Berry Global Group Inc (BERY) 2009 Q3 法說會逐字稿

Ladies and gentlemen, 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 may be recorded.

I would now like to introduce your host for today's conference, Mr. Mark Miles. Mr. Miles, you may begin your conference.

Thank you. Good morning and welcome to Berry Plastics earnings conference call. With me I have Ira Boots, our Chairman and CEO, and Jim Kratochvil 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 call we may make forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements include statements concerning the plan -- the company's plans, objectives, 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 in the level of the company's capital investment and the result 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 various filings with the Securities and Exchange Commission. And now I'd like to turn it over to Mr. Ira Boots.

Thank you, Mark. Good morning. This is Ira Boots, the CEO. As always, it's a privilege to speak with you. Thank you for joining us today for the Berry Plastics third quarter 2009 earnings call. Throughout this call, we will refer to the third fiscal quarter as the June quarter.

Berry is pleased to report improved results for the company during the quarter, in spite of continued difficult economic environment.

Throughout the June quarter, Berry's financial performance was strongly influenced by three separate dynamics. First, the lingering recession has continued to affect sales volume mainly in our construction-related categories. Second, the company received a benefit from the decline in the price of many of our raw materials, which was greater than the reduction in selling prices to our customers.

And finally, Berry received a positive impact from continued aggressive cost reduction programs and the realization of acquisition synergies which were implemented earlier by the company. These profit improvement initiatives more than offset the difficult external market dynamics resulting in an overall positive quarter for the company.

Now I will report the highlights from the quarter. Berry Plastics' sales were $770 million for the quarter, a decrease of 18% from the $940 million of sales reported in the June quarter of 2008. These results include an overall decline in price adjusted volume of 7%. Selling prices decreased 11%, mainly in response to lower resin prices.

Adjusted EBITDA, including unrealized synergies for the June quarter was $141 million, an improvement of $3 million from the adjusted EBITDA of $138 million in the June quarter of 2008. These results are consistent with the estimated earnings press release issued last month. Specific detail and periodic changes to net sales and adjusted EBITDA will be provided in the financial review.

Overall, company volumes remain mixed. In the rigid side of the business, the growth in thermoform cups, containers, bottles, vials, and housewares more than offset the softness in food, overcap, injection drink cup, and closures businesses. The flexible side of the business remains soft overall, but Berry continues to adjust overhead and labor costs to match plant operating activities. Most of the benefits from cost reduction programs implemented earlier in the year was realized during the June quarter. Some highlights of these programs include a reduction of the G&A staffing, a decrease of salary and wages, a reduction of travel and trade show expenses, the elimination of 401(k) matching, and plant downsizing and closings. The company also has defined programs to reduce both energy costs and material used throughout the system.

With the exception of plants affected by soft volumes, most of the company's manufacturing facilities continue to record positive operating performance. Lower costs in non-resin raw materials and decreased freight costs were also realized during the quarter. Another positive note, the company's new product pipeline continues to be robust in several product categories.

Areas continuing to make progress are major capital improvement projects announced earlier in the year. The thermoforming expansion in Evansville is on track for completion in the first quarter of 2010. Other large capital investments in rigid (inaudible), flexible films, tapes, and coated products were all in various stages of completion with the correlating positive impacts to earnings expected throughout 2010.

Company liquidity continued to remain strong throughout the quarter, with continuing gains in both operations and working capital. The heightened visibility for newly installed IT systems has facilitated a reduction in working capital in addition to the working capital benefit from the resin cycle. This strengthened liquidity has allowed the company to take full advantage of the debt repurchase program which was summarized on our July 20th earnings press release.

Apollo Management, which is affiliated with Berry Plastics through ownership in the company, has pursued the reorganization of the plastic, film, and flexible packaging producer, Pliant Corporation, through the US Bankruptcy Court. Apollo is currently contemplating that Berry contributed stretch films business to Pliant and enter into an intercompany services agreement with Pliant with an initial term of five years. In exchange, Berry would initially receive 20% of Pliant's common equity with the ability to acquire an additional 5% if certain performance conditions are met.

On July 31st, 2009, Pliant and an ad hoc committee representing Pliant's first lien note holders reached a preliminary agreement to withdraw their prior objections. A more detailed summary of the relative court proceedings are included in the company's most recent filed 10-Q.

In summary, Berry recorded very solid performance during the June quarter. The relationship of customer selling prices and raw material costs was more balanced, as a high-cost inventory from 2008 was previously consumed in the March quarter. The EBITDA impact of softer volume in certain product categories was mitigated by aggressive cost reduction initiatives. To date, the diversity of Berry Plastics products and markets have effectively softened the severity of the economic downturn to our company.

With this, I will turn it over to Jim Kratochvil for more details on the financial results.

Thanks, Ira. I would like to begin by reviewing key June quarter 2009 financial statistics. As Ira mentioned previously, total net sales for the quarter were $770 million compared to $940 million of net sales for the June quarter of 2008, a reduction of $170 million. Decreased selling prices were approximately $99 million, and a reduction in base volume of approximately $53 million, accounted for most of the remaining change.

After considering unrealized synergies, cost reductions, and the impact of acquisitions, adjusted EBITDA was $141 million for the quarter, compared to $138 million in the prior year quarter, an increase of $3 million. Adjusted EBITDA, excluding unrealized synergies and pro forma cost reduction was $138 million for the quarter, reflecting an improvement from the $125 million in the prior year quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA change of $13 million, which includes, first, a net impact of lower flexible volume, partially offset by higher rigid volume, resulting in a $10 million decrease in EBITDA. Second, the impact of lower selling prices in raw material costs resulting in improvements of $22 million. And, third, a $10 million improvement in operations and G&A expenses which were partially offset by $9 million of additional bonus expense.

The rigid side of the business enjoyed net price adjusted volume growth of 2%, led by continued strong sales of thermoform cups and housewares, with modest growth in containers and prescription vials. This was partially offset by softer volume to injection drink cups, closures, tubes, and overcaps. EBITDA for this business improved approximately $6 million for the quarter. The EBITDA impact of the increased price adjusted sales volume in the rigid business was approximately $2 million.

Lower customer selling prices resulting from even lower resin price reduction yielded a $9 million EBITDA improvement. Operations improved by approximately $1 million and SG&A expense increased $6 million, mainly due to higher employee bonus expense.

In the flexible business, adjusted EBITDA improved approximately $7 million, overcoming approximately $12 million of negative EBITDA impact on the 17% decline in price adjusted sales volume. While retail products such as trash bags were relatively constant compared to the prior year, other product categories, including building and construction-related products were relatively soft. The flexible films business, which was most affected by the runoff of high-priced inventories earlier in the year, reported an improvement in the relationship of customer selling prices compared to raw material costs, resulting in positive EBITDA of almost $9 million.

The tapes and coatings division reported approximately $4 million in increased prices compared to changes in material costs during the quarter. Operations continue to improve by approximately $3 million during the quarter, despite the low operating rates in some of the businesses. SG&A improved approximately $3 million as well, due to cost-cutting efforts which were net of increased bonus expense.

A real bright spot for the quarter and the trend throughout the current fiscal year has been the improved liquidity generated from operating activities. Both accounts receivable and inventory have contributed positive liquidity since the start of the year, with additional improvement in accounts payable during this quarter. This return of cash into the business as a result of both lower resin prices and management focus on working capital improvement. Overall the company generated almost $340 million in cash provided from operations since the beginning of the fiscal year.

The company is no longer maintaining cash in excess of operating needs due to the return of stability in the financial markets. Because of our strong liquidity position and market availability, the company today has been able to acquire or receive commitments to acquire, through its subsidiary BP Parallel, a non-guarantor subsidiary of the company $50 million of the ten and a quarter senior subordinated notes for $24 million in cash plus accrued interest and $518 million of principal of the company's parent, Berry Plastics Group, Inc.'s senior secured term loan for $168 million. The cash required to fund the remaining open commitments at quarter end was approximately $43 million. In addition to the approximately $29 million of cash on hand, the company had unused borrowing capacity of approximately $280 million under the company's revolving line of credit.

Capital spending for the quarter was approximately $46 million, bringing the year-to-date spending up to approximately $144 million. Our target for the year continues to be close to $200 million, including the 2009 costs for the Evansville thermoforming addition. The purchase of the assets of Erie County Plastics was approximately $5 million.

As a reminder the company has no material maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $20 million per year and our first material debt maturity or revolver does not occur until 2013.

This concludes my financial review of the third quarter of 2009. And at this time, I'd like to turn it over to the operator to entertain any questions we might have from the participants.

Thank you. (Operator instructions) Our first question comes from Bruce Klein of Credit Suisse.

Hi. Good morning, guys.

Morning, Bruce.

Hi, Bruce.

Maybe you could touch on volumes a little bit more in terms of what you're seeing in terms of any trends kind of during the quarter. Did things get better or worse? And I guess the thermoform business was up, I guess due to some of your capacity ads, maybe, maybe not, and then the injection drink was down. What was [sort of] -- was that just a food service end market issue, why that was lower? If you can touch on that. And then just your thoughts on resin would be helpful, as it sort of bounced up and whether you think that's sustainable or not.

Bruce, this is Ira. I'll be happy to entertain that. I think our volumes are pretty consistent with the external market conditions. Obviously, the construction industry remains down at our volumes are pretty reflective of the percentage that housing starts are down as well. So, [in fact], that's certainly, probably our weakest area. There's other areas, a small percentage of our business that's in automotive, certainly is reflective during this quarter of the downturn inside automotive as well.

So the rest of our business, the food business, the trash bags, the prescription vials, those type -- certainly personal care products, housewares, are pretty consistent. They're soft, but there's not a major downturn inside those particular areas. And that diversity, as always, is very helpful to Berry. As you know, we're very adverse to economic cycles due to the diversity of our product lines. And so the volumes of those products remain relatively stable, albeit you can see slippage from zero to minus two in some of those areas. But, for the most part, they remain relatively stable.

Regarding the cups, though, my comment was that injection cups were down, but it's miniscule. And, again, that's not a growing part of the market. And that's definitely due to the fact that companies such as Berry that continues to bring on thermoform cups that have a lot of the characteristics of an injection cup, due to the quality upgrades we've been able to achieve with the material, that there's less market and less requirement for an injection cup inside the marketplace.

So our t-form cup volume was good, but wasn't off the chart and a lot of that was the cool spring that we encountered here is what we like to say the 100 days of summer, which is our heavy drink cup days, had a little later start this year. Now, that was mitigated by the improved volumes that are going through the QSR and convenience, as the economy turned down and people turned to those lower-priced venues for their food. So the cool spring was offset by the turn to those type of restaurants.

And all-in-all, we had a good quarter in t-form cups and toward the end of June, you can see the heat was building in the country, you could see our sales volume was improving strongly in those particular areas.

Resin's been on a cycle increase during this quarter. The resin producers put many price increases in place and were able to keep them in the marketplace. They were able to stick them in many cases. So resin has climbed during this quarter toward the end of June. The question remains whether they're going to be able to sustain any more -- any further price increases and if there will actually be decreases going into the back half of the year, which is traditionally a little lower use for the resin markets.

And so from our opinion, I think that our opinion would be consistent with what we have done and seen in the past. We think that the prices have relatively flattened and have some propensity to actually even decline during the back of the year. But, certainly, we don't see a propensity for any price increases. And that's pretty traditional with our historic past, given the same relative market conditions and with oil and the resin consumption that we see today.

Certainly that's a long-winded answer, but hopefully that's helpful.

No, it is. And to follow up on the flex and tapes and coatings, it looks like your, I think your EBITDA in the June quarter was up quite a bit versus March and December. I'm wondering if that's kind of clean. Obviously some of that is resin catch up. But I don't know where the -- where in the pro forma cost savings, the synergies, I don't know if there is a heavier contribution into those segments, which might have boosted that this quarter. I don't know if that's a Mark question. Or that is -- or you think that's a pretty clean improvement and whether that sort of is sustainable under a low economic scenario.

Yes. This is Jim. I think that what you're seeing in terms of our flex business, you do see a substantial amount of the synergies being realized, that, you know, we've talked about those for a couple years and those are coming home, as well as cost reduction programs. Those businesses, the infrastructure of those businesses has improved dramatically since we merged with Covalence. And I think what you're seeing, those improvements are happening in spite of tough economic conditions in the downturn.

So I mean, all the -- we've talked about numerous plant consolidation and rationalizations. We've also talked about our capital spending and investing in those areas and we have done it throughout the flexible business. We've also talked about reorganization of those businesses. And I think what you're seeing here is those programs coming home to roost in the quarter, overcoming the softness. If we had seen strong sales volumes, I think you would have seen very strong operating improvement, but we just didn't see those -- we just haven't seen those volumes yet.

Bruce, consistent with the past, in 2007, when we took over Covalence, we spent about the first nine months trying to understand their business, integrating their people and their systems inside Berry. But we didn't spend a lot of capital until we understood where their needs were and what we wanted to do with the business. We started investing heavily inside that business in 2008. And some of the benefits that you're seeing coming through is the fact that we have integrated these plants, so -- for the most part on our IT systems. We have brought them to what we would call Berry culture. That doesn't diminish the culture they came from, thought, please don't take it that way. But when they became part of our company. And those assets that we have rationalized and/or the capital expenditures that we have made are paying benefit, I know.

So some of the improvements that you see are certainly sustained. Some of it is the fact that that high-priced resin inventories have burned through, and, as I spoke about, there's a parity now between sales price and resin price inventories that we have. And of course, that, as you know, that's a one-time event when you see those type of things.

All right. Okay. Thanks, guys. I'll pass it on.

Thank you.

Your next question comes from Joe Stivaletti of Goldman Sachs.

Morning. At the beginning of the call, you mentioned the three things that had the big impact on your quarter. Volume was one, and then the other two, one was raw material versus going down more than selling prices, the other was cost reduction. And I just wondered if the raw material versus selling price, there's more there to go, or I think you were sort of alluding to the fact that that has leveled off and was a bit more of a match today, but also if you had considerable amount of additional cost reductions that we should expect in the future or if you thought those were heavily reflected in the quarter that you just reported.

First of all, from the resins and selling price relationship, as Ira mentioned, those prices of resin are going up. So now it's a question of increasing prices. And I would say that they are in a normalized state today. I mean, we're not going to see a huge benefit because of that based on the dynamics of the resin cycle as we see it.

From a cost reduction standpoint, there were a, I will just tell you, there were a few projects that we implemented that we did not get the full benefit of during the quarter. But the lion share of those implemented projects, which we started as early as January and through March, were in place. So there are a few remaining out there at that time.

So I would say that normalized resin, little bit to go on price reduction. Or no. I'm sorry. Cost reduction.

Okay. Thank you. The second question was about your -- you mentioned that you bought back a significant amount of debt, both the Holdco PIC term loan and the subordinated bonds, I just wondered why it's structured in this way, why you're not just retiring that debt, but you're continuing to hold those, and what you're sort of anticipating looking forward with that.

This is Mark. I think it's just flexibility, gives us the most flexibility with respect to those purchases.

Okay.

That's exactly right, Joe. This is Ira again. And, first of all, good morning to you. Again, I think it's business prudent that -- always remain and keep yourself in a position of being flexible enough, that's exactly what we've taken this position.

Okay. Fair enough. And just a final question I had. Solo Cup's been in the market talking about investing money in thermoforming capacity and bringing that online. I wondered if you're -- I don't know if you want to address that specifically. But just in general are you feeling that the thermoforming market, which has been such a huge success for you, is becoming any more competitive, if you're feeling any market share pressure there. I just wondered if you could update us there to let us know if there's any sort of change in how you feel positioned in that market.

We have always had competitors inside our marketplaces, Joe. And those competitors, I will say, always make us work to [peruse] quality parts at a cost effective price. Solo's movement into deep draw polypropylene, thermoform, is provocated on the fact that Berry was able to move that marketplace from polystyrene to polypropylene and they are a player inside that marketplace. And I'm sure that they did not want to turn their back on it and wanted to continue to compete and produce products in that area.

But the fact of the matter is, we have many competitors across the board that produce drinking vessels, whether they're polypropylene, polystyrene, or PEP, and so we'll continue to be a competitor there. And I don't think that we feel challenged any more than we've always felt challenged to produce a quality product at a cost-effective price.

Saying that, we have honed our skills, experience, and we have spent hundreds of millions of dollars in this area now, and I think probably $200, Mark, to be exactly --

Yes.

-- for anybody to be a challenge in a significant way to the amount of capital that we've employed and are effectively utilizing, that's a pretty tall mountain for anybody to climb. And we, as we spoke in our previous calls, we're starting to move aggressively in products that are party to the same drink cup. So we're looking at small portion containers and other type of drinking vessels that, as we're opening markets that are sister markets to our drink cups.

So we're very bullish on where we stand, what we've invested, and where we're going with our t-form polypropylene initiative.

Great. Thank you.

The next question comes from James Daly of Deutsche Bank.

Good morning, guys.

Hi, Jim.

Can you just give a little bit of information on the assets that will be -- that are proposed to be going to the Pliant transaction? Any positive you see from Berry's standpoint on that occurring?

I'm sorry. Could you repeat the very end of the question?

Yes. I just want to get your reaction on the Apollo-Pliant proposed transaction as far as the structure film assets going into Pliant and what you think are -- if there are any benefits or major negatives related to Berry.

I'll take that, James. We're excited with the Apollo plan and we're fully supportive of the initiative that they have taken. But it clearly is an Apollo plan. And, as I stated on the previous call, people should not misinterpret what that is. And their current thinking would be that Berry would contribute certain assets in the stretch category in exchange for a percentage ownership of the company, and as well as the transition services agreement.

So right now, again, we're supportive. We think that Berry owning a portion of Pliant will be, first of all, synergistic, and, second of all, will pave the way for us to build, to offer additional values in terms of product end quality to our current customer list as well.

So we're excited about that. It involves three of our plants and we're very careful there. These are Berry employees and Berry plants. It also involves a number of our customers, about 600 customers are involved that purchase products from these different plants. And I can tell you, we're walking very thoughtfully on how to best take care of our customers or employees in our business regarding the contribution of assets to Pliant.

Okay. Thanks. That's helpful. Looking forward next quarter to -- you've obviously had a great benefit from -- a great job of reducing working capital. And with the resin prices kind of picking up a little bit, how much more benefit do you think you can kind of wring out of working capital over the next quarter or two? Kind of what should we expect?

This is Jim. Let me try to put a little color on that. We have seen some increases in resin, as Ira talked about. And to the extent that we continue to see increases or if there are decreases, that will flow through to our working capital as a use or return, most likely a use at the present time. And I think the increases aren't anywhere near compared to what the decreases were in November or December at this point in time. So there will likely be some give-back based on the resin cycle.

From the other piece, which we have -- you know we mentioned on the call, mentioned it probably on a couple of calls now, there's been -- we gained a great deal of visibility when we added our IT systems on the former Covalence facilities, particularly in flexible films and in coated products. We had a great deal of flexibility and there's been a lot of focus. That will not be -- those savings I consider to be permanent. And I think there's additional opportunity as we order more.

So I think that there's -- it's kind of a trade. Clearly resin will, if it shoots up, will have a bigger impact than what management can ring out through just heavy focus and visibility in the systems. But the piece that is resulting from management focus will not be return -- should not be return.

Great. Thank you. I know autos isn't a large portion of your business. Just wondering if you're seeing any up tick in the flexibles of tapes and coatings due to the recent kind of surge in auto sales and the automakers starting to restock some inventory somewhat.

That -- your question, though, would be regarding basically the quarter that we're currently in, James. And, as you know, we're very careful not to give our information regarding marketplaces. But again, I think some things are obvious and, with common sense, you're hearing us say that he downturn in automotive reduced ourselves and caused us to declined in revenue. And I think it's obvious that if there's an increase in the number of cars that are made in our products that are using them inside those cars, that they would affect positively our sales. But I caution, just keep in mind, that that's a small percentage of our --

Sure. Sure. That's all. I appreciate it, guys. Thank you.

The next question comes from Richard Close of Jefferies.

Yes. Hey, guys. Could you maybe be a little bit more specific on the amount of synergies and cost reduction contributions to the improved gross margin in the quarter? Could you kind of get us in the ballpark of some kind of number, the benefit that that had for you guys?

Give us one second here. Quarter-over-quarter is roughly $6 million on synergies and $3 million on cost reductions. Now, keep in mind that there's some of that that spills into SG&A. I don't have those exactly breakouts. But probably at least 80% of it would be in -- well, probably 70% of it would be in cost versus SG&A. And that's a pretty rough estimate, but it can give you an idea.

That's fine.

The other thing that's important here is that we booked about $9 million of, it would be company-wide bonuses this year that we had not earned last year, and there was a catch up last year in the fourth quarter where we had caught up. And this year we're booking that earlier. So there is that offset, as well, is built in there.

Okay. Great. And then can you guys tell us, how much more availability do you have to repurchase sub-notes here, going forward?

Well, first of all, I think it's more a function that our ability to purchase sub-notes is more predicated on the value of those notes. I think that market has rebounded dramatically. So the availability of sub-notes is quite a bit different than it was.

And the other thing I would add is, we're very disciplined about the amount of liquidity we maintain. So I 'd say the most limiting factor's probably ourselves and just the amount of liquidity that we want to maintain to operate the business.

All right. Thanks, guys. That's it.

The next question comes from Roger Spitz of the Banc of America.

Thanks. Good morning, guys.

Hi, Roger.

Hey, Roger.

Hey. Am I correct that you've been purchasing the Holdco unsecured term loan using the general permitted investment baskets under your indentures?

Roger, we haven't -- this is Mark. We haven't disclosed exactly the baskets. We analyze those and we haven't disclosed exactly the -- which basket out of what bucket. As you know, we've got a variety of baskets that are available for use.

Well, let me ask you this -- maybe a little more general question that you might be able to answer. Under the indentures are basically two different permitted investment baskets. There's the -- of equal size. One is a general basket, the other's an investment in a similar business. Since you're buying your own Holdco PIC notes, would you consider that an investment in a similar business?

Roger, I don't know. We would have to confer with our lawyers that are more intimate with those documents. I can tell you before we do any purchase, we make sure that we're within all the tests and covenants within our basket sizes, we obviously have a very -- we go through a very thorough process to make sure we're in compliance with all the relevant agreements.

No, I was just -- I'm just showing you'd be running your potential baskets down unless you hit some other baskets. That's why I'm asking these questions.

Let me ask you something on the Pliant. Will we be able to identify when you ultimately consummate the contribution in exchange for 20%, will you be able to identify the value that you've described to your pending contribution of the stretch film business to Pliant. For instance, will they -- will it be identified in your balance sheet detail on investments and affiliates, perhaps? Or the transaction show up in your cash flow statement?

That's a fair question, Roger. We haven't gone through all the -- I'm not -- I haven't confirmed yet with our external accountants to get all the exact accounting treat of the transaction. But we'll obviously be doing that here in the near term as the process moves forward.

You're just a little bit ahead of us. I think that what Apollo has reached here with first liens in the company, basically, is just -- it's a preliminary deal. And we haven't -- all those details haven't been worked through yet.

All right.

It's a good question.

Okay. One last, but different covenant question, I guess. Am I correct that regarding the non-cash interest income from owning the Holdco term loans on the [Avcos] consolidated balance sheet, that you get the EBITDA credit and a reduction in fixed charges under the definitions under your various bond indentures.

I wasn't fully sure I understood the question, Roger. But I can tell you, I don't think we -- we haven't -- you're talking about on the group loan that we hold at Berry when you say the term loan?

Yes, you get -- since you're holding the Holdco term loan, presumably you're booking interest income for holding at BP Parallel, LLC, presumably you're booking interest income on that from your Avcos -- excuse me -- from your Holdco. So I'm thinking that that interest income might be included in both improving your adjusted EBITDA as defined, as well as potentially offsetting and, thereby, reducing your fixed charges under the definitions under your indentures.

If I understand your question, Rob, is the first part, it would have no impact on adjusted EBITDA as it's interest. And I have not -- we have not gone back to our external lawyers and made the evaluation of the interest income and whether or not that would be included or reduce the fixed charges, as you stated. Again, we just haven't looked -- this was the first quarter that we had it and it was very small in the quarter. This was the first quarter we had any recorded and it was very small.

All right. Thanks very much, guys.

The next question comes from [Louis Wang] of Silver Point Capital.

Hi, Guys. Can you hear me?

Hi, Louis. Yes. Good morning.

Hi. I want to get some color around kind of how long it takes resin to move through your supply chain. So once you buy resin, does it come out in three months? Is it a one-month issue?

This is Jim. Let me answer that. First of all, it depends on, it obviously has to go through resin inventory, and it depends on where we are. Sometimes if resin prices are going up, we try to be a little bit heavier and if resin prices are going down, we try to be a little bit leaner, okay. It's getting harder and harder to do that because the resin companies are making it more difficult to do that. But typically we're a little heavier. So but an average would be about 30 days for it to go through there.

30 days.

For the raw material.

But then in the finished goods piece, that would typically be another 30 days. Now, what we saw happen -- and that's based on like a constant demand. What we saw happen last fall, as resin prices fell and demand fell, we ended up having a much longer lead time of it washing through finished good inventories. So in January and February of this year, we saw higher priced resin going [through] with prices, and, in fact, with the de-escalators had already decreased in January.

So what's typical and what always happens are not -- or I should say what you would think would happen and what actually happens can be different depending on what goes on with your volume and also what goes on with resin buying in the front end. But I think as a rule of thumb, it would be 30 days in raw material, 30 days in finished goods.

So then it takes -- so when you talk -- when you think about it in terms of passing costs on to the customer, how long do you think it takes, roughly to get that past price through?

It depends on the type of customer that we have. We have escalator customers that, for example, in the rigid side of the business, I think it's like 65%. That usually is within 90 days. There can be some exceptions. But usually it's within 90 days. Some are on -- few of them are a monthly, fewer is longer than that. But it's typically within 90 days.

On the customers that we put price increases through, that typically is within, I would say, within 60 days, because we typically follow the market. So it marries up closer to the increases in resin in the flow-through of inventory, typically.

And then there are some customers that it can be as much as a year, that they have fixed characteristics for a year, then you negotiate that after a year. And that's a much smaller percentage of our total business, maybe 10 to 15% of our business. Things like housewares would be an example of that. Injection drink cups have those characteristics. But that would be -- some of the retail products.

Right. And then you have the fourth category which would be transaction bid business that we bid daily on the internet. And, obviously, that has a very short fuse. So that doesn't, in terms of price and a cross-correlation to the resin.

Got it. Thank you. And one question about the Pliant deal. Do you have any estimates kind of around the IMPACT, the EBITDA of the intercompany services agreement?

We expect the EBITDA to contributed business and the inter-company agree to basically wash, very close to wash.

It should be similar offsetting.

Got it. Okay. That's it. Thank you.

Thank you.

Your next question comes from [Jack Wagner] of MJX.

Yes. Good morning. You mentioned earlier that the decline in the selling prices was mostly due to a lower resin pricing. Do you see any pressure from your competitors? And was there any discounting of the products resulting in the lower selling prices?

Jack, this is Ira. The answer's yes. We always have competitor pressures inside the marketplace. But certainly in a slower economy, when people are running at reduced rates, they're going to lower prices to try to fill their shops. And Berry's no exception. So there's additional pricing pressure in the market today due to the slow economy and which is reflected inside our earnings.

Now, the 11% decline in selling prices, how much would you say was attributable to competition and how much due to lower resin pricing?

11% was mainly due to lower resin prices. That's just simply -- we are past the decreases that resulted in an 11% decline. It's the remaining setting there which still have a little bit of pressure coming in from the competitors.

Well, they deal -- actually, the 11% will include --

I think it's -- I think the answer is it's impossible, really, to distinguish between the two, because, as Ira mentioned, the transactional business, how do you distinguish when prices are down, how do you distinguish whether or not that price is driven by resin or competition? I think it becomes you're -- there's some guesswork involved if you're trying to distinguish that, I think.

Right. I think that's an answer. And maybe I have misled you a little bit there, Jack. But again, it's just not a mechanical past due resin. But when resin's falling, coupled with the market pressures I spoke about, that's what's driving that 11%. And so as Mark spoke, maybe it's inseparable to say which one's driving the price down.

Okay.

And we're doing the same thing, I'll just tell you, we're getting the same thing with our vendors. Outside of resin, we do exactly the same thing. I mean, we've seen benefit of other -- I think I mentioned this, of non-resin raw materials as well in freight and other areas, that happens because we focus on it and achieve price decreases.

Regarding the Pliant transaction, did the transfer of the business, the stretch film business, require any approval from your lenders?

I'm sorry, what was the --

The question was --

No, no. Did we require approval? No, we do not.

Do not require approval.

Did not require approval?

We did not.

And the 20 to 25% of common stock, does that go to the lenders as collateral?

I don't know the answer to that. The answer is we think so, but not 100% certain.

Okay. All right. Thank you.

The next question comes from Jeff Harlib of Barclays.

Hi, guys. Just a few follow-ups.

Hi.

The $3.4 million of [OpEx] for cost reductions and synergies, what's left there that hasn't been implemented? Is it IT? And when should that be completed?

On the $1.5 million of cost reductions, that's basically implemented. It's just we didn't get the full benefit in the last quarter. So if it was implemented mid-quarter, you only got half the benefit.

They're [reducing] communications expenses and there's a number of little projects like that.

On the synergy side, it's mostly IT conversions that we're in the process of. Again, there's a handful of other things in there, but it's mainly that along with another cost reduction initiative, a large cost reduction initiative in our operations area.

Okay. And when was that put in place?

It's not yet implemented. It's in the process of being

The bottom line is there's some additional projects out there. We just can't disclose them at this point.

Yes. But by the end of the calendar year is what I would say (inaudible).

Okay. And, Ira, just in the flexible and tapes and coatings, with the revenue declines, are you -- how's your plant operating rates? And it looks like you've certainly adjusted the capacity. But is there more that needs to be done to reduce fixed costs there with the lower volume?

I think, Jeff, I could say that -- well, first of all, we are always looking to make sure we match up our manufacturer with our orders. But I think I can say, for the most part, is we're pretty well matched up. We don't have major plans in that particular area. So we're -- right now we are winning business and have orders, as I spoke, inside our pipeline of new products. We have a nice robust pipeline. So we certainly, in the face of business specialty, we need the construction, the new housing starts, to improve. And until they do in a dramatic fashion, we're going to be light on the revenue side there.

Okay. And then just lastly, is the stretch film business pretty separate from Berry's other businesses, from a manufacturing-marketing point of view and splitting it off, require costs or transitions?

From our factories that produce the stretch products, they are mainly in the stretch film business and they do have some other products that are in there that we will have to separate. And we do have a portion of our sales force that are dedicated to selling the stretch products. So I can say, for the most part, this is one of the easier businesses for us to be able to carve out of Berry. There are always difficulties in some areas due to interactions with other products or other groups. But this one here is, I think I can say mainly self-contained and easier for us to handle.

Great. Thank you.

(Operator instructions) The next question comes from Tim Burns of Cranial Capital.

Hi. Thanks. Good morning, Ira, Jim, Mark.

Good morning, Jim.

Good morning.

I just had kind of more of an operational question for you that I think is probably where you guys are really focused. But the t-form franchise, you mentioned $200 million invested in, that's a pretty big sum for that business. And I guess the head start is pretty significant, although you do compete with a lot of other folks. [Light weighting] has been the rage. So it's kind of fit right into what you do. Is that fair?

That is fair, yes.

Okay. Also, if you look out there at people who want to get into the business of drink cups or grow into other facets of the business where you could use this technology, the number of vendors out there really aren't that prevalent. In fact, some of the jokes in the industry are that vendors are really just outsourcing of Berry RD&E on a confidential basis. So it might make it difficult for others to compete.

But how good do you feel about the new market applications that you've talked about. I mean, is there a target size? I mean, could this be another $400, $500 million business that you guys do very, very well?

The market that we're moving towards are equivalent or, in some cases, even larger, than the white drink cup market that we participate in currently with our t-form cups. So this technology is going to be applicable and appropriate for other product lines and other markets, again, that are sister-type markets to the drink cups. I don't want to go too much further in detail there, because, obviously, those are competitive advantages to Berry on where we're turning our guns and what we're going to do. But I can leave it with our investors that we're encouraged, our pipeline is robust, and our investment in the expansion of Evansville and other plants that we have on the table continue to drive growth inside this marketplace for us.

Got you. And then I guess the follow-up question I had is, you've bought a lot of businesses, a lot of them are not thermoforming. They're not as far a field as your stretch film business or tape and coated products, which, personally, I wouldn't mind seeing going bye-bye.

But in terms of [blow] modeling, injection molding, things of that nature, are there breakthroughs there that you're kind of opining, given the ownership period now is 4 or 5, 6, 7 years, and, I mean, we all know you know how to burn resin and turn it into green. Is there more beyond the teacup franchise?

These are all very good questions, Tim. First of all, I want to state we're very proud of our tapes and coated products division and have not lost any interest regarding that. The fact that housing starts are down to 340 or 370,000 starts, that's something that nobody could have predicted and they can't do anything about. But we're very pleased that we're in that marketplace.

But saying that, our injection business and our blow business, I mean our pipelines are the deepest and the most robust that we've ever seen in those areas. Our technologies and, keep in mind, the major advantage that Berry has on a global basis of the large size machines and molds and the technologies associated thereof with automation and robotics that puts us in a class of our own in that area. And I can tell you that our customers are very large customers that are out there, are highly interested in continuing to develop product. So with our injection technology and we are upgrading our blow molding technology and we purchased [Cap] then when we purchased [Kerr], which both had major bottle operations, and we were doing the same thing there we've done in Covalence. We've learned the business, understood what we needed, and now we're moving them to platforms that offer our customers higher yield and lower costs and lighter weight parts, and are very consistent with the pattern, as you've seen Berry, for the last 20 years do.

We like to take over a market. We like to understand the market. And then we like to come in and capitalize it with the best equipment that puts a barrier of entry to most of our competitors and provides the highest quality and the lowest cost parts to our customers. So we've done this in nearly every marketplace that we're in, and we're continuing to do that in the injection, we're continuing it with blow and we're doing it inside the flex business, as we're sitting here, and the tapes business.

Got you. So you're pretty comfortable that there's a lot of value and potential growth coming from these businesses that are, let's be honest, hidden underneath big segment reporting names? Just don't -- I just didn't want to forget about them and I kind of thought you could bring some value to them.

Yes, you bet you. I can promise you, they're alive and well and growing.

Great. All right. Ira, Jim, Mark, thanks very much.

Thanks, Tim.

(Operator instructions) One moment, please.

Operator, we'll take, if there's any more questions, we'll take one more question.

We're showing no further questions at this time.

Okay. Good.

Okay. Well, we, again, we appreciate each of you attending and we certainly appreciate the support of Berry and are very pleased to have the earnings that we reported on this quarter here. Thank you for joining us this morning.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.