Berry Global Group Inc (BERY) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Berry Plastics earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this program is being recorded. I would now like to introduce to your host for today's program, Mr. Mark Miles. Please go ahead, sir.

Thank you. 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 measures are available in our public filings. An archived audio replay will 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, 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 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 businesses is set forth in the Company's various filings with the Securities and Exchange Commission. Now, I'd like turn it over to Jon Rich.

Thanks, Mark. Good morning, everyone, and thank you for joining us today for the Berry Plastics second quarter 2011 earnings call. Throughout this call, we will refer to the second fiscal quarter as the March 2011 ending quarter. I'm pleased to announce that Berry's performance in the March ending quarter of 2011 was significantly improved compared to the Company's results for the March quarter of 2010. Berry's improvements from the prior year were the result of better product mix, driven by new product introductions and successfully winning new customer accounts, price increases which were necessitated by the dramatic increases in raw material inputs, and most significantly by productivity and cost reductions which were the result of operational improvements and the restructuring actions that were implemented in the end of calendar year 2010 and continued into the March ending quarter.

Now I'll report some of the highlights. Berry Plastics' sales were $1.104 billion for the quarter, an increase of 5% from the $1.056 billion of sales reported in the March quarter of 2010. Adjusted EBITDA for the quarter was $163 million, which was a $13 million increase from the March quarter of 2010. Specific detail on periodic changes to net sales and adjusted EBITDA will be further described by Jim. Since coming to Berry in October of last year, a particular focus area for me has been to improve the profitability of our films-related businesses. In many of these product lines, operating margins have been unacceptably low. In part due to our inability to pass on rapidly rising raw material costs in a timely, effective manner. The result is that our products did not reflect, in my opinion, the value they deliver to the marketplace.

Over the course of the last 12 months, we have strategically withdrawn from chronically unprofitable product lines. We have focused on improving our productivity, increasing our operating efficiencies, and ensuring that the prices we charge are reflecting the values that our products deliver for the marketplace. In the March ending quarter, margins improved in our films business, consistent with our plans, and while there still is much to be done, I am pleased to report that we are on track to achieve the improvements that we have outlined.

The biggest challenge we have faced this quarter was the rapidly inflating cost of our plastic resins, other raw materials, energy, and freight. All materials which are based on petrochemicals are rising at rapid rates. Certain of our materials such as polypropylene resin are regularly recording monthly double-digit increases. While economists and media pundits debate about whether we're in an inflationary environment, we are seeing rampantly higher costs for our inputs. Our customers are concerned about the higher cost they pay, not only for packaging but the ingredients that they put in the packages, and consumers are feeling the effect of this in retail outlets where our products are ultimately sold. The inflation that we are getting is putting substantial pressure on our us, and in response, we've gone out multiple times with price increases to try to recover these costs.

As we look forward, we anticipate that these conditions are likely to persist throughout 2011. The overall picture for our business continues to be challenged with ever-increasing raw material costs. Although we have continued to take prudent steps to pass through inflationary costs that we are receiving from our vendors, we continue to experience a lag in passing through these raw material cost increases. As we've discussed with you in the past, about two-thirds of Berry's business is conducted with customers with whom we have longer-term contracts, generally for 1 year, and these contracts contain provisions for price changes due to resin cost changes.

As we've faced a period of unusually high volatility in resin prices over the past 2 years, it's become increasingly challenging for us to deal with a lag in resin price pass-throughs. At Berry we view ourselves as value-added designers and producers of innovative packaging that help our customers differentiate themselves. We are not oil and plastic resin arbitrageurs. Over the past 6 months, we have had a key initiative to work with our customers to pass through raw material cost in the 30-day period. We made progress on this in the March ending quarter, and we'll work with customers as contract renewal throughout 2011.

Another area of focus for the Company is to improve our manufacturing operations. Operational challenges from the newly acquired plaint business and expanded thermoforming operations impacted the business for most of calendar year 2010. Several proactive steps, including plant consolidations, improvement driven by capital investment, and cost reduction initiatives were meaningful contributors to improve manufacturing results during the quarter. As noted in prior calls, we continue to see positive momentum in the former pliant businesses.

Now before turning it over to Jim, let me make a couple comments about our performance on cash, our focus on working capital and our actions to reduce our debt leverage. Cash balance at the end of the quarter was $126 million, an increase of $6 million from the December quarter. Working capital increased in the quarter as a result of seasonality and the inflation of material costs, as we discussed before, but the internal actions that we implemented during the March ending quarter resulted in flat inventories for the quarter versus year-end, and a reduction of over $40 million in inventories versus the same quarter last year. At Berry, we remain extremely focused on cash generation and debt reduction. The combination of improved earnings, increases in cash and working capital actions allowed us to reduce our debt leverage by about 0.4 in the quarter. 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 March quarter 2011 financial statistics. As Jon mentioned previously, total net sales for the quarter were $1.104 billion, compared to $1.156 billion of net sales for the March quarter of 2010, an increase of $48 million. During the quarter, higher selling prices of $88 million were partially offset by a decline in base business of $40 million, primarily due to the loss of the Walmart Great Value waste bag business and exiting most of our sheeting business. Adjusted EBITDA, including an annualization of cost savings, was $163 million for the March quarter, reflecting an increase from the $150 million recorded in the prior-year March quarter. Adjusted EBITDA, excluding annualization of cost savings, was $157 million for the March 2011 quarter, reflecting an increase from $138 million recorded in the prior-year March quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA improvement of $19 million. When compared to the prior year, the selling-prices-versus-raw-material-cost--relationship improved $14 million, improved manufacturing contributed $11 million, and as a result of a better mix of products sold, net price adjusted organic sales volume contributed $3 million of EBITDA. These improvements were partially offset by $9 million of higher SG&A expenses driven by higher-accrued performance compensation.

In the rigid businesses, adjusted EBITDA increased approximately $11 million overall. Increased sales volume of 1% was primarily due to base volume increases in bottles, closures, overcaps, and thermoformed drink cups, partially offset by sales volume declines in containers, housewares, and prescription vials. This higher-base volume resulted in an EBITDA increase of $3 million. The relationship of net selling prices to raw material costs resulted in a $3 million EBITDA improvement and improved manufacturing added $14 million of EBITDA. This was partially offset by higher SG&A costs of $9 million, primarily driven by increased crude performance compensation.

In the specialty films business, adjusted EBITDA increased approximately $4 million overall. The relationship of net selling prices through raw material costs resulted in a $9 million EBITDA improvement. Manufacturing cost increases, lower base volume, and higher SG&A costs resulted in a $5 million EBITDA reduction for the quarter.

In the tapes, bags, and coatings business, adjusted EBITDA increased approximately $4 million overall. Decreased sales volumes of 13% and the tapes, bags, and coatings division was primarily due of the private-labeled Walmart waste bag business and our decision to exit certain sheeting businesses. This lower-base volume resulted in EBITDA increase of $2 million due to improved sales mix. The relationship of selling prices and raw material costs during the quarter resulted in EBITDA increase of $2 million.

As of January 2011, the Company had cash on hand of $126 million and unused borrowing capacity of $445 million. Working capital improved compared to the year-to-date March 2010 as a result of our continued focus on working capital. Additions to property equipment declined by $35 million compared to year-to-date March 2010. Our capital expenditures are forecasted to be approximately $205 million for fiscal 2011, and will be funded from cash flows from operating activities and existing liquidity. As a reminder, the Company has no material financial maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $31 million per year, and our first material debt maturity, our revolver, does not incur until 2013. This concludes my financial review of the March 2011 ending quarter, and at this time, I would like to turn it back to Jon.

Thanks, Jim. In summary, we are pleased with our March ending quarter, as we were able to increase our sales and earnings while expanding our operating margins in the face of a slow recovery from the recession and rapidly rising raw material inputs. Our results this quarter were consistent with our plans to grow the business by supporting our customers, improving our films business, focusing on cash, and reducing our debt leverage. 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 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 that for your interest in Berry, and now we are ready to answer your questions.

(Operator Instructions). Bruce Klein, Credit Suisse.

I was just wondering, I don't know if you gave us the spread variance between product price and resin, which I know is a key issue. Do you know what that would have been sequentially versus the December quarter, is my first question?

I don't think we have that number, Bruce.

I don't think we generally report it by month.

Can you quantify what sort of hikes that you all have initiated out there and do you think they're being accepted reasonably well, and has there been some volume? I know that you had conscious volume exiting of unprofitable business. What the more macro strategy in terms of volume versus price strategy, given this resin surge environment?

A couple of comments on that. One is, we have been out with several price increases this year. As you know, our resin costs settle on a monthly basis and we are trying to move as rapidly as we can to adjust pricing to reflect not only the cost increases that we are seeing in resin, but to also appropriately reflect the value that our products deliver to customers in the marketplace. So we've been out with numerous increases this year. I think in terms of the effectiveness, you can see that in the first quarter we had about an 8% year-over-year impact of price. Each product line and each customer is different. So you have to look at it on a case-by-case business.

In terms of the volume, I think the volumes that we are seeing are reflecting of the end-of-line consumer demand for the goods that are inside of our packages. And there I think we are seeing some modest weakness due to the weakness of economic recovery. But aside from a couple of specific areas that Jim highlighted, with private label bags and sheeting, we are not seeing any significant loss of market share.

And then, Jon, you mentioned that the film profit focus, and I did notice the margins have improved.

I'm sorry, you're breaking up a little bit.

I think your margins improved in the film business, is there sort any quantifiable goal that you have for the film business profitability improvement, you mentioned the pliant cost savings you're getting, are there any numbers behind that or anything else you can tell us on that?

The margins in the quarter on a year-over-year basis were up just around 2%, up just slight of that. That's certainly good progress in the right direction. We need to continue that in the forward- going quarters, and we certainly believe that our products deliver value representative of that.

Okay. I will pass it on. Thanks, guys.

James Daly, Deutsche Bank.

My first question goes back a little bit to the resin, and just trying to get a better feel to how the resin impact your COGS on basis of the resin impact price increases really started let's say January, February in polypropylene and polyethylene, and we've seen another recent price increases in April. Can we expect a little bit more of an impact in the June quarter versus what we saw in the March quarter or is there enough price increase in there to offset that?

Jim, first of all, we are going to continue to raise prices to follow what happened in the first quarter. We continuing to follow that -- I'm sorry, in the March quarter, we're continuing to follow that in the June quarter. I would tell you that there have been, Jon mentioned this and we have continued to say this a few times, we are working hard to narrow the gap on the lag. Okay? Relative to quarterly customers going to monthly. And we have been somewhat successful, and I think part of the success we had in the March quarter was reflecting that. That is increasing as contracts expire and as we work with customers.

But, as you also know, resin, particularly polypropylene, has continued to increase. We do have some customers that have cases where we have just, in the month, not in the 90 days, because of resin moves more than a certain amount. We have invoked some of those clauses in those contracts which have been helpful as well in mitigating it. I will tell you that there is, particularly towards the end of the quarter we are in now, there is some amount of lag that we will incur and we haven't exactly defined what that is, but there will be some lag incurred at the back end of the quarter that we are in right now as a result of the increases.

That's helpful. And a little different topic. You talk about your focus on free cash and [verdant] capital and all that. What is an M&A activity fit into that picture? Do you consider that separate from your focus on cash, or we infer from that that M&A activity might be a little lower than it has been in the past?

As we described to people in the last quarter, our strategy on M&A is two-fold. One is, of course, Berry has been extremely successful over the years of making well-timed acquisitions and that's part of our Company culture. I think you'll see us try to focus on specific opportunities that will end up being met deleveraging after synergies within a 12-month period, or conversely something that would accelerate our path forward towards ultimately a public offering, and I think those two things guide our principles at the moment.

That's very helpful. Thank you.

Roger Spitz, Bank of America/Merrill Lynch.

Thank you and good morning. Was there any FIFO inventory holding gains in this quarter ending March?

Roger, first of all I don't understand what a FIFO inventory gain would be. We adhere to a FIFO inventory methodology, which we have since the inception of the Company. We that means is that we purchase resin and it flows through inventory and flows through cost of sales, and as we consume it, it flows to cost of sales and is reflected in the financial statement. Okay? So to the extent that we have inventories flowing through, which we do, there will be some time from the point where we purchase inventories until we report those through our cost of sales, which has been consistent quarter after quarter for us. So I'm not sure what you mean when you say that.

Okay. SG&A in the first half of this fiscal year looks like it's running higher than the fiscal 2010. Would this be the new SG&A run rate, or is it higher but it will come back down towards the 2010 rate?

I think, Roger, the way to think about it, SG&A ex -- if you think about 2010 when we were having a more difficult time period. We weren't in a position to meet management performance compensation goals, so SG&A was lower last year than that. If you take that out, ex the performance compensation accruals, SG&A is actually running significantly lower than the same period of last year.

Okay, this relates to the $9 million you've got.

Reflecting lower headcount levels and some significantly lower discretionary spending.

Got it. Okay. Finally, in Tapes, Bags, and Coatings, I missed this on EBITDA bridge, there $2 million on the margin, was that other $2 million on volume for exiting bad business or was that $2 million improvement on operations, on running the operations better?

It was volume.

It was $2 million due to improved sales mix.

Okay thank you for that. Thank you very much.

Joe Stivaletti, Goldman Sachs.

I had 2 things. One, just following up on the whole -- the resin versus selling price. In your 10-Q, in your outlook you talk about a spike, particularly starting in January 2011 on resin, which we are aware of, and how that would impact going forward. I wonder, when you pull all of this together and with all of the changes you're trying hard to make with your contracts and your lags, do you expect in the June quarter that the resin price versus sell price would be a negative or positive? On an EBITDA year-over-year basis.

Joe, I would just remind you that the June 2010 quarter was a significant -- (technical difficulties)

(Technical difficulties) The sheeting business was resulting in a negative recovery of material that was fairly dramatic. We are no longer in that Sheeting business. Okay? So when you compare it, last year was very difficult. This year will be less difficult than last year. All right? The other thing I think that important to realize is that there is a tremendous focus being placed, because resin to us is like gold, and there is a tremendous amount of focus on reducing our material usage within the Company, which has been helpful. I mean that helped us in the March quarter and continues to help us.

Okay, that's helpful. The other question I had, you obviously saw some nice benefits in your most recent quarter on the manufacturing and efficiency side, I believe you said $11 million year-over-year. I just wondered if you could bring us up to date on what more there that you are expecting? I know you have the salaried workforce reduction of $40 million. I know there is some synergies. I wasn't real clear on if all of that is captured in this $6 million of annualized cost savings that you've factored into your EBITDA bridge, or if you could bring us up to date on what more you are expecting to get?

Joe, this is Mark. The $6 million would not have been in the bridge that Jim went through. We actually excluded that. But that $6 million would reflect the annualization of all of the savings programs that we had implemented through the March quarter.

Joe, let me just make a comment. There's are a couple of things that are going on. We announced that we had, obviously, a reduction in force that was significant. I think we said since last October we had taken $40 million out in that particular program. We also have a significant program in place for reducing discretionary spending, which we has been highly effective for us. I think that the remainder of our improvement is because of just major process improvements that we have done. If you remember a year ago, we had installed a huge facility in our thermoforming area. We have made significant inroads terms of improving our processing in that area, which has helped us. We've also made, with the pliant business, we made significant process with taking several plants out from a year ago. So it's an all-in effort in many different areas, which have helped us.

So, in your Q when you show $50 million when you're showing your LTM EBITDA reconciliation and you show $50 million of annualization of cost savings, does that encompass all of those things? Meaning that looking out over the next 12 months, you would expect your overall cost to be $50 million lower from those items, or are there things, all of those initiatives not really being picked up in there?

I wouldn't say all initiatives are picked up in there.

The identified programs are picked up in there, the process improvements, offset by other inflation, other things that we are facing, are not in there as well.

Correct, that's correct.

Okay. Thanks a lot.

Michal Marczak, UBS.

Thanks for your commentary on resin pricing in terms of showing the pass-through period. Can you give us a sense of the amount of contracts you have been able to switch? Is it one-third, one-half?

About roughly 10% of our pounds have moved from quarterly to something less than quarterly. And that is over the course of the last 6 months to a year.

I think you have to keep it in perspective, about 60% of our business is on contract --those contracts expire on a continual basis. So you can see that I think we are doing a fairly good job on that.

Got it. Could you give us, resin and volumes aside, you mentioned that new products have helped volume this quarter I believe in the past. Can you give us some examples, and maybe give us how we should think about it in terms of year-over-year basis. Is it 2%, 3%, 4% growth going forward?

You have to break it up in terms of the contribution to mix and then volumes, right? Obviously total demand in Q1 was weaker just based on weak consumer demand at retail, right? But as we discussed before, price was up about 8%, I think mix contributed another 3%, 4% positive in the quarter. So that is how we think about the impact of mixing our products up to higher-value goods and newer products.

We have had several new product introductions this year as a result of capital investments last year, which are helping.

Got it, but no percentage number or --?

We really don't have one available.

Got it that's fair. Maybe 2 more. One, did you see any restocking, or more probable, destocking in this quarter at all?

It's hard to -- obviously volumes were weaker in the quarter, again, due to weaker demand. Now dissecting that out between the ultimate weakness in consumer demand. That you can see by the way a lot of retailers have reported recently same-store sales and so forth, you can see that weakness. How you break that out, and how, of course, our customers are also trying to increase their inventory efficiency in the face of higher raw material costs. I think those 2 factors go together. But it's difficult to put an exact figure on the breakdown between the two.

Okay. I guess working capital, it was encouraging to see working capital pretty much unchanged quarter-over-quarter. Normally you tend to build into the summer and high resin costs, how should we think about that in terms of inventories second half of this year?

Let me address that point in a couple of different ways. First of all, starting last October, we had a major initiative here, we put in some software, which really has helped us to monitor more closely our inventory needs and be able to maintain less of a finished good number that we had been able to manage previously. So that had a big impact. The second thing is that we have improved our productivity. Okay? We have for manufacturing pop than we have had historically. So we have not had to pre-build for some of the seasonal products as we have had to do in the past. So we've been able to help ourselves, because there is a double benefit of having strong productivity, and that is you do not have to maintain inventory to get you through the busy season. So at this point it looks like we're not going to have to build at the same level we have historically had to do, which of course in a time of rising prices is helpful to offset, because the best thing to do as prices go up is not have the inventory versus having to worry about the cost of having inventory. So those two points I think are the strongest areas of inventory that have affected us. Mark is there anything else you want to comment?

It's all said.

Great, thanks, that was very helpful.

Tarek Hamid, JPMorgan.

I guess maybe can you talk a little bit about what you're seeing from customers in terms of any thoughts about substituting away from polypropylene resins to resins that haven't moved up quite as much, like polyethylene or polystyrene?

Clearly, if you think about many of the applications where the customers have the opportunity to use polypropylene or switch to something like paper, customers have talked to us about that dialogue. I would tell you that to date, we have not seen any substantial switching. I can tell you we have worked extremely hard internally to look at product designs, look at what we can do to reduce waste and change designed so we can help customers save money from a cost standpoint. So I can't forecast what will happen in the future, but to date I can say that the amount has been minimal.

Okay. And returning a little bit to a question that was asked earlier. Just more for modeling purposes than anything else, any sense what the impact of LIFO accounting versus FIFO accounting would have been during the quarter?

We don't do LIFO accounting, first of all. So it is difficult for us to go through and exercise where we put into the terms of LIFO accounting. I think if you take a look and think about what the pass-through is of the materials. Usually there is a pass through, our inventories are lower than they have been. It used to be a pass-through of 30 days for raw materials, and another 30 days-ish through finished goods before you understand the full impact of those increases and hits cost of sales.

But remember the selling prices, even when you have a 30-day lag, their lagged from and [indices] perspective. So the selling price impact is slower than the resin costs impact. But you have a lag when it is going up.

Let me see if I can help you and others here. As we think about the second quarter, clearly we are facing higher resin costs. Those polypropylene especially, but there has been announced increases. If we take that into account but then say to ourselves, gosh, if we continue to have the rate of success that we've had in capturing the price value of our products in the market that we had in the first quarter. If we continue to achieve the levels of productivity that we accomplished in the first quarter, which frankly are ahead of our expectations. Then taking into account that the second quarter is normally, seasonally higher volumes for us, just in normal seasonality. If you take those things into account plus the expectations that we have for resins, if those things play out, we should be able to at least be able to achieve the operating margins that we achieved in the first quarter.

Okay that's actually really helpful. Thank you, Jon.

Jeff Harlib, Barclays Capital.

Just on the CapEx, it looks like $205 million is a little higher than you were looking for before. Can you talk about what else you might be investing in?

Yes, basically we had come out initially and said our run rate CapEx would be $170 million. Okay? We had not included in that the carryover of projects that were being completed for the last fiscal year. So, in fact, we had a number that was layered on top of that number and that is what really what it is, Jeff We had to pay for some projects that really were carried over from the last year that were higher than would be typical in the business. There were significant investment that was made last year. So we see that this run rate is going to be lower. But that is the carryover items that you have had there.

To clarify it, we haven't our view that we are still running on or below the $170 million run rate for new projects. The delta is simply a lower cash expenditures that we had in 2010 versus our prior forecast and that is just carrying over. But we are not increasing the commitment to new projects above the $170 million.

Okay. And just, you are shortening the pass-through on resin. I think in the past you've also talked about increases to offset other inflation such as freight, energy, et cetera. Is that part of your whole price increase announcements or there are surcharges and how are you doing with that aspect of it?

Yes, and again I think the prices that we are achieving are again I think reflecting the ultimate value that we deliver to our customers in the marketplace. But we are certainly seeing increases in other things other than plastic resin, as well, and we're trying to account for that.

Okay, lastly the product mix benefit, can you talk about for a Company your size to see that benefit, can you just go into that a little bit more. Is it a lot of it exiting the Sheeting business and what are some of the other reasons for that and do you think that could be a recurring phenomenon?

It's mainly two contributors. One is, you know we have had historically lower margins in the film business and our Rigid business, as you said. We are exiting chronically unprofitable business there and that is by definition improving our mix. But we also have exciting new product offerings in every one of our product lines. And as we introduce those higher-value added products, they are increasing the profitability of each of our business segments. Those two things together are increasing our overall product mix.

Thank you.

Richard Close, Jefferies.

Most of my questions have been answered at this point, but can you just talk a little bit about what you're seeing competitively pricing-wise in both the specialty films and the Tapes, Bags and Coatings segment here. I am just curious, it seemed like it was more rational over the last couple of quarters, and I am curious if that is continuing.

We are not going to comment on any actions taken by any competitors. I will reiterate that we continue to believe that our products deliver a lot of value to our customers in the marketplace and we are going to price commensurate with that value.

All right, that's all I have, thank you.

(Operator Instructions). Sandy Burns, Sterne Agee.

I know in the past you've mentioned that most of the resin you use is polyethylene and polypropylene, about 90% of your total resin. I was wondering if you could break it out a little further, is it more of a 50-50 split or it more weighted to one over the other and to what extent?

It is more heavily weighted to polyethylene then polypropylene, and the next biggest ones are PET and PVC, but it drops off pretty fast. I would say well over 50% is polyethylene.

Okay, and since polypropylene is the resin you use in the Rigid business where you have a lot of contractual pass-throughs, are you generally comfortable keeping a little more inventory of polypro, given you know you have that contractual ability to pass it through that you have less so for polyethylene in the Films business?

We have been working extremely hard to increase our inventory turns. Those actions have been focused on both finished goods and raw materials. And we feel, again, we are not resin arbitrageurs. We think the value that we contribute to our customers is in the design and in the ability to help our customers innovate in the packaging systems that we deliver. So we want to be as efficient as we can in our use of cash for inventory and we will work with our customers on that.

Okay. Just last question, in the rigid open top business, the volumes have been rather lackluster the last few quarters, slightly down 1%, 2%. Following up on the prior question, is that -- do you feel mostly a response to the big spike in polypropylene cups, or are there any competitive issues that play there, which other companies who have increased their polypro capacity recently or related to economic issues as well?

Market share, and if anything on the opentop side we may be having some competitive gains. I think the weakness in volumes is just due to the -- again when you think about all of the inflation that consumers have had to take on the food side and energy side, that is driving down demand at the point of sale with consumers at retail. We think that is the norm. And so we are confident that when the consumer comes back -- and then there has been we believe some effort by our customers to reduce their inventories as they look at higher costs. We think as demand comes back at the point of consumer sale, we will see increases as well. But we think we are doing fine competitively.

Okay, great. Thank you.

(Operator Instructions). I and I am not showing any further questions in queue at this time.

Again, I would like to thank everyone for joining us for the call today. We appreciate your interest in Berry and we look forward to talking with you again at the end of next quarter. Thanks, everyone.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.