Berry Global Group Inc (BERY) 2010 Q4 法說會逐字稿

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

I would like to introduce your host for today, Mr. Mark Miles. Sir, please go ahead.

Thank you. Good afternoon, and welcome to Berry Plastics earnings conference call. With me today I have Jon Rich, 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 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 impacts of changing environmental laws, changes in the level of the Company's capital investment, and the results and integration of acquired business.

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

And now I would like to turn it over to Mr. Jon Rich.

Thanks, Mark. Thank you for joining us today for the Berry Plastics fourth quarter 2010 and full-year earnings call. As you know, Berry has a fiscal year that runs through the Saturday closest to September 30. Throughout this call, we will refer to the fourth quarter fiscal year as the September 2010 ending quarter.

This is my first opportunity to participate in a conference call as the CEO of Berry Plastics, and I want to say how excited I am to be a part of the great team here at Berry. For those of you that have followed Berry for some time, you're well aware of the tremendous accomplishments of Ira Boots during his long career and 10-year tenure as CEO of Berry. During that time, Berry grew as a Company from $40 million in sales to over $4 billion. Ira's track record of success is well documented in the financial results the Company has turned in for the past 10 years. But beyond that, Ira's legacy will live on in the communities where we work, and in the memories of everyone at Berry who he touched.

All of us at Berry congratulate Ira on his incredible career, and wish him and his family well in his retirement. For me, I look forward to carrying on his mission of growth at Berry, and look forward to Ira's continued contributions as a member of the Board of Directors.

And now, I'll report the highlights for the quarter. Berry Plastics sales were $1.154 million for the quarter, an increase of 45% from the $794 million of sales reported in the September quarter of 2009. Sales in the quarter were positively impacted by a 1% increase in physical volume. The acquisitions of Pliant and Superfos contributed 34% incrementally to volume on a year-over-year basis. During the September 2010 quarter, Berry realized improved volumes compared to the prior year quarter in most of our businesses, as our customers saw modest recoveries from the recession period of 2009.

Volume increases in general have been better throughout 2010, with growth reported in most product categories. This growth was partially offset by the loss of the Wal-Mart Great Value private label waste bag business, and our decision to exit certain sheeting businesses. The Pliant business, which is operated under Berry since late last year when it emerged from bankruptcy, also enjoyed an increase in sales volumes. The Company experienced some operational challenges during the quarter, primarily in the specialty films business. Unusually high summer heat resulted in higher scrap and manufacturing inefficiencies. These negative costs were partially offset by other cost savings programs, and synergy realization.

Adjusted EBITDA for the September quarter was $161 million, which was a $21 million decrease from the prior year EBITDA of $182 million. Selling prices increased 10% during the quarter compared to the September quarter of 2009, reflecting the partial recovery of higher material costs. Margins continued to be pressured versus last year, due to significant inflation on resin raw materials not offset by price increases or productivity. Specific details on period changes to net sales and adjusted EBITDA will be further detailed by Jim.

2010 has been a challenging year for Berry, as we face the pressure of inflation in the commodity raw materials that we purchase, especially polyethylene, polypropylene, and the other resins that we convert into finished goods. In addition to direct material resin inflation, we have also experienced significantly rising costs for indirect materials, packaging, energy, and freight. As we faced this latest round of inflation, our customers were continuing to see weak consumer demand for their goods, as the effects of the recession stubbornly lingers on. As a result, our customers were seeking price relief from us at the same time we were facing rapid inflation in our costs from our suppliers. This pressure affected all of our businesses, but was more pronounced in our specialty films and tapes, bags, and coating segments.

In the face of this squeeze on our operating margin, Berry intensified its productivity actions, including process improvements, reductions in our labor force, and consolidation of several of our assets. The Company recently announced the rationalization of two facilities, Battleboro, North Carolina, which was primarily a flexible sheeting plant, and Albertville, Alabama, which provided cloth backing to our tapes business. These actions, however, were not sufficient to offset the inflationary pressures that we face. Ultimately, the inflation that we are experiencing in direct materials and indirects will have to be passed on to our customers.

In October, we announced price increases in all divisions, in order to address the inflationary pressure we are experiencing. As we look forward, we anticipate further inflation on the cost of resin and other goods we purchase, and that the rate of inflation will likely accelerate. In the face of this reality, we are working with our customers where we have indexes on resin to reduce the lag on those indexes. Additionally, we will work with customers to create mechanisms to pass through non-resin related cost increases, whose rate of inflation is similar to plastic resin.

On the acquisition front, Berry has fully completed the integration of Superfos, and continues to make good progress towards fully integrating clients. Synergy realization is on track, and to date, many projects have been realized on a run -rate basis. IT conversions are continuing, and should be completed by mid-year.

Our synergy realization program with Pliant is expected to span over a period of three years. A large portion of the capital projects initiated in 2010 are now in place, with the expected benefit to be realized throughout 2011. Capital spending is expected to remain similar to our current rate of investment for the next two quarters, as previously committed projects are completed. Berry expects that the total CapEx level for the full-year calendar year 2011 will be decreased to around $170 million.

As most of you are aware, Berry recently took steps in November to refinance a portion of our second lien notes, extending maturities on the new debt out to 2020. This refinancing has meaningfully extended the maturity horizon of our capital structure. We were very pleased with this successful refinancing, and we highly appreciate the continued support of the investing community in Berry.

In summary, for Q4 2010, improvements in sales volume, higher customer selling prices, and synergy realization, as compared to the prior-year quarter, were offset by increased material prices, and some operational challenges. While resin prices decreased for a brief period, they are again increasing in the latter part of 2010. To counteract these and other raw material cost increases, Berry has implemented both pricing actions, and increased cost reduction programs.

Now I'll turn it over to Jim for more details on the financial results. Jim?

Thanks, Jon. I would like to begin by reviewing key September quarter 2010 financial statistics. As Jon mentioned previously, total net sales for the quarter were $1.154 million, compared to $794 million of net sales for the September quarter of 2009, an increase of $360 million. Higher organic sales volume of $11 million, and acquisition volume of $268 million was further increased by $81 million of higher selling prices. Adjusted EBITDA, excluding pro forma adjustments, was $153 million for the September 2010 quarter, reflecting an increase from the $129 million recorded in the prior-year September quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA change. Acquisition EBITDA contributed approximately $21 million. Strong price adjusted organic sales volume resulted in a $6 million increase in EBITDA. The impact of increased selling prices during the quarter, and even higher raw material costs resulted in an unfavorable $1 million impact to EBITDA. Operational difficulties, driven partially by excessive summer heat, and slightly higher SG&A, resulted in a $2 million decrease in EBITDA.

In the Rigid businesses, adjusted EBITDA increased approximately $14 million overall. This business enjoyed net price adjusted volume growth of 4%, led by thermoformed drink cups, bottles, closures, overcaps, prescription vials, and laminate tubes. The relationship of net selling prices to resin costs resulted in a $6 million EBITDA improvement. Price-adjusted base volume growth contributed approximately $5 million, and acquisition volume added approximately $4 million of EBITDA. Operations, start-up costs, and SG&A increases resulted in a reduction of approximately $1 million of EBITDA for the quarter.

In the specialty films business, adjusted EBITDA increased approximately $15 million overall, including acquisition EBITDA of $17 million. This business recorded an improvement in base volume, led by institutional can liners, stretch wrap, shrink films, and agricultural films. This higher net volume resulted in an EBITDA increase of $1 million. The relationship of net selling prices to resin costs recorded a negative $1 million impact to EBITDA in the September quarter compared to the prior-year quarter. Operational difficulties and SG&A increases resulted in a reduction of approximately $2 million of EBITDA for the quarter.

The tapes, bags, and coatings division, which now includes retail waste bags, recorded decreased EBITDA of $5 million for the September quarter. Decreased sales volume of 12% was primarily due to the loss of private label Wal-Mart waste bag business, and our decision to exit certain sheeting businesses. The relationship of selling prices and raw materials during the quarter resulted in a decline of approximately $6 million. Operations and SG&A improved EBITDA by approximately $1 million during the quarter, compared to the prior year.

As of October 2, 2010, the Company had cash on hand of $148 million, and unused borrowing capacity, $446 million. Working capital requirements improved during the quarter due to the impact of lower cost resin and inventories, partially offset by stronger volumes. As a reminder, the Company has no material financial maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $29 million per year, and our first material debt maturity, our revolver, does not occur until 2013. This concludes my financial review of the fourth quarter of 2010.

At this time, I would like to turn it back to Jon.

Thanks, Jim. As we look back at the recently completed fiscal year, we take pride in the accomplishments that we achieved, including the successful integrations of the Pliant and Superfos acquisitions. At the same time, we continue to face the realities that are confronting us. Our business continues to be impacted by the severe recession that began in late 2008. Demand for many of our products still has not returned to pre-recession levels.

As we look forward, we anticipate an ongoing recovery from the recession, but at a grudgingly slow pace. At the same time, we are now facing rapidly increasing inflation, reminiscent of 2007 and early 2008. In the face of these challenges, Berry will continue to leverage its innovation, and relationships with customers to create the differentiated products that will help our customers grow their business, and by doing so, drive our growth.

In 2011, we will continue to aggressively drive productivity, and focus on free cash flow generation by judiciously controlling our capital expenditures, and generating cash from working capital reductions. Ultimately, I am confident that Berry people will succeed, as they always have. I look forward to leading them in that endeavor.

I thank you for your interest in Berry, and now we're ready to answer your questions.

(Operator Instructions). And our first question comes from the line of Richard Close of Jefferies.

Hi, guys, good afternoon.

Hi, Richard.

Can you talk a little bit more specifically about what you're seeing on resin? I know you saw prices come down your last quarter, and I know prices have started to push higher here, but how much higher are we talking? And then, do you think we're going to continue to see this over the next three to six months out here?

You know, look, I will just reference some -- the commonly quoted indexes of CMAI and others, right? I think they are calling at least for the next three months for resin prices, especially polyethylene and polypropylene, to go up in price somewhere between 10% and 20%. Now, whether that actually happens or not, we won't know. And I think beyond that period of time, I think the ability to accurately forecast future resin prices sort of is in the eye of the beholder. So, it's our belief that in the short term we're going to see inflation, especially on the polyolefins, and we're going to have to react to that.

Okay, and with regards to reacting to it, how have you guys done? I mean, I know on the Rigid side of the business, it tends to be a little bit better as far as price realization goes, but on the specialty film side, and on the tapes and coatings side, has that market been acting more rationally? Have you guys been doing a better job of getting your price increase there, and how is that October price increase that you announced going?

Yes, let's talk about them individually. We do have a substantial amount of pricing power as you correctly stated in terms of our Rigid businesses. But we have more aggressively been out in the marketplace now than probably we ever have since we've owned these businesses, relative to the specialty films business. And we feel, at this point, good about it. Now, it takes a few quarters to understand what the implications are about taking a tough stance relative to volume, and that's yet to be played out. But I think at this point we have taken a more aggressive stance in these businesses than we have historically.

The tapes, bags, and coatings division, that business is affected less by polyethylene increases, and more by increases of other materials like resin -- or, I'm sorry, by, like a rubber and tackifying resin and foil. Unfortunately, those things have gone up as well, and we are also in the process of raising prices in those areas. So we're pretty strong on the street right now with increases.

Okay, and then lastly, can you comment on the size of those price increases that you've announced across those businesses?

I think it depends on the individual product line, and the individual channel.

That's right.

All right, fair enough. Thanks, guys.

Thank you. And our next question comes from the line of Gary Madia of Gleacher.

Hi, Gary.

Hi, Jim. Hi, Jon, how are you?

Doing good.

A couple questions to follow on, not to beat a dead horse, but in the films, tapes, bags, and coating, I think you mentioned in the prepared remarks that you're starting to see things improve. Can you give us any color? Have things improved a little bit more, I guess, quickly in the recent past over the past Q? Are there any green shoots that are accelerating? Can you give us any color on that?

I'm not sure I can give you a lot of color on that. I can tell you that demand is increasing, but at a grudgingly slow pace, as the economy turns around, but demand is increasing. I think we've done some things here to try to deal with the raw material pressures that we're feeling, and some of those price increases are starting to be reflected in our results. But I would say that it's still too early to get a great sense of the total acceptance of the increases that we're out with. We're anticipating that next year's demand will continue to improve, sort of consistent with what you read about the recovery of the economies. And we've made some steps, especially in our tapes business, where we've made some recent investments to improve our efficiencies, and improve the quality of our product, and we think that's helping us as well.

Yes, in the tapes business in particular, we have a new piece of equipment that's just coming online right now, in this quarter, which will help us in terms of our manufacturing process. The other thing I think that's important, relative to where we are today versus this summer, we had a number of operational difficulties. In several of those areas, we've made substantial improvement to some of the things we incurred in the summer.

Okay, great. So it sounds like you're thinking along the lines, growth in line with GDP, and then hopefully some addition -- further cost cuts to help either maintain or improve margins. Is that a fair assessment?

I think it's growth at GDP or slightly ahead.

Okay.

With raw material inflation being recovered in the marketplace, and then further cost actions to improve margins. That's correct.

Jim, can you break out in further detail, so I can get a better segment performance analysis, the $22 million in acquisition cost? I think I know where most of them go per segment, but can you specifically tell me where they should be put?

Yes, sure. $19 million is in films, and $3 million is in the Rigid side, open top and closed top, mostly open top. The $3 million is mostly open top.

And then a final question. From a cash funding perspective, I think Jon already said the CapEx was $170 million next year. Now, I know that you've recently announced some restructuring in terms of some consolidation, and kind of shutting down some facilities. Can you give us a sense as to your thinking on restructuring cash costs from those endeavors? And then, finally, are you expecting any additional pension funding next year, over and above what's going to be contained in the P&L?

Yes, we can do those in order. We have some remaining cash costs related to restructuring from actions that we've taken that will spill into fiscal 2011. I don't recall the exact number. I'm trying to look it up here as we're talking, but it's $6 million. And then there will be some incremental costs in that. Our trend has been that we intend on that to decline from fiscal 2010 levels.

And relative to pension, let me get you that amount.

While he's doing that, I would like to make one other comment regarding our restructuring. We're still in the midst of additional cost reduction actions, so it's hard to lock into a firm number that we would tell you, because as we take additional actions, there will be additional costs.

Right.

$6 million is the number for the pension in fiscal 2011.

Okay, so approximately $6 million on both?

Yes, which is -- well, no, be careful. Two things. One is, the $6 million for pension is right. The $6 million for other expenses, that's just the spillover from what got expensed in 2010. There will be some incremental expense in 2011 that's above and beyond that. But what we're saying is that we expect it to be, at this point, less than 2010 unless, Jim pointed out, there's additional actions that need to be taken as we go through the year.

Okay. All right, good. All right, I appreciate it. Thanks, guys.

Thank you. And our next question comes from the line of James Daley of Deutsche Bank.

Good afternoon, guys.

Hi, James. How are you?

Good. Real quick, could you give us an update on the thermoform cup expansion, how that's been going? I think there's been some -- some of your competitors brought up some capacity on that industry in that segment as well. And just any dynamics that have changed in that business, and any -- as it has been in the past, been a very strong performer?

First of all, in terms of relative to our expansion, okay, our expansion is completed. We did have some start-up related expenses in the quarter, because those -- these facilities are not easy to bring up, and they aren't simple machines to run. But those are mainly, I would say -- Mark, correct me, but they are mainly done at this point. The systems are running well, they are in place, and we feel good about it, and we continue to have -- have continued to have double-digit growth in that area.

It is true, we are aware that there are competitors that are starting up lines in that area, but we feel like we can and will continue to be very competitive in this marketplace. But there are some people that have announced expansions. I think you know who those are in the marketplace, and we'll deal with them as we will with any competitor.

What do you think your market share is in that business?

We're not going to comment on that.

Okay, and how about the start-up costs you mentioned that hit in the fourth quarter, can I get an idea of how much that was, and which lines it was running through on the income statement?

What's the question again?

The start-up costs you mentioned hit -- that hit in the fourth quarter from the expansion? Any dollar price you can give us on that?

Oh, it's not, I mean it's not -- it's in the couple million dollar range. It's not tens of millions or anything like that. It's immaterial.

Okay, and it goes through SG&A and COGS, I take it?

COGS, not SG&A.

Okay, cool. Thanks, guys.

Yes.

Thanks, James.

Thank you. And our next question comes from the line of Bruce Klein of Credit Suisse.

Hi. Most of the questions were answered, but just, with regard to the product price recovery of resin, do you get the sense your competitors are supporting these hikes, in addition to what you're doing more aggressively, or they've lagged, or how do you feel about what the response has been?

Look, we're not going to talk about competitors, especially with regard to the pricing. I think the thing what we're trying to do -- first of all, we're trying to make sure that we correctly assess the value that we're delivering to our customers in every product line segment that we're in, and we're trying to price for that. Secondly, as I said in my prepared remarks, this rate of inflation, while we're working extremely aggressively to offset that with productivity, the magnitude of the current inflations are simply such that we're going to have to pass that on through to customers. And we're taking those steps as we speak, and we'll let the marketplace decide what happens.

Okay, thank you.

Thank you. And our next question comes from the line of Roger Spitz of Bank of America.

Good afternoon.

Hi, Roger.

Pliant did roughly $90 million to $115 million of normalized EBITDA in the past. Given the businesses you've exited or walked away because of competitive pressures, what would you say your normalized EBITDA would be if this was closer to 2006 versus 2010, same-stores kind of EBITDA.

That's kind of a complicated question, Roger. I don't know if -- .

Yes, I'm not sure how to answer that. Let me answer a different question. Look, we think that we're achieving all of the synergies that were outlined for us in terms of when we did the deal with Pliant, so we think the synergies are on track. Unfortunately, I think the resin inflation that we're seeing is dramatically higher than what we had anticipated. So I think there's a short-term squeeze as we try to get on top of that in terms of both productivity and resin price pass-through. And so, I think those two have been working in opposite directions of each other.

Understood. All right, thank you very much.

Sure.

Thank you. (Operator Instructions). And our next question comes from the line of Michal Marczak of UBS.

Hi, thanks for taking my question. Just a couple of follow-up ones. One would be, could you give us the actual amount for the expected non-resin price increases? Does it go into the teens, or is it kind of single digits year-over-year?

We are not going to comment on, for competitive reasons, to the absolute number. But I would tell you that we think that sort of non-resin prices, and they are much more diverse than resin in terms of the mix of things that we buy, they are going up at a similar rate.

Okay, thank you. And then, with regards to the synergies, the $58 million in LTM adjusted EBITDA calculation, could you break that down between synergies and cost savings? And then, maybe, how much of the synergies with Pliant have you realized through the fourth quarter?

Give us a second to get the page. The unrealized synergy is $33 million-ish of the $58 million. And the realization, on a -- if you look at it on a run-rate basis, I would tell you we're almost at the full, if you annualize where we are now, we're almost at the full $55 million. And we expect by the middle of next year, we'll be at the full run rate on the synergy side.

Great. Thanks, and maybe one last one. As resin prices continue to move upwards, do you potentially see any M&A opportunities going -- given the flexible packaging side of the business seems to have more issues than the Rigid side?

Not really, but we don't, I don't think we have any comment on that.

I think that there's potential for people to fall out during this environment, people that are relying on -- that are strictly flexible people, I think that there's probably a lot more pressure there. So, I don't know, there's things will happen. It's just a question of what time.

I think we'll have to see how the market plays out.

Got it. Well, thanks for taking my question.

You bet.

Thank you. And our next question comes from the line of Josh Givelber of Nomura.

Hi, I was just hoping -- in your discussion, you talked about EBITDA by segment, and you gave the change in EBITDA by segment. Can you just give me what the EBITDA was by segment?

Sorry, we haven't disclosed that information.

But you talk about the change. Okay, well, let me just ask a different way. You give the operating income by segment, and obviously the D&A by segment. And I was just wondering, what else would be in there besides those things?

The add-backs are the -- you have to add back the acquisition costs and the business optimization cost, which -- a lot of those go to the films area, because Pliant fell into the specialty films segment.

Right.

So if you take the add-backs, and kind of apply them back to the divisions, you can get relatively close.

Okay. Well, thank you.

Thank you. And I show no further questions in the queue at this time.

All right, well, then again, I would like to thank everybody for your continued interest in Berry Plastics. And we look forward to talking with you again at our next conference call. Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.