two is 27.

And all of that was essentially due to the resin costs you're saying?

Yes. It was the relationship between selling price and resin, not recovering all the resin and other raw material costs.

Okay, great, thanks. Very helpful.

I'm showing no further questions at this time.

Thank you everyone, for joining the call. Ira, do you have any closing comments?

Again, we appreciate everybody's attendance, and I just want to leave you with, we're working very hard to continue to focus on the EBITDA of our company and where we're going in this very difficult time of resin increases. We're very, very fortunate that Berry has a very diverse product offering and is relatively recession resistant in regards to the type products that we have. So, we appreciate everybody's interest today and attendance. Have a nice day. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.