Berry Global Group Inc (BERY) 2009 Q4 法說會逐字稿

Welcome to the Berry Plastics earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to hand the conference over to your host, Mr. Mark Miles. Sir, you may begin.

Thank you very much. Good morning, everyone, and welcome to Berry Plastics earnings conference call.

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 include statements concerning 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.

With me today, I have Ira Boots, our Chairman and CEO, Jeff Thompson our General Counsel, and [Jim Till] from our finance group. Jim Kratochvil, our CFO, sends his apologies, as he is unfortunately out ill today. And with that, I will turn it over to Mr. Ira Boots.

Thank you, Mark. Thank you for joining us today for the Berry Plastics fourth quarter 2009 earnings call. Throughout this call, we will refer to the fourth fiscal quarter as the September quarter.

Berry is pleased to report improved results for the company during the quarter, which marks the fourth quarter of continuous base-adjusted EBITDA growth from the prior year quarters. During the September quarter, the sales volume dynamics influencing Berry's financial performance were somewhat improved from the trends seen in earlier quarters. While the flexible business volume continued to lag compared to the prior year quarter, volume characteristics in the rigid side of the business were more robust, with solid growth reported in containers, cups, and bottles.

Customer selling prices were lower as compared to the prior year quarter, mainly due to changes in the base price of commodity resins from year-to-year. The September quarter did see the impact of higher resin costs from the June quarter of 2009 resulting in a negative lag in the recovery of material cost to selling prices for the first time this year. The company is continuing to receive a positive benefit 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 volume and resin market dynamics, resulting in an overall positive quarter for the company.

Now I will report the highlights from the quarter. Berry Plastic sales were $795 million for the quarter, a decrease of 18% from the $966 million of sales reported in the September quarter of 2008. These results include an overall decline in price adjusted volume of 1%. Although increased from the June quarter, selling prices decreased 17% from the September 2008 quarter. Adjusted EBITDA, excluding unrealized synergies and cost reductions, was $129 million, an improvement of $9 million from the prior year quarter. Adjusted EBITDA, including unrealized synergies and pro forma cost reductions for the September quarter was $132 million, which was unchanged from the prior year quarter, after considering the pro forma effect of 2009 cost reductions and unrealized synergies.

Specific detail on periodic changes to net sales and adjusted EBITDA will be provided in the financial review.

Overall, company sales volumes remain mixed, with substantial improvement in the rigid side of the business with growth in thermoform cups, containers, bottles, and vials, mainly offsetting the continued softness in the flexible side of the business and virtually all construction-related product categories.

Cost reduction programs implemented early in the year, combined with realized synergies, continue to drive improvements in the business. As a reminder, some highlights of these programs include a reduction of 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 usage throughout the system.

Berry is continuing to make progress on major capital improvement projects earlier -- announced earlier in the year. The thermoforming expansion in Evansville is on track for completion in the March quarter of 2010. Other large capital investments in rigid closed top, flexible films, tapes, and coated products, are all in various stages of completion, with correlating positive impact to earnings expected throughout 2010.

Company liquidity continued to remain strong throughout the quarter with continuing gains from both operations and working capital.

On the business development front, Berry is very excited about our current opportunity to acquire Pliant Corporation. We believe this will be a solid investment for the company, with assets and products that strongly complement our existing flexible films business. The Pliant business will be run as an operating division within Berry and is expected to close shortly. Financing for the transaction was completed in mid-November with moneys held in escrow until the acquisition is completed.

Further news on the acquisition front is our announced intention to acquire 100% of the common stock of Superfos Packaging, Inc., which is a wholly owned subsidiary of Superfos a/s located in Taastrup, Denmark. This business is a very high-quality company with the primary focus on rigid packaging that is highly complementary to the products at our rigid open top division.

With mixed emotions, I am announcing that our Chief Operating Officer, [Brett Behler], has indicated his intention to retire after 24 years of service, effective at the end of this year. Brett has agreed to work with Berry in a consulting role for two years. We appreciate everything Brett has done for Berry Plastics and wish him a happy retirement.

In summary, Berry recorded a very solid performance during the September quarter. Volume improved in the rigid businesses. The unfavorable relationship of customer selling prices and raw material cost was mitigated by aggressive cost reduction initiatives and synergy realization. The diversity of Berry Plastics products and markets has continued to prove resilient during the continued difficult economic cycle.

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

Thank you, Ira. I would like to begin by reviewing key September quarter 2009 financial statistics. As Ira mentioned previously, total net sales for the quarter were $795 million compared to $966 million of net sales for the September quarter of 2008, a reduction of $171 million. Decreased selling prices of approximately $161 million and a reduction in base volume of approximately $8 million accounted for most of the change.

As Ira mentioned, adjusted EBITDA, excluding unrealized synergies and pro forma cost reductions was $129 million for the quarter, reflecting an improvement from the $120 million in the prior year quarter.

The following comparisons will focus on major components of this year-on-year quarter EBITDA change of $9 million, which includes, one, higher rigid volume, mainly offset by continued soft flexible volume resulting in a $1 million decrease in EBITDA. Two, the impact of selling prices and raw material costs resulted in an unfavorable timing lag of $6 million. And, three, a $16 million improvement in operations and G&A expenses.

The rigid side of the business enjoyed net price adjusted volume growth of 6%, led by continued strong sales of thermoform cups, containers, bottles, and prescription vials. This was partially offset by softer volumes in 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 an improvement of approximately $6 million.

Both resin prices and customer selling prices were lower when compared to the prior year quarter. These price changes yielded a net $6 million decrease in EBITDA. Operations in SG&A improved by approximately $6 million for the quarter.

In the flexible business, adjusted EBITDA improved approximately $3 million, overcoming approximately $7 million of negative EBITDA impact from a 9% decline in price adjusted sales volumes. The largest volume decline came from our pipe corrosion protection business, which is a transactional business.

Other building and construction-related products were also relatively soft. Within the flexible business, the flexible films division realized a $3 million decrease in EBITDA due to the relationship of selling prices to raw materials. But the tapes and coatings division reported approximately $3 million of EBITDA improvement due to the relationship of selling prices and raw material -- raw materials during the quarter.

Operations improved by approximately $6 million during the quarter, compared to the prior quarter, despite the low operating rates in some of the businesses. SG&A improved approximately $4 million as well, due to cost-cutting efforts.

A real bright spot for the quarter and the entire fiscal year has been the trend of improved liquidity generated from operating activities. This includes a return of cash from working capital and is a result of both lower resin prices and management focus. Overall the company generated over $440 million in cash provided from operations in the fiscal year.

As Ira mentioned earlier, we are very pleased with the progress we have made on the acquisition front. We expect to close on the Pliant transaction very shortly, using the proceeds from the $620 million of financing obtained through a notes offering which was completed last month. The Superfos transaction is expected to close early next year and be financed with the combination of cash on hand and the proceeds from a $100 million expansion of our existing revolving facility which will close shortly after the Pliant transaction.

In addition to approximately $10 million of cash on hand, the company had unused borrowing capacity at year end of approximately $279 million under the company's revolving line of credit.

Capital spending for the quarter was approximately $50 million, bringing the year-to-date spending up to $194 million, which was very close to our target for the year. As a reminder, the company has no material financial maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $20 million per year and our first material debt maturity, our revolver, does not incur until 2013.

This concludes the financial review of the fourth quarter of 2009. And at this time, I would like to turn it over to the operator to entertain questions from the participants.

Thank you. (Operator Instructions) First question comes from Bruce Klein from Credit Suisse.

Hi. Good morning, guys.

Hi, Bruce.

Good morning, Bruce.

Hey. What -- I caught the -- I'm not sure I caught the product price-raw material relationship. Was it a $6 million impact? And is it possible you could break that out also sequentially as well as year-over-year? Is that possible?

I don't have sequential with me, Bruce. But I can -- the $6 million is correct. It was unfavorable by $6 million for the quarter over the prior year quarter.

Okay.

Do you want -- I've got it broken out between rigid and flex as well if you want that.

Sure, that'd be helpful.

Okay. Rigid was -- hold on. I had it right in front of me. Rigid was a $6 million decrease and flex was a push.

Okay. And then what -- maybe just -- it looks like the flex or the old covalence business, looked like it jumped up in June quarter and then September was also better than the prior I think four or five quarters on an EBITDA basis. Maybe you or Ira could just touch on, do you think that's sustainable improvement? Because I suspect the top line hasn't done much in those businesses. Is that an accurate way to think of it? Or is there even any maybe one-time benefits that are going to be absent in future quarters on those businesses? Because I think it's the second quarter in a row which sort of took a step change up. Maybe you can comment on that.

Yes. I mean, the flexible business has improved quarter-over-quarter, Bruce. And it did again this quarter by $3 million over the prior year quarter, and it has been, as you said, not so much volume driven, but cost-reduction driven. And we've continued to invest capital in that business, as we -- I think we've stated before, Tyco had not invested in that business. And so we've reduced cost and we've made capital investments that are showing on the bottom line. The first part of when we merged, we stabilized the business and made decisions about where did we want to invest capital. And we started that process and are enjoying the benefits of those investments in the flexible business.

To the extent volume does come back in that business, we've got -- we've certainly got upside potential as volume recovers.

Bruce, this is Ira. This is Ira. And on a -- we have been notified from one of the largest customers that we have in this particular area that we are going to lose some business in the trash bag area of this particular division, flex side division. It's a very low margin portion of the business, but a relatively high amount of net sales. There's -- there are some changing of the business. Some of our other portions of the business are picking up a little bit. But we're definitely going to see a negative hit on our net sales on our trash bag sales inside the flex division and it will cause some amount of deterioration on the EBITDA, the earnings, as well.

Okay. What was the -- what -- why was the loss? It was just competitive bidding or do they not like something or what? What happened there?

It was competitive bidding along with we had some quality issues in regards to some of the seams on the trash bags.

And lastly, maybe, Ira, just touch on Pliant, what you think you could do, and maybe summarize it in one or two bullet points in terms of what you think is the opportunity, what you think you could do different than Pliant was doing before. Is there anything obvious that you see you can do differently and why you think you could do better than it was running prior?

Well, adding the scale of Pliant's purchasing along with Berry's, again, add separation to Berry inside the field of resin buying, and that's going to take us up to about a 2.7 billion pound purchase and, obviously, that's a very world-class scale. So that's one of the things that helps us. The second of all, for the first time, we're really picking up food and beverage packaging that on the flex side, our current flexible business, mostly in commodities, would be in films, trash bags, and those type of products. Pliant has a heavy concentration and a very extensive product offering in the food and beverage side, and we're very excited about that. When you take Berry's current customer base of 13,000-plus and expose them to the Pliant offerings, we think that there's going to be some nice synergies coming on the net sales side.

Okay. Great. I'll pass it on. Thanks, guys.

Bruce, and to the field before you leave here, Mark had a slight misstatement when he was reading. I just want to make sure that we have this clarified. Overall the company generated over $414 million in cash provided from operations in the fiscal year. Mark had stated $440 million in cash. So I just want to make sure that that's corrected. It's over $414 million in cash.

Got it. Four-one-four.

Thank you.

Thank you.

Our next question comes from Jeff Harlib from Barclays Capital.

Hi. Good morning.

Good morning, Jeff.

Ira, can you talk a little bit about the Pliant plans in terms of their state and whether significant CapEx will be needed? What kind of condition are they in? And maybe also talk about the synergies, how far along you are in the planning there and what we should be looking for with savings as well as cash restructuring, CapEx, et cetera?

The -- well, the planning on the savings, we're not ready to disclose that in, certainly, in totality at this point. I can certainly speak about it in more general terms. With a bankruptcy-type sale, the due diligence process is limited much more sooner to what a public corporation would be. So we're not going to be able to speak within the depth of knowledge that we would have if this would have been an auction or a private transaction.

But, stating the above, Pliant's equipment is reported from them and in decent or above-average condition. I think in most cases you wouldn't call it state of the art. But I think we're looking forward to some solid equipment inside their plants. Their plants appear to be very well managed. We're encouraged by the personnel that we have met, [Dave Corry] and his team are certainly very quality individuals and they're going to fit well inside the Berry system.

We think that the -- our first capital that will be infused will be in business expansion areas more than in fixer-up-type categories. And that expansion capital should allow for us to be able to secure some additional contracts and some additional business.

So that's kind of where we're looking at at this point. Mark may have some numbers that he wants to disclose here, but -- Mark, you want to speak about on the security side?

Yes, sure. Yes, sure. Jeff, on the capital side, we've laid out a current plan of $215 million, which would include Pliant for 2010. Of that $215 million, we've earmarked approximately $29 million for Pliant and $7 million for synergy CapEx. Obviously, just as any year, past year, as the year progresses, those numbers could shuffle around if needs come up throughout the year. But that's our current plan.

Okay. That's helpful. And, Ira, just the improvement in the rigid volumes really moved up pretty significantly from where they have been. How much of that is market verse new products? And also what can you say about volumes heading into the December quarter, given we're in -- just two months into it?

Right. Again, as you know, we're very, very tight on any future-type predictions or comments, so.

Right.

But speaking -- I can speak on the quarter that we are reporting on. We continue to have advantage inside the cup arena with our thermoforming process. We fully recognize this. Our customers recognize this. We have spent a lot of money in this particular area to, I don't know, enhance our abilities and supply. And our customers have been fortunate enough to be able to award us some of their contracts and we're fortunate enough to have received them.

So anyway, so our business in the thermoform cup side is very solid. Our technology continues to be world class and world leading and the customer base recognizes this and continues to want to advantage themselves with our products that are made with this type of process.

Okay. And then just lastly, on the resin verse price, you see resin continuing to pick up a little bit. And how are the price increases moving through? You see another quarter of some headwinds there?

Well, we have a lag on the price increases that we received during the June quarter, as we're going through this quarter here. But nothing has changed in the basic dynamics of our business to be able to put through resin increases. They just have to go through the discipline of our contracts that are the matrices that we base our pricing off of. So I don't think there's any basic changes. The prices went up in the June quarter and we felt the negative effect of that in the September quarter. And though there are price lags, but, again, our contracts historically have always been able to pick up that slack. And I see that -- no difference right now.

Okay. Thank you.

Our next question comes from Roger Spitz from Banc of America.

Thanks. Good morning. On Superfos Packaging, can you give us a sense of EBITDA of the business that you bought there? Or are buying.

Yes, we -- hey, Roger. Good morning. We haven't -- this is Mark. We haven't disclosed the actual EBITDA. I mean, what I would tell you is it's fairly consistent with our rigid business. The margins are similar to our rigid business.

That'd be 18% to 19% EBITDA margins?

Yes, they're in that range.

[Their] business.

Yes, in that range.

Yes.

It's more inline with our rigid business in terms of margins than the flexible business.

And any preliminary views, any material synergies, that would come from that business?

The largest advantages that we have, we'll be able to enhance our service levels to customers that want smaller orders, Roger. Our equipment, as you know, we -- Berry owns the large percentage of the largest molding equipment on a global basis when it comes to containers. And container manufacturing in Superfos has always taken a different approach. They take a European approach. They manufacture their containers on very small molds, very small machines which are at depth and useful for people that want small orders or high changeovers. And that's going to give us a little bit of a lift in the low -- in that low volume end of the market that we currently can't do with our large equipment. So that's the largest pickup that we're going to have.

And then the next one would be their IP products. They have some very, very nice patented products that obviously we can't manufacture due to the IP rights that's associated and that we're going to find very useful with our customer base to take their products. They're very good products. It's a very well-ran company, very nice equipment, and we're going to be able to take that on a little larger scale with Berry. But it's a smaller acquisition by nature.

Okay. And is it all in, their machines and business is all in Europe or essentially all in Europe right now?

No. The entity that we are buying, the -- I want to make sure I get the right name -- Superfos, Inc.

Packaging. Superfos Packaging, Inc.

Superfos Packaging, Inc., is located here in the United States. It's a one-plant operation in the US.

We're not buying any of the European assets from the parent company, Superfos.

I see. Okay. Thank you very much.

Our next question comes from James Daly from Deutsch Bank.

Good morning, guys. Most of my questions have been answered. Just if you could, Ira, just give us some idea of, as you're looking at Pliant here, how are you seeing their contracts being set up as far as resin pass through in comparison to how Berry is set up right now in either the rigid or flexible business?

We're going to maintain the programs that they're on, certainly upfront, James. They seem to be advantaged in some areas. They have a little quicker turn, a little less lag time than what Berry historically has done. And I think that's the nature of the flex side of the business more than the rigid side. Rigid side tends to have longer terms and a little more lag than what we do inside our flex. And, of course, they're mainly a flex company. So they have little bit shorter turns there. We'll maintain that.

In terms of the, James, in terms of the percentages, they're about 60% with -- that have a -- 60% of their business has a contractual pass-through mechanism and about 40% is transactional, market based.

And is there kind of a split between certain products that have more transactional versus contractual?

Yes is the answer. Yes, they're -- Ira talked about their food packaging business is more contractual pass through. And businesses like stretch would be more transactional.

Okay. Great. Thanks, guys.

(Operator Instructions) Our next question comes from Richard Close from Jefferies.

Yes. Hey, guys. Good morning.

Hi, Richard.

Morning.

Can you guys talk a little bit about what you're hearing from your customers on the volume side of things? Are they anticipating any kind of a pickup here going into to 2010? Or what are they saying?

Again, Richard, we don't speak too much with future-based [governance]. But I can tell you from this quarter here, and we don't see this quarter to be an exception at this time, we think this is more of the rule, people continue to be very conservative. You're not seeing the product launches that historically we have seen in the past. People continue to -- are in the [desunking] mold, more wait and see. And I'm sure this shopping period that we're in right now in November and December, will set some of the trends for what we're going to see in 2010, how free people are with their spending.

But, obviously, the food side of the business, the -- our medical course of the business, they are less volatile. People are still eating, they're still taking their medicine, they're still taking the trash out. I mean, they'll -- those businesses remain very robust, if you can say, in this type of environment. But our construction courses of our business, housing starts are still -- is still lagging and very consistent with what you see housing starts that are lagging. And we don't see any type of a pickup in a material basis as we're sitting here today.

Okay. Great. And then did you guys see higher purchase prices for resins then in the fourth quarter as well, consistent with the industry?

Yes.

Okay. Great. And then, lastly, do you think that the Pliant acquisition, do you think that has the chance to improve pricing power within the stress film -- stretch films industry at all?

No.

Okay.

I think that there's still plenty of suppliers inside that particular industry and I don't think the consolidation of Berry and Pliant will be material in any way of moving prices.

All right. Great. Thanks, guys.

Our next question comes from Bob Franklin from Prudential Financial.

Hi. I think you mentioned that there are some quality issues with the trash bags. Is that right?

Yes.

That's the first time I recall you actually having quality issues. What was going on there? And was it localized?

They would still be considered very, very low in terms of numbers. We're speaking where we would be shipping way in the millions, 10, 20, 30 million bags and have one or two [side seal] complaints on it. But still, the question was what caused the change of business. And it was a combination of the competitive pricing along with the fact that we did have some quality complaints. It certainly -- they certainly were very minimal in terms of numbers. But, obviously, they were very [arousing] in terms of the customer having to respond to the complaints and for us to try to fix the problems to be able to get zero defects on the trash bags.

Okay. On the stronger demand where you've had it, do you know if that's an expanding market or are you taking market share from others?

Which? The expanding of which, the trash bags?

No. No, I'm switching topics. The rigid side. You said you saw some stronger demand, I think the thermoform cups.

I think it -- yes, I think you almost have to look at it market-by-market and segment-by-segment. I mean, I think in some areas we're definitely gaining market share and in others we're probably not. But so thermoform drink cups would be a good example where I think we are gaining share from other substrates.

Right. We continue to gain share on our rigid open top containers and our thermoform drink cups. We have other areas, as Mark spoke about, that we have given up or yielded some as well. But on overall, on our rigid open top side of the business, it would be a very fair opinion to say we're gaining market share.

Okay. But is it over, as you said substrates or is it over other manufacturers who are trying to do the same thing?

Both.

Okay.

We have been able to capture some business from paper, taking them to plastic. We have been able to take some out of styrofoam into our rigid plastics. And we've been able to take some from polystyrene, which is a rigid plastic, over polypropylene, which is another rigid plastic. So the answer would be all of the above.

Okay. And what's the size of the Holdco loan now?

Well, it's around 80 --

Okay. I think that's what you gave on your last presentation.

Yes.

I wanted to make sure I had that right.

Yes, 80 million. It's actually in the 10K.

And in which case I apologize for missing it, so.

No, no, it's okay. There's a lot of stuff in there.

No problem.

Okay. Thank you.

Thank you.

I'm showing no further questions at this time.

Great. As always, we appreciate our investors and the analysts and thank you very much for attending today (inaudible).

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.