Berry Global Group Inc (BERY) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Berry Plastics earnings call. At this time, all lines are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this program is being recorded.

I would now like to introduce Mr. Mark Miles. Mr. Miles, you may begin.

Thank you. Good morning and welcome to Berry Plastics earnings conference call. With me today I have Ira Boots, our Chairman and CEO, and Jim Kratochvil, our CFO. During this call, we will be discussing some non-GAAP financial measures including 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 be available on the Company's web site.

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, the 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 results of integration of acquired business. Although management believes it has the business strategies 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.

Now I'd like to turn it over to Mr. Ira Boots.

Good morning. It's our privilege, and we thank you, for joining us today for the Berry Plastics first quarter 2010 earnings call. Throughout that call, we will refer to the first fiscal quarter as the December quarter. Berry is pleased to report improved results for the Company during the quarter which continues the five quarter trend of base adjusted EBITDA growth from the prior year quarter. During the December quarter, Berry saw a rebound of sales volume compared to the prior year in most of our divisions. Volume characteristics from the business were robust with solid growth reported in containers, cups, bottles and institutional can liners. Certain product categories of construction-related products still remain soft. Customer selling prices were lower as compared to the prior year quarter, mainly due to the timing of resin price changes and market resistance to the pass through of higher resin prices for products such as retail trash bags and institutional can liners. The volume growth and cost reductions more than offset selling price and resin market dynamics resulting in an overall positive quarter for the Company.

Now I will report the highlights from the quarter. Berry Plastics sales were $880 million for the quarter, an increase of 2% from the $865 million of sales recorded in the December quarter of 2008. These results included an overall increase in price-adjusted volume of 14%. And acquisition volume from (inaudible) of 8%. Although increase from the September quarter, selling prices decreased 20% from the December 2008 quarter. Adjusted EBITDA excluding unrealized savings, programs, and acquisition EBITDA was $113 million, an improvement of $2 million from the prior year quarter. Adjusted EBITDA including unrealized savings programs and acquisition EBITDA for the December quarter was $128 million which was relatively flat with the prior year quarter of $149 million. Specific detail on periodic changes to net sales and adjusted EBITDA will be provided in the financial review.

On the investment front, Berry is continuing to make progress on major capital improvement projects announced earlier in the year. The building which houses the thermal forming expansion in Evansville is now complete and new lines are currently being installed in Viva. Completion of the project is on track for the March quarter of 2010. Berry's goal is to stay at the leading edge of thermal forming technology to effectively compete with other manufacturers who are engaged in the manufacturing of polypropylene drink cups. Company liquidity remains strong throughout the quarter with continued gains from working capital. Seasonally strong sales volume combined with the impact of higher resin prices will become a use of cash to fund higher working capital levels as we progress through the March quarter.

On the acquisition front, Berry is pleased with our decisions to acquire both Pliant Corporation and Superfos. Initially the Company had planned to add the Pliant business as a new division of the Company. We have since decided that a better structure combines most of Berry's former flexible film business with Pliant's business to form a new division called Specialty Films. Pliant's medical related products will be relocated into our Tapes and Coatings division as well as retail products from the former Flexible Films division. The Superfos facility located in Cumberland, Maryland will be transitioned into Berry's Rigid Open Top division. The integration of both companies continues to progress smoothly. The organizational structure is now complete. Many of the identified synergy projects are in the process of being implemented, and Berry has already initiated the process of converting both companies to our platform IT systems.

The largest head wind facing Berry at this time is the continued inflationary trend of plastic resin. The ability of US resin producers to swing resin production to light feeds from cheaper natural gas has made domestic production of certain resins relatively low priced on the world market. This production cost differential, combined with Middle Eastern supply disruptions has resulted in very high export demand raising domestic prices. While higher material costs are putting pressure on all of our resin-driven businesses, continued capacity in the specialty film side of the business has created a timing lag on recovery of resin increases and on contract customers, and limiting the ability to fully recover these increases in the short term from transaction-based customers.

In summary, Berry recorded very solid performance during the December quarter driven primarily by higher sales volumes. The unfavorable relationship of customer selling prices at raw material costs offset a portion of this gain. Resin prices are continuing to increase in the March quarter. While still early in the process, good progress has been made to integrate both Pliant and Superfos.

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

Thank you, Ira. I would line to begin by reviewing key December quarter 2009 financial statistics. As Ira mentioned previously, total net sales for the quarter were $880 million compared to $865 million in net sales for the December quarter of 2008, an increase of $15 million. Higher sales volume of $120 million and acquisition volume of $71 million was partially offset by decreased selling prices of approximately $176 million. As Ira mentioned, adjusted EBITDA excluding unrealized savings programs and Pliant EBITDA was $113 million for the quarter reflecting a modest improvement from the $111 million in the prior year quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA change of $2 million which includes, first, both higher rigid and flexible price adjusted sales volume resulting in a $23 million increase in EBITDA. Second, the impact of lower selling prices and raw material costs resulting in an unfavorable timing lag of $15 million. And third, a $6 million decrease in operational performance because of the timing of plant holiday shutdowns and higher bonus-driven G&A expenses.

The Rigid side of the business enjoyed net price-adjusted volume growth of 21% led by continued strong sales of thermal form cups, containers, bottles, overcaps and prescription vials This was partially offset by softer volumes in injection drink cups and tubes. EBITDA for this business improved approximately $5 million for the quarter. The EBITDA impact of the increased price adjusted sales volume in the Rigid business was an improvement of approximately $24 million. Both resin prices and customer selling prices were lower compared to the prior year quarter. These price changes yielded a net $10 million decrease in EBITDA. Operations in SG&A decreased EBITDA by approximately $9 million for the quarter primarily due to the timing of holidays, inefficiencies in our two manufacturing operations, and higher bonus expense.

In the Flexible business, adjusted EBITDA declined approximately $3 million overall. The flexible films division improved volume by almost 10% due to strong sales in institutional can liners, stretch wrap and sheeting. This resulted in an EBITDA contribution of $2 million. The Tapes and Coatings division realized a decline in sales volume of 7% mainly due to softer sales of corrosion protection products which is a transactional business. This softer Tape and Coatings volume resulted in an EBITDA decrease of $3 million. Within the Flexible business, the flexible films division realized a $10 million decrease in EBITDA due to an unfavorable relationship of selling prices to raw materials in product categories such as institutional can liners, where there has been market resistance to accepting higher prices. The Tapes and Coatings division, which does not use plastic resin as the primary raw material., reported approximately $5 million of EBITDA improvement in the relationship of selling prices and raw materials during the quarter. Operations and SG&A approved EBITDA by approximately $3 million during the quarter compared to the prior year quarter, despite the low holiday operating rates in some of the businesses.

A real bright spot for the last several quarters has been the trend of improved liquidity generated from operating activities. This includes return of cash from working capital in the December quarter of $50 million, and has been the result of both lower resin prices and management focus on improvements. This positive trend is not expected to continue into the March quarter as both seasonality and resin prices are again putting pressure on the business as a use of cash.

As Ira mentioned earlier, we are very pleased with the progress on the acquisition front. We closed on both the Pliant and Superfos transaction using the proceeds from the $620 of financing obtained through a notes offering which was completed in November and a portion of the additional $100 million with increased revolver commitments completed in December. In addition to approximately $22 million of cash on hand, the Company had unused borrowing capacity at year end of approximately $292 million under the Company's revolving line of credit. Capital spending for the quarter was approximately $62 million which remained high as we continued funding several large projects throughout the quarter. As a reminder, the Company has no material financial maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $23 million per year, and our first material debt maturity on our revolver does not occur until 2013.

This concludes my financial review of the first quarter of 2010. At this time I would like to turn it over to the Operator to entertain any questions we have from the participants. Operator, if you would open the lines.

Thank you. (Operator Instructions). Our first question comes from Jeff Harlib with Barclays Capital.

Good morning. Again, what was the total year-over-year effect price versus resin for the Company? And if you have it sequentially as well.

Just one second. Year over year, Jeff, it was $15 million unfavorable. Sequentially, we don't typically look at the changes sequentially. We haven't analyzed it sequentially so that's not something I typically look at.

Okay. Can you provide some more detail on the client synergies and other acquisition synergies, the timing of implementation, what kind of run rate do you expect to be at of the $50 million for Pliant and more for some other, as you go through this year?

I would just tell you first of all, the $50 million is correct on Pliant. It is a much smaller number for Superfos. Things are going really well at this point in time. The ones that we have initiated to start with, and have executed on, are relative to material price changes. There are some SG&A type things that we have already begun saving money on. Benefits changes are happening. So there's a lot of things that are in place and in the works. I think more than a majority will be realized this year. Because of the nature of what they are they're not all obviously completed. Certainly things that we look at in terms of optimization of plants and IT system implementations are the longer reaching benefits that we have. But basically we feel good about the progress we're making at this time.

You said most of the savings in place by year end?

No. I said a majority.

Okay. And the cash costs relating to that?

There certainly are some severance costs that are associated with that. And the primary, or I should say the largest cost that we have, things that would be associated with plant optimizations, will not be realized until obviously we make decisions on what we want to do there. There are other type costs, IT implementation costs, for example, which we will be realizing through the year. Mark, any other comments on there?

Okay. Ira, just on some of your comments on pricing and resin passthrough, which of the businesses where it's a little more difficult to get those passthroughs, either on a contract or transaction basis?

First of all, before I go to businesses, we would look at those two areas. Our contractual passthroughs are easier to put through because of the obvious answer, they are contracted. But there's lags associated thereof, and those contracts could range from as short as 30 days and go all the way up to 12 months in term and time. So the lags are going to be different with the contractual side. The transactional side, our ability to put through price increases are depending upon how our competitors view the market and how aggressive they are with their prices. So that side of the business is much more difficult.

Then if you look at it by division, as you're asking, our open top and our closed top areas of our business tend to be, a good portion is contracted in those, and the transactional type businesses in those areas are of a different nature than what we would see more in commodity type areas like canned liners or sheeting or stretch wrap. Those type of film products. So our ability to pass through resin in the film side of the business is not as good as it is on the rigid side of our business.

Paints and Coatings has its own characteristics, as well. Some of the areas, again, are contracted and the passthroughs happen by contract. Other areas are bid type situations that they're not quite as transactional as it is in the film. But our ability right now has been hampered to put through price increases there just simply by the softness of the market in the construction industry.

That's helpful. Last question, have you seen the impact of the business loss in the trash bag business yet?

Very little during this quarter.

Okay. There will be more going forward?

Yes.

Okay. Thank you.

Our next question comes from James Ellie from Deutsche Bank.

Good morning, everyone. Can we talk a little bit more about the volume increase you saw. They were pretty extraordinary in the rigid business. Can you just walk us through a little more detail what's driving that?

Yes. Basically, we continued to be strong in the thermal form cups. Let's take a step back, too, and say that the December quarter a year ago in '08 basically decreased rather dramatically. It was fairly soft. So we continue to see strong results in our containers. We saw strong results in our cups. And then also, as Ira mentioned, on the bottles. We've been saying all along that our bottle business, we've had good quoting activity and that bottles have been fairly strong. We never had a down quarter in thermal form cups, and containers hung in there.

The other thing that we saw, we saw really pretty strong business in our institutional can liners which we also said at the same time we didn't see the prices that we'd like to see in institutional can liners. So we saw strong volume there but still hard to pass that through. We did see some strengthening in our flexible business resulting from things like institutional can liners.

James, this is Ira. We're really seeing a nice effect with our cross selling between divisions and remain encouraged with the products we're bringing on Pliant and Superfos. But the net effects of us being able to sell multiple lines of products to the customer base that Berry has, which as you know is very broad, and that's helped from the volume side.

What was the breakdown of the $15 million of the price lag issue by division, if you have it?

Hold on just a minute. I'll give it to you directionally. Basically, we were ahead on our Tapes and Coatings division, so we benefited. Remember, they don't use a lot of resin in that business. So we have been, let's say, more aggressive on the marketplace there. We've been able to get increases through. In terms of the flex business, we were under water there for the reasons that Ira talked about. A lot of pressure, a lot of market resistance because of the additional capacity that's still out there versus the needs of the market. On the closed up side of the business, we were close to being even. We were a little down. And we were down on the open top side of the business. A lot of that, even in the contractual business, the timing of these increases, propylene went up in the quarter. There was one month where it went up $0.12 and then came back down. That washed through during the quarter. That certainly affected our open top business during the quarter, as well. And some of our closed top business.

That's very helpful. Thanks, guys.

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

Thanks, good morning. Has customer restocking and/or market share changes impacted your volumes as opposed to just underlying and market demand growth?

I think it's an excellent question, Roger, and it's one that Berry's very fortunate. We have extensive information systems and ability to read. We know there's some pipeline fill that occurred during this quarter that was bringing back our customer's inventories from extraordinarily low levels, and we enjoyed some of that. We are watching the sell-through at the cash register at the same time. We know the pipeline fill is greater than the cash register rings. Now how that will be affected as we're moving forward still remains to be unseen.

The 10-Q mentions that Berry paid Apollo Graham $22 million for their pre-bankruptcy investment position in Pliant. Does this represent the amount Apollo and Graham paid for the Pliant second lien bonds, and not related to the purchase of the new equity of Pliant at bankruptcy? And did this fully take our Apollo Graham's full investment in Pliant's bond?

It's Mark. I think I understood your question. They were treated the same as all of the other people in their respective category. So relative to what their cost basis was, I don't have any idea, but that was their share of the investment and security that they owned in Pliant. Does that answer your question?

The way I understood it is pre bankruptcy they basically are buying their bonds. I understand they own a little over 50% of the second liens. Coming out of bankruptcy, of course, they made an investment in the new Pliant equity which is immediately taken out when Berry bought Pliant. I'm assuming this $22 million related to the pre bankruptcy purchase of bonds, did I understand that correctly?

Yes, it's kind of all one and the same. In lieu of taking cash in their bankruptcy plan, they had all chosen the rights offering. So this is their payment. Effectively the same thing.

Okay, great. Thanks very much, guys.

Our next question comes from Richard Clarke from Jefferies & Company.

Good morning, guys. Just a question on acquisitions and how you view potential acquisitions here going forward. Do you see yourselves doing something on the larger side or are we sitting tight here and integrating Pliant at this point?

Richard, we appreciate the question. This is Ira. But, no, I don't speak very much on forward-thinking. Historically, Berry is an inquisitive company. We're a high growth company. That's been our strategy, inclusive all the way up through this quarter here.

Okay. Fair enough. Secondly, I think you guys have talked before about margins on the Pliant type business or the flexible business that you guys have. You said that it could be a lot higher, I think even up to 14% or something like that. How do we get to those type of levels going forward?

I'm going to ask you to restate that, Richard, I want to make sure I'm clear on the questions. I'm happy to take the question.

Sure. I think previously in a prior call you guys had said that you believe that run rate margins for the flexibles business should be a lot higher. Basically how do you get to those higher margins? What types of things need to happen either with you guys or within the industry so that we can realize the higher margins on that business?

One of the areas that we're keenly interested in with Pliant, their product offerings being brought in with Berry, is the combination of their specific products with our offerings as well, such as an in individual serving, microwavable type products. Pliant had film, which is Berry's now, which are microwavable, from freezer to microwave, that fits very well on top of our rigid offerings that we have inside. I think that combination of package is being looked at favorably inside the marketplace, and typically would be more in line with our rigid type margins versus what you may have seen on the film side. So that's one area. Now, how material that is to the Company is up to you to figure those things out. But that's an example of an area we are keenly interested in and we think adding very specific type film products onto Berry's offerings inside the rigid world creates a dynamic that we have not had in the marketplace before, and we're pretty excited about that.

On the other side, on how to improve our margins on commodity base, I think, as you know, Berry has a leading technology processor in most areas, and we continue to improve the technology, the business that we bought from Covalence, and we'll continue to do that with Pliant, to be able to add productivity gains inside those businesses is going to allow them higher margins on their products as we go forward.

And part of that is obviously capital investment. Pliant, for example, has not had the freedom to be able to invest because of their financial situation, and we are evaluating where we can make a difference and improve productivity through capital investment, as well.

Lastly, the scale of Berry's purchasing and our ability to acquire in larger quantities and larger run orders for our vendors is affording us to have benefit when it comes from the cost side, as well, which is going to improve our margin. So I think those are three of the key areas anyway.

Thanks a lot.

Our next question comes from Clark Meade from JPMorgan.

Good morning, guys. The way the business mix has shifted a little bit towards flexible with this Pliant purchase, can you talk a little bit about any updates to your long term leverage or liquidity targets. Has the business mix change changed your strategy on the balance sheet?

We're trying to figure out exactly what you mean by that but I don't think it really has affected our strategy on the balance sheet. Obviously, we're trying to, as much as we can, delever the business. We're continuing the same things we've always done in terms of managing this business. There has been an expansion of our presence in the flexible side, in particular flexible films. But it really doesn't change the way we think about our business and what we need to do here.

I think I would add to that, historically and we continue to be very mindful of the liquidity that is on the balance sheet and the use of our revolver inside the business.

Any sort of update on expectations for working capital if resin costs a little bit higher here?

I alluded to that in the commentary. Last year we had quite a large benefit from working capital all through the year. A portion of that was permanent, a portion of that was not permanent, as we knew. We expect, as resin prices continue to to climb, that that will affect both our inventory and obviously our AR. However, I will tell that you we have done a nice job of keeping our inventories at leaner levels than they had been to run the business, so it has less of an impact than it would have had if we would not have take that action. I don't expect to have to give it all back if resin goes back up. But a portion of it certainly will affect us if resin continues to climb and be at higher levels. And I don't think anybody knows what that's going to be as we go through the year.

We've been able to improve the uses of our working capital with permanent fixes inside the business, as well. When we purchased Covalence, it was very fragmented with our IT business, and their ability to manage the working capital inside their business was limited compared to what Berry has done. We have stepped in, we have put our systems in place, and we have very, very sophisticated systems to be able to forecast our business on a go-forward basis in terms of open orders, in terms of work in process and in terms of inventories required. Those are permanent changes that have improved our working capital inside our business.

Thanks. Very hopeful.

(Operator Instructions)

Are we showing any other questions, Operator?

I am not showing any other questions at this time.

We appreciate everybody's attendance and again, we're very bullish on the performance of Berry during this quarter and feel very good on what's happening. Have a nice day.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.