Berry Global Group Inc (BERY) 2011 Q1 法說會逐字稿

Good day 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, today's conference is being recorded.

I'd now like to turn the conference to your host, Mr. Mark Miles.

Good morning 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 impact 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 various filings with the Securities and Exchange Commission. I would now like to turn it over to Mr. Jon Rich.

Thanks Mark. Thank you for joining us today for Berry Plastics' first-quarter 2011 earnings call.

Throughout this call, we will refer to the first fiscal quarter as the December 2010 ending quarter. The December 2010 ending quarter was my first full quarter as CEO of Berry Plastics. Since coming to Berry, I've learned to appreciate the large diversity of our products and processes and the market dynamics which affect each of our various segments and businesses. As I've gotten to know our customers and gain an appreciation for their business challenges, I remain confident that Berry Plastics is on the right path to serve their needs, and by doing so enhance our value to shareholders and employees.

I am also impressed with the depth of talent at Berry and I'm convinced that this company is well-positioned to navigate through the challenges of the economic environment that we may face in the coming months and years. The overall environment that we faced in the first fiscal quarter of 2011 was similar to what we saw throughout the calendar year 2010. The cost for materials in indirects that we purchased, including plastic resins, rubber, tackifiers, packaging and transportation increased at a dramatically faster pace than our sales. This inflationary pressure led to a compression of our operating margins despite intense efforts to offset these costs with increased productivity. As a result, 2010 was one of the more difficult periods that we've experienced financially in recent years.

Now I'll talk about the highlights from the quarter. Berry Plastics' sales were $1 billion for the quarter, an increase of 18% from the $880 million of sales recorded in the December quarter of 2009. It should be noted for comparisons that, due to the layout of our fiscal calendar, which has 53 weeks, there was an extra week of sales in the December quarter of 2009 that was not repeated in 2010.

Actual sales in the quarter decreased by 8% in physical volume, mainly due to a combination of an extra week in 2009, the loss of the Wal-Mart Great Value waste bag business, and our decision to exit unprofitable sheeting business. The acquisitions of Pliant and Superfos contributed 20% incrementally to volume on a year-over-year basis, and selling prices overall increased by almost 5%. During the December 2010 quarter, after the true-up for the fiscal calendar adjustment previously discussed, Berry realized essentially flat volumes compared to the prior-year quarter in most of our businesses.

Adjusted EBITDA for the December quarter was $138 million, which was a $20 million decrease from the prior-year quarter of $158 million. Specific details on the periodic changes to net sales and adjusted EBITDA will be further detailed by Jim.

The operational difficulties affecting the business during the September quarter, primarily in the Specialty Films business, diminished in the December quarter. The Company did realize lower operating leverage during the quarter directly related to our initiatives to permanently reduce finished goods inventories.

Now, on the acquisition front, Berry is continuing to make good progress towards fully integrating Pliant. IT conversions are continuing and should be completed by midyear. While the integration of Pliant has gone well, the financial performance of Pliant did not fully meet expectations throughout calendar year 2010. However, we are pleased that this trend is improving. Our focus in 2011 will be to extract full value from the acquisitions that we've made in recent years.

A large portion of the capital projects initiated in calendar 2010 are now in place with the expected benefit to be realized throughout calendar year 2011. After completing and funding all of the carryover projects committed to in 2010, the run rate CapEx is expected to decrease in 2011 to around $170 million per year.

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 appreciate the continued support of the investing community in Berry. This financing resulted in a net -- in a decrease in net income of approximately $68 million during the quarter due to the write-off of deferred financing fees, unamortized debt discounts, and premiums paid for the extinguishment of existing debt.

As we start out into 2011, the overall picture for our business remains the same. Clearly, the most pressing financial issue facing Berry and many companies is the rapid inflation of numerous raw commodities, energy and freight, including the commodity resins which make up the bulk of our raw material inputs. To combat this inflationary pressure, Berry has taken aggressive actions to raise prices in our business. We raised prices starting in early October 2010, and have continued to take prudent steps to pass through the inflationary costs that we are receiving from our vendors. Just in January alone, for example, the price of polypropylene, a key input in our rigid plastics products, increased by an all-time record of $0.17 for a single month, a larger increase than even during the period of Hurricane Katrina.

In addition to general price increases, Berry is working with our contract customers who have resin pass-through clauses to shorten the cycle of passing raw material costs changes to a 30-day lag. The inflationary pressure that we are seeing not only impacts our earnings and operating margins, it also has a significant negative effect on our working capital. In this environment, we are asking customers and the suppliers to work with us to minimize the increases in our working capital caused by inflation. We're also taking steps to reduce inventories and improve supply chain efficiencies.

We empathize with our customers in this period of rapidly escalating inflation. To date, we have not been able to offset the full impact of the cost pressures that we are facing. In light of this, we are intensely working to offset the gap with productivity, including significant new steps, such as a companywide reduction in our salaried workforce, that has resulted in an over $40 million -- in $40 million of annualized savings. We are also focusing on further reductions in discretionary expending and increased actions to minimize scrap and improve productivity. We expect to see the benefit from both the pricing actions and cost reductions beginning in the late second fiscal quarter.

In summary, despite an increase in sales, the quarter was impacted by rising inflation compared to the prior-year quarter. The Company also realized loss of operating leverage due to intentionally reducing finished goods inventories.

While trending improvement, the Pliant acquisition still performed under prior expectations. Raw material inflation continues to be the largest issue facing the Company today, but we have taken steps to mitigate this impact through the pass-through of higher prices and substantial cost-out activities.

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 December quarter 2010 financial statistics.

As Jon mentioned previously, total net sales for the quarter were $1 billion compared to $880 million of net sales for the December quarter of 2009, an increase of $161 million. During the quarter, acquisition volume of $180 million and higher selling prices of $42 million were partially offset by a decline in base business of $61 million, primarily due to the loss of the Wal-Mart Great Value waste bag business, exiting most of our sheeting business, and the impact of the fiscal calendar adjustment in the prior-year quarter mentioned earlier.

Adjusted EBITDA, excluding unrealized cost reductions, was $135 million for the December 2010 quarter, reflecting an increase from the $132 million recorded in the prior-year December quarter. Adjusted EBITDA, excluding unrealized cost reductions and pro forma acquisitions, was $135 million for the December 2010 quarter, reflecting an increase from the $117 million recorded in the prior-year December quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA change. During the quarter, acquisition EBITDA contributed approximately $17 million and increased selling prices versus rising raw material costs contributed approximately $2 million. These improvements were partially offset a 7% decline in price-adjusted organic sales volume, which resulted in a $4 million decrease to EBITDA. Lower SG&A expense, partially offset by increased labor and overhead costs, resulted in a $3 million increase in EBITDA.

In the rigid businesses, adjusted EBITDA increased approximately $2 million overall. Decreased sales volume of 4% was primarily due to a base volume decline in bottles, closures, overcaps, prescription vials and containers, partially offset by increased sales in thermoform drink cups. This lower base volume resulted in an EBITDA decreased of $3 million.

The relationship of net selling prices to raw material costs resulted in a $4 million EBITDA improvement and acquisition volume added approximately $4 million of EBITDA. Unfavorable operations costs, primarily driven by the Company's focus on lowering finished goods inventories, was partially offset by lower SG&A costs, resulting in a $3 million reduction in EBITDA for the quarter.

In the Specialty Films business, adjusted EBITDA increased approximately $16 million overall, including acquisition EBITDA of $13 million. The relationship of net selling prices to raw material costs resulted in a $1 million EBITDA improvement. Operational improvements and SG&A decreases resulted in an additional $2 million of EBITDA for the quarter.

Decreased sales volume of 24% in the Tapes, Bags and Coatings division was primarily due to the loss of the private-label Wal-Mart waste bag business and our decision to exit certain sheeting businesses. The lower base volume resulted in an EBITDA decrease of $1 million. The relationship of selling prices and raw material costs during the quarter resulted in a decline of approximately $3 million. Operational improvements, combined with lower SG&A costs, improved EBITDA by approximately $4 million during the quarter compared to the prior-year quarter.

As of January 1, 2011, the Company had cash on hand of $120 million and unused borrowing capacity of $444 million. Working capital requirements improved during the quarter due to seasonal fluctuations and an increased focus on working capital.

During the quarter, the Company completed a private placement of $800 million aggregate principal amount of 9 3/4 second priority senior secured notes due in January 2021. We used the proceeds from this offering, along with cash on hand, to fund the repurchase of our 8 7/8% second priority senior secured notes which were due in 2014. In addition, we entered into two separate interest rate swap transactions to protect $1 billion of variable rate term loan from future interest rate volatility. Each agreement has a notional amount of $500 million that expires in 2013. The two agreements swap three-month variable LIBOR contracts from fixed three-year rates of 0.8925% and 1.0235% respectively.

As a reminder, the Company has no material financial maintenance covenants associated with our debt (technical difficulty) facilities. Also, our debt organization is approximately $28 million per year. In our first material debt maturity, our evolver does not occur until 2013.

This concludes my financial review of the December 2010 ending quarter. At this time, I'd like to turn it back to Jon.

Thanks Jim.

Now, as we look back at the recently completed year, we can take pride in the accomplishments that we achieved in a challenging environment, including the successful integrations of the Pliant and Superfos acquisitions. Our business continues to be impacted by rapidly increasing inflation. 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 businesses 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. Now we are ready to answer your questions.

(Operator Instructions). Joe Stivaletti, Goldman Sachs.

Good morning. I had just wanted to dig in a little bit on this polypropylene, the recent fairly major move. So in your 10-Q, you show a first-quarter average of around $0.78, and some market data shows about $0.96 for the current quarter. Is that in line with what you're seeing?

We are not going to quote specific prices, obviously, that we pay for raw materials, but I think the magnitude of the differential is correct, yes.

So can you talk a little bit about -- I know you're trying very hard to deal with that from a pricing perspective. But just maybe just talk a little bit about how that is going from a very short-term perspective, and also maybe talk about the volume of this resin that you're using on a quarterly basis?

Again, I'm not going to talk about the amount of polypropylene that we use, because that would be a competitive discussion. But let me talk generically about what I think is happening. Clearly, the factors that are leading to increases in propylene monomer and polypropylene prices, those have been well-discussed in the public domain. I think what we're hearing from our customers, first of all, is that they're experiencing, like we are, a modest economic recovery from the recession that began in late 2008, and demand for goods continues to increase but at a very modest pace. Consumers are still hesitant to pay increased prices for goods because unemployment still remains at a high level. So the pace at which we are seeing inflation for commodity raw materials is dramatically higher than the pace of increasing demand. That's creating a squeeze for us and frankly a squeeze for our customers.

In light of that, we are looking to do everything we can, including passing through the increases, trying to shorten the lags in our contract, trying to reduce the inventory levels that we have, and trying to work with our customers as they think about alternatives that they may have to use other materials or try to serve their customers in other ways that will allow them to continue to meet their customers' demands. So I think we're kind of at a tipping point here where, at some point, customers are really going to start looking at alternative materials if we continue this current rate of increases.

Joe, just as a reminder, the majority of our propylene usage is in our rigid businesses, which have -- 75% to 80% of that business has escalator/de-escalator arrangements. So again, we are working to shorten the lag in that 75% to 80%. But just as a reminder, that's where the majority of our propylene --

I think to summarize, as Mark said, we have an escalator program primarily with propylene, but we have general price increases in the marketplace. We've also taken actions to shorten the lags, and we've also increased prices probably more aggressively on our lower-and commodity type volumes.

The other question was you also talked about other raw materials in dealing with energy and freight and whatnot. I wondered if maybe you could put some framework around that in terms of what you're experiencing right now?

I think we are seeing a broad-based inflation mainly driven by commodities. I think you've got to get in -- for example, in our tapes business where we buy tackifiers and rubber, aluminum for film, some of those materials are going up even at a faster rate than plastic resins. Other items, generic general energy, gasoline related transportation costs, are going up perhaps at a slightly more modest pace than plastic resin, but on the whole we are seeing a significant amount of inflation here as we enter the year.

Okay, thank you.

Bruce Klein, Credit Suisse.

Good morning. On I guess those other raw material cost inflation issues, is there an attempt or sort of any pass-through abilities to your customers on those items other than -- I know you talked about resins?

We look at those two different ways. One is in our tapes and coating -- tapes, bags, and coatings division where we have a large CPG business. We don't have a lot of escalator/de-escalator type arrangements there, so we are out in the marketplace with increases now out there to cover those costs, or attempt to cover those costs. So that's where a big part of the other inflation is coming from, things we just mentioned in -- the rubber costs are going through the roof, I guess, to use a euphemism. But in the other businesses, this is the reason we have general price increases, okay, that we talked about as to work on recovering the other non-resin related costs in the business. We are out in the marketplace with those as well.

Then volume, just sort of you broke down the acquisition volume and one week impact, etc. But sort of current volume trends, Jon you touched on this I guess in terms of your -- well, you touched on what your customers are -- you have, you're watching any (inaudible) etc., but sort of organic volumes in your various businesses. Are you seeing any changes in trends up or down in the last two, three, four months?

I think we continue to see modest improvements in volume sort of related to economic recovery in the low single-digit percentages. Aside from a couple of specific items that we called out, like the sheeting business and the private label bag business at Wal-Mart, we're seeing modest improvements in volumes kind of across the board, which we are encouraged by but, again, unfortunately nowhere near the pace at which we are seeing commodity cost inflation. But I think we are experiencing modest and steady improvement in consumer demand.

Lastly, just the Pliant, what sort of was the issue in '11 why it was little below plan? I guess what was driving (multiple speakers) right now?

In Pliant in what period?

Last year I think was a little below plan (inaudible)

With Pliant, there were a number of issues that we have. Certainly, they have the same resin pressure that the resin company had to start with, but we also ran into some operational issues. We had some issues in our Mexican facility that surfaced during the year, but we also ran at significantly high volume levels in a lot of the film plants during the very difficult summer months, which ended up having exceptionally higher scrap than we would typically have had. We made some decisions on blends of materials that in hindsight were not the best decisions for us. So we ended up running through our busiest months with significant amount of inefficiency and scrap related to the way we ran the business, as well as cost -- high costs related to these blend changes that I talked about. So those -- I think those will be the primary issues. Mark, is there anything else that you think (inaudible)

(inaudible)

A lot of those things, by the way, Bruce, as we mentioned, a lot of those things are behind us. Most of those things are behind us actually.

Your finished goods was down. That did have I guess a (inaudible) absorption issue hitting your results.

Yes.

Is that what you're saying?

Our finished goods were down because it has been intentionally our desire to lower our inventories in the face of rising prices. In particular, it makes sense to not have as much inventory. We have a new -- one of the things that contributed to that that allowed us to do it, we have a new bolt-on software package which has helped us really evaluate our need for finished inventories.

In the rigid side of the business, particularly in open top, I think we decreased our inventory almost $20 million in that one area, and we ended up having about $5 million of inefficiency because of operating leverage, just taking the time to decrease those inventory, we took the one-time pain in our operations. We shut down facilities in order to decrease those inventories. That was an intentional plan that the Company did to permanently lower our inventories.

Thank you guys.

Andy Burns, Sterne Agee.

Good morning. I was just wondering -- the strategy to try to reduce the time lag in passing through raw material and resin changes, I guess overall what's been the competitive response to that? Given the volatile raw material environment, is that volatility kind of hurting your effort or possibly helping the effort because everybody in the industry is facing the same pressures you are?

I'm not going to make any comments about competitors, but I think, with regards to what Berry is trying to do, look, we want to leverage our innovation and our value-added capabilities to our customers in terms of unique capabilities of branding on products with our printing capabilities and so forth. So we are not resin-arbitrageurs, right, and so I think what we are trying to communicate our customers is, look, this -- these cost increases that we are getting don't have anything to do with our value-added proposition and we need to pass those through as rapidly as we are getting them. I think customers understand that. Especially as Berry gets to be bigger in scale, we just don't have the capability of doing physical volume, holdings and so forth. So I think customers understand it. We've been able to make significant progress in terms of moving in that direction, and we will continue to do that.

Just maybe as a follow-up to a comment you made early in response to Joe's question, I guess with the rapid rise in polypro prices, are you finding customers now reducing their orders and switching to other substrates, or is that part of the discussion that is happening with customers, given even though all the value-added prospects of polypro cups?

It's two different things. One is customers are doing what we are doing, which is they are trying to reduce their inventory levels in the face of higher prices, so everybody is drawing down inventories. I think there's a lot of conversations going on about material alternatives. I wouldn't say that any of those have come to fruition yet because I think people are waiting to see what happens, but I would certainly say that plans are being established. A lot of conversations are being held. Depending on the further direction of where these costs go, I think customers are getting ready to look at their alternatives. But to date, I wouldn't say it's widespread yet.

Jeff Harlib, Barclays Capital.

Just an update -- on the cost savings, I think you had said before you were close to $50 million of the $55 million run rate expected synergies of Pliant. Now you're saying you have $40 million from the headcount. Can you just update us on the timing of the realization of those, and where you stand now?

Yes, Let me talk, first of all, let me talk about the $40 million of reduction in force that we had. We started this in the fourth quarter of last year. A portion of that happened in the fourth calendar quarter, so that would be the December quarter. So we are starting to see that. Then we just completed the remainder of that, or the majority of the remainder of that. There's always a little bit left, but the majority of that we just completed last week, so we're going to see the benefit of that.

The other programs that we have in place, okay, which are reducing our discretionary spending, that will be an ongoing endeavor for us, as well as our intense focus right now on reducing our material usage and productivity products. So those are in place in various forms. The reduction in force is I would say mainly done. That's mainly done. The other programs are -- will be continuing.

In terms of the synergy, the $55 million that we mentioned earlier, I would say most of those projects are in place at this point in time on a run-rate basis. Most of those products are in place. There are some carry-over projects that are continuing. There things like conversion of IT systems which are continuing and that we will not see the benefit of until those are fully implemented. But those projects are mainly in place from a run-rate standpoint.

Mark, any other comments?

Good. Just on the business, can you talk about how the thermoform drink cup business is doing in terms of volume, and post the start-up costs and how you're doing with that business?

Yes, in terms of -- we've had -- continue to have double-digit growth every single quarter since we started, which continued through our first fiscal quarter, so we continue to have good success in that business. We did have operational problems, as you know, through a good part of the year with the start-up of the business. We feel like most of those are behind us at this point. Our efficiencies are improving I would say significantly as a result of now being fully operational in that business. In fact, we are adding capacity without adding equipment in that business as we speak. So that business has been and continues to be healthy.

I can't make comments about the future because to comment -- will people decide to go to paper cups or some -- that -- what happens in the future is not clear depending on what happens with resin prices. But at this point in time, we continue to log another healthy quarter in that business and the operational difficulties that we have appear to be behind us.

Good. Just in the tapes, bags, and coatings business, can you talk about what's kind of core in that segment and what you're still investing in?

Certainly. We just completed a major investment in the tapes business, and we invested in a large calendar system which is actually for the manufacturer of duck tape and other tapes. That was what Mark? A

$20 million.

A $20 million investment? So that was a major investment. We also invested in a small business that was a small acquisition type business, Tek Rap, which allowed us to expand our product capability into double-sided tapes, which was a -- and the CPG, which is a corrosion protection area of that business which has been a very good business for us. So those are two major investments that we have made in that business.

We have not made major investments in terms of our retail waste bags, which would be the private label business and our Ruffies brand type business. We have made minor investments but have not made major investments in that business. We have not -- after we made an investment in a major piece of equipment in our coatings business last year, we have not made any more investments there. So --

The only other thing I would add is, on the retail bags business, specifically we've taken a very aggressive position in terms of trying to move the price because the margins that are simply demanding.

Thank you.

Just so you know, this is the business that we exited a significant amount of sheeting business in, which we felt like we were not ever going to be able to invest our way out of that.

Thanks.

Roger Spitz, Bank of America.

How much of your polypropylene-based products would you describe as ultimately consumer discretionary, like cups versus perhaps more necessary like overcaps on personal care products?

That's a good question. It's hard one to answer. I think the consumer discretionary piece makes up the majority.

Okay. In terms of Pliant and the underperformance, I think you are referring to the calendar year 2010, or maybe fiscal year 2010 -- calendar year (multiple speakers)

We only owned it since November of 2009, so --

Right. Is there any way to give sort of a [thought] if you still account for it this way in terms of sort of the EBITDA of that business or the EBITDA underperformance versus what you were expecting that was disappointing?

You mean the shortfall versus expectations?

Yes, either the EBITDA of Pliant 2010 or the EBITDA if you're more comfortable and can disclose this to EBITDA shortfall versus what you were hoping to get from Pliant.

I guess what I would say is we've overachieved on the synergy side kind of the core base business. The EBITDA there went backwards a little bit. But again, due to the price-material relationship that we are focused on improving, as well as some of these operational issues that are behind us, the trend has been continuing to improve in the Pliant business.

The other thing, Roger, that it makes it more difficult to give you just a straight answer on that is that business has become comingled with our specialty films business. Certain things like the stretch film, the shrink bundling, and those kind of things, the combined businesses ended up having a problem because of actions that we took. When we had problems in the factory, it was the combined factories that we taxed, and it was the combined factories that we had excessive scrap on. So it's really hard to delineate that and say how much of it was Pliant versus specialty films. But --

I think one important factor there is, look, the flexible businesses which I described as both the film business and the tapes business, we have much lower percentage of index -- resin index contracts in that business than we do in the rigid business. So we've taken a very aggressive stance in trying to move as quickly as we can on the pricing side, on the film side, because margins there simply got squeezed to a level that wasn't sustainable. So we've taken a very aggressive stance on the flexible side of the business.

I think, if you look, you'll notice the trends started to improve in the December quarter on the flexible businesses.

Okay. Do you believe your competitors are also aggressively pushing to shorten the time lag in passing through resin pricing, and also contracting in non-resin inflationary costs as you are (multiple speakers) --

We are not going to comment on what we think competitors are doing. We are doing what we've think is necessary for Berry Plastics, especially when you look at the reinvestment economics in the business, so we are intensely focused on what we think is the right thing for us.

Could you tell us the average duration of your contracts, so we can figure out sort of the timing of when you could hopefully change the terms of these contracts?

It really runs the gamut depending on the customer. I think it's difficult to put a number on it. On average, it is probably about a year, but I think it runs a pretty broad distribution depending on the customer.

We have some that are three years, some that are --

On average probably about a year (multiple speakers)

Thank you very much.

Richard Kus, Jefferies & Co.

Good morning. Just a little bit of housekeeping -- what was the base volume decline on the Specialty business in the quarter?

Give us just a second.

No problem.

Flat.

Okay. Then with regards to the Specialty business, I know the competitive environment on the film side has been pretty tough over the past couple of years, and you guys are out there with your price increases and taking a more aggressive stance. Have you seen the competitive environment change to the point where you'll end up having a better rate of success on the pass-through price increases there?

We are not going to comment on competitors. I think that, in working in conjunction with our customers, I think we've been able to talk to them about the value that we add to them, and also have a meaningful conversation about the kinds of inflationary pressures that we are seeing. Those two things I think are the story that we are selling to our customers and we are not going to comment about that.

Okay. Well, are you guys seeing more pass-through success in that business at this point then?

We are taking the steps that are necessary to make sure that our flexible business is sustainable, and we are having success with that.

Okay. Then with regards to resin, is there any light at the end of the tunnel at this point that you might see costs start to come down a couple of months from now?

Look, in terms of forecasting commodity prices for oil and oil related byproducts, if we were really good at that, we could make money the easy way without all of this investment in the ground. So we don't know. We are just going to make sure that -- we are value-added guys. We are value-added in terms of converting pellets into finished goods that our customers can capture the value from, and we're going to stay focused on that.

Okay. Thanks guys.

[Gary Nadia], [Legermco].

Thank you. Good morning. Just a couple of follow-on questions here. You mentioned earlier in the call that you are trying to decrease the time lag on the rigid business to something closer to 30 days. Can you give us a sense for the non-rigid businesses, if you're successful in getting the price pass-through that you are (multiple speakers) yes, I mean, typically --

Look, I think, for all businesses where we have index pricing -- and we have some on the flexible side as well. It's just a much lower percentage. On all businesses where we have index pricing for resin, we are trying to move those to 30 days.

Another important step is that, look, we want to make sure that those contracts have reopeners so that for non-resin and the related inflation that we are seeing, which we discussed earlier, is just as significant as the resin inflation, [that] there are also mechanisms in place to deal with that. For customers that are just spot business or non-contractual business, we are taking aggressive steps now to deal with the cost increases that we are seeing on a real-time basis.

v Real-time. So if successful, is it immediate? If you're successful in getting the spot business price increases, is that something that will kind of reset in 30 days, or what is that?

The [main] price increase that we get will drop through in the immediate period as soon as we book the sale.

Good. Then I know you mentioned the $0.17 increase in polypropylene, and I know polyethylene has already popped a little bit in the last quarter. Any color on what you're expecting or seeing on the polyethylene side?

I think you know the magnitude of what's happened. I think the fundamental dynamics, which are being driven by oil-gas ratios and demand for liquids in Asia, those two phenomenon (sic) I don't see any reason for that to change. So that's going to continue to put inflationary pressure on monomers into the foreseeable future. We don't see anything on the horizon that's going to change the fundamental underpinnings of why this inflation is current.

I think the short-term spikes that you see in any one monomer, like propylene or ethylene or PET, those can be due to short-term production outages or turnarounds. Those can happen on a month-to-month basis. We are not so worried about that. The long-term dynamics which are causing this inflation, the pressure there, we don't see anything on the horizon that's going to change that picture short-term.

That speaks to perhaps the fundamental change in how the business is managed, if you are in the camp that oil is going to stay relatively elevated because of macro supply and demand. Is that a correct assumption?

The reason we are taking the steps that we're taking is because of exactly what you just said. We don't see -- there are sort of changes in the fundamental underpinnings in terms of the relationship between oil and gas and the demand for liquids in Asia and the emerging markets, which we think are going to continue to put pressure on small molecules like the C2s and the C3s. We don't think that -- we don't see anything on the horizon that is going to disrupt that trend, and so we are taking -- the steps we are taking are sort of in response to that, which we believe will be long-term pressures on the Company.

Very good, I appreciate the color. Thanks.

Michal Marczak, UBS.

I was wondering if you can touch on working capital. You mentioned you were lowering inventories in the quarter. Is that done at this point? Should we expect normal seasonal trends going forward?

I think you're going to see us continue to take steps on working capital. Again, I think the challenge the Company has on working capital is that, with sales recovering and with inflation coming on our raw material costs which flow into our inventories, the natural pressure is to have working capital go up. So we have to offset that with actions that we're going to take with our customers, our suppliers, and with our internal supply chain activities because it is the Company's goal to try to generate positive free cash flow from working capital changes this year despite the fact that the natural pressure on the business is for working capital to go up. So you'll continue to see us take aggressive steps in all areas of working capital to try to offset the natural trend.

Okay. Then I guess a follow-up. I know you mentioned it in your -- I guess in the first question. I think in the past you said the rigid business uses roughly 60%/40% for polypropylene/polyethylene. Could you give us that breakdown for the flexible business, the tapes, coatings, and specialty [foam] segment?

Again, I'm not going to give the exact percentages, but the use of polypropylene in the flexible business is dramatically lower. It's primarily a polyethylene-based business.

That's fair enough. Thanks a lot.

Chris de Young, Schroders.

Good morning. My apologies. I'm going to flog the resin question a little bit more. Could you give us a general idea as to the percent of raw material resin as a percent of your cost of goods sold?

Again, our two businesses are different. The rigid business has a lower percentage. I'm not going to give the exact numbers for competitive reasons. The rigid business has a lower percentage of material costs as a percent of total costs. The flexible business has a higher percentage, otherwise saying rigid has more fixed-cost leverage and flexible has (multiple speakers)

Substantially higher (multiple speakers).

One of your competitors tells us that 55% of their product costs are raw materials. Would you say that yours falls within that same zip code?

It depends on which -- we are not going to comment on the specific percentage of our costs. Again, I think, as we've said before, rigid is lower and flexible, significantly higher. I don't know who that competitor is, but (inaudible) a rigid kind of number.

Then as far as your resin purchases, can you give us a breakout as to what you are buying? You say polystyrene -- polyethylene versus polypropylene versus any other resins? Where are you predominant?

I think the way to think about this is, as I've said before, various businesses now -- our sales are about half from the flexible side of the business and half from the rigid side of the business. So if you think of our $4.5 billion in sales, have flexible, half rigid, the flexible business is primarily polyethylene. So, the rigid business is probably more than -- significantly more than 50% polypropylene, so that will give you a sense of balance, polyethylene being the biggest [one].

Some of the questions on this call were asking about switching resins to -- for raw material headwinds. It just seems to me that that's I guess much easier said than done. If you take a younger company and you flip it upside down, PP, it's polypropylene. I know you guys are pretty big in your cup business, is that correct?

Yes, correct.

Yes.

So you can't switch the mix. I mean, it's polypropylene. You can't decide to make it out of PET one day, correct? I mean you are pretty much locked into a given resin mix, is that correct?

I think it depends on the nature of -- there are some customers who can switch more rapidly than others, drink cups being a good example. Some packaging applications are harder to switch. But regardless, when the customer makes that decision, that's not going to be a decision -- that's a monumental decision for the customer. That's not one where they're going to say "This month I'll buy paper and next month I'll buy plastic." What our resin suppliers need to understand is that when the customer and if the customer makes that decision, that's going to be irreversible for period of time.

So look. What I'm talking to all of our resin suppliers about is I'll tell you exactly what our customers are telling us. But when that customer makes a switch, it's not like if resin prices drop next month, they're going to come back again. This is a decision which is going to be permanent for some period of time. I agree with you. It's not a decision that our customers take lightly. But in light of the conversation we just had about oil, gas, and so forth, they are just as cognizant of these economic drivers as we are, and they are trying to make decisions that are in the long-term interest of their business. Look, our resin suppliers should be cognizant of this.

Understood. If you look at CMAI forecasts, I think it said it's about as good as it gets, or as authoritative as it gets. I don't know how good it is. But you see the -- whether it's PET or polypropylene or polystyrene, the first half of the year, you've got some sequential increases, and obviously they are year-over-year increases. But sequentially it drops off in the second half of the year.

Now, just for laughs, what is your lag in passing that back to customers?

There's a couple of different questions in there. Let me start. I think CMAI does a very good job of reporting what happened historically. Secondly, I think our pass-throughs depend on our contracts. Those run the gamut of anywhere from a month to two months to a quarter or something different. As we've stated today, we are working aggressively to try to push all of our contracts to 30 days.

But generally do you have to price -- do you have to pass through resin price deflation as quickly as you try to put through a price increase for inflation?

Look, I think again, the concept the Company would like to focus on is the value add that we give to our customers. We are not resin arbitrageurs. Just like we don't want to sort of game it on the upside, we don't care about the downside. All of our focus is on the value-add that we put into the products that we make. We would be thrilled to take this resin -- again, if we wanted to be resin arbitrageurs, we don't need to have billions of dollars worth of molding machines in the ground and thermoformers and so forth to be resin arbitrageurs. We just need a couple of guys with a computer and we can play that game. That's not (technical difficulty). We are value-added molders, and we would like to take that resin equation out of the whole discussion completely, upside or downside.

Wouldn't that be great. But as you can tell by this call, everybody is on board with the modest demand improvement, but it's clearly the resin headwinds is the number one concern here. (multiple speakers)

As it is with ours, which is why we are taking the steps that we're taking on shortening the lags and passing through the increases.

Also understand when you shorten the lag for going out, it also shortens the amount of time we can hold onto it going down.

We are okay with that. We are okay focusing on the value-added discussion with our customers.

Great, thank you.

I'm showing no additional questions sir.

Again, I'd like to take this opportunity to thank all of you for your continued interest in Berry Plastics. We look forward to talking to you at the end of the next quarter. Thanks everybody.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.