Berry Global Group Inc (BERY) 2011 Q3 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 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, this program is being recorded. I would now like to introduce your host for today's program, Mr Mark Miles. Please go ahead, sir.

Thank you. And 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 reconciliation of the differences between the GAAP and non-GAAP financial measures are available on 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 Company's various filings with the Securities and Exchange Commission. Now I would like to turn it over to Jon Rich.

Thank you, Mark and good morning everyone and thank you for joining us today for the Berry Plastics third-quarter 2011 earnings call. Throughout this call we will refer to the third fiscal quarter as the June 2011 ending quarter. As you may recall, shortly after my arrival at Berry, I announced that the Company's go forward strategy would include an intensive focus on cash generation, debt deleveraging, and improving the Company's profitability. I am pleased to announce that Berry's performance for the quarter was significantly improved from the results reported in the June 2010 quarter end.

The year-over-year improvements were achieved primarily through pricing actions to capture the value of our products. Aggressive cost reductions, restructuring initiatives and manufacturing process improvements. Additionally, working capital reduction programs and close management of capital spending also contributed to reducing the Company's overall leverage. These improvements were realized in spite of an environment of increasing raw material input costs on a relatively soft economy. Other major accomplishments for the quarter which I will discuss shortly included signing a definitive purchase agreement for the acquisition of the SBC division of Rexam PLC, which will be immediately deleveraging to the Company.

More specifically, for the quarter sales were $1.187 billion, an increase of 2% from the $1.168 billion of sales reported in the June 2010 ending quarter. Adjusted EBITDA for the quarter was $178 million which was a $26 million increase from the June 2010 ending quarter. Profits, as measured by EBITDA and operating margins, improved in every Berry business from the same period in 2010. The specific details on the periodic changes to net sales and adjusted EBITDA will be further detailed by Jim.

Even as our performance has improved, we remain focused on improving our productivity, increasing our operating efficiencies, efficiently passing through raw material cost changes and ensuring that our selling prices are recovering the value that our products deliver to the marketplace. While there is still much to be done, I'm pleased with the margin improvement in our businesses and the generation of free cash flow consistent with the goals that we have outlined for the year.

The biggest challenge we face this quarter was inflating costs of our plastic resins, other raw materials, energy and freight. As we look forward to the next quarter, we anticipate that these conditions will ease temporarily as published industry sources recorded some relief in June from the record high cost of plastic resin we experienced earlier in the year. As we've discussed with you in the past, about two-thirds of Berry's business is conducted with customers with whom we have sales agreements that contain provisions for price changes due to resin cost changes. As we have faced a period of unusually high volatility in resin prices, it has become increasingly challenging for us to deal with the lag in resin price pass-through. In order to address this we accelerated initiatives in late 2010 to work with our customers to shorten the timing lag of passing through the raw material cost changes.

The second challenge we faced in the quarter was relatively weak consumer demand as the recovery from the 2008/2009 recession slowed, as recently indicated by US GDP figures. For the rigid plastics businesses of Berry, physical volumes were essentially flat with the prior year period as improvements in market share were offset by weaker consumer demand and our proactive measures, the lightweight and redesign products.

In our Flexible businesses volumes were lower than the prior year as we consciously pursued a strategy to price for the value of our products in the marketplace and shed business where margins are chronically unattractive. As a result of this approach, profits in our Flexible businesses, which include films and tapes, improved by more than 60% year-over-year and operating margins were up more than 4%. As I've outlined before, significantly improving the profitability of our Flexible Film and Tapes businesses was one of our top -- one of our primary goals for 2011. I am pleased with the results we have achieved in the first half of 2011 which are consistent with our goals. There is still much to do to further improve these business segments.

Now I want to make some brief comments about what we are seeing for the September quarter and the remainder of the year. There is a growing concern that the economy continues to remain weak and that this may have some negative impact on future volumes. The consumer nature of Berry's customers and products typically protect the Company from large cyclical swings in volume. The commodity prices often deflate as global demand softens. But competitive pressure may increase if the economy remains sluggish for a prolonged period of time.

We expect that volumes will remain soft in the September quarter, similar to the pattern we saw in the June quarter. We also expect that the price of plastic resins will decline in the September quarter sequentially from the June quarter. If these conditions play out, as they have in July, we would expect that Berry's financial performance in the September quarter would improve from the prior-year period. It is difficult to have much transparency beyond the September quarter, but our current perspective is that if economic conditions stabilize and continue the slow but steady improvements that we have seen in 2010 and 2011, resin prices are likely to flatten or return to an inflationary environment.

On the business development front, we are very excited about the pending acquisition of the Rexam Specialty Beverage and Closures Business. We feel this acquisition is not only a strong complement to our all ready broad product offering, but is also in line with our goal to continue reducing our debt leverage. The Rexam business will fall under our Rigid Closed Top division. It is my expectation that by utilizing Berry's extensive knowledge as of the closures businesses, rapid implementation of the synergies we've identified, the normal Berry focus on productivity and innovation, and our historical relationships with North American customers that this business will significantly improve its financial performance in the future. In order to finance the acquisition in June we amended our revolving credit facility which increased the commitment by $150 million to a total of $650 million, and extended the maturity to June 2016.

And 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 June 2011 ending quarter financial statistics. As Jon mentioned previously, total net sales for the quarter were $1.187 billion, compared to $1.168 billion of net sales for the June 2010 ending quarter, an increase of $19 million. During the quarter, higher selling prices of $96 million were partially offset by a decline in base business of $77 million. Adjusted EBITDA of $178 million for the quarter, reflecting an increase of $26 million from the $152 million recorded in the June 2010 ending quarter. Adjusted EBITDA, excluding annualization of cost savings, was $177 million for the quarter, reflecting an increase of $44 million from the $133 million recorded in the June 2010 ending quarter.

The following comparisons will focus on major components of this year-on-year quarterly improvement of $44 million. When compared to the prior year, the selling prices versus raw material cost relationship improved $26 million, while improving manufacturing contributed an additional $24 million. These improvements were partially offset by a negative net price adjusted organic sales volume impact of $4 million and $2 million of higher SG&A expenses driven by higher accrued performance compensation.

In the Rigid businesses, adjusted EBITDA increased approximately $21 million overall. Decreased sales volume of 2% was primarily due to decreased market demand in containers, closures, and prescription vials. This lower-based volume resulted in EBITDA decline of $2 million. The relationship of net selling prices to raw material cost resulted in an $11 million EBITDA improvement and improved manufacturing added $15 million of EBITDA. This is partially offset by higher SG&A costs of $3 million, primarily driven by increased accrued performance compensation.

In the Specialty Films business, adjusted EBITDA increased approximately $13 million overall. The relationship of net selling prices to raw material cost resulted in a $10 million EBITDA improvement. Improved manufacturing added $5 million of EBITDA and lower SG&A costs resulted in an additional $2 million of EBITDA. This was partially offset by lower-based volumes which resulted in a $4 million EBITDA reduction for the quarter.

In the Tapes, Bags and coatings business, adjusted EBITDA increased approximately $10 million overall. Decreased sales volume of 13% in the Tapes, Bags, and Coatings division was primarily due to a base volume decline in our retail waste bag business and our decision to exit certain sheeting business. This lower-based 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 an EBITDA increase of $5 million and improved manufacturing added another $4 million of EBITDA. This was partially offset by higher SG&A costs of $1 million, primarily driven by increased accrued performance compensation.

In June 2011 the Company entered into an amendment to the revolving credit facility which increased the commitments by $150 million to a total of $650 million, and extended the maturity to June 2016 subject to certain conditions. As of the end of the quarter, the Company had $462 million of availability, net of letters of credit, and expects the additional $150 million of borrowing capacity to become available upon the completion of the Rexam SBC acquisition. As of July 2, 2011 the Company had cash on hand of $171 million and unused borrowing capacity of $462 million, providing a significant amount of liquidity totaling $633 million.

Working capital improvement compared to the year-to-date June 2010 despite raw material cost inflation as a result of our continued focus on working capital. Additions to property equipment declined by $45 million compared to year-to-date June 2010 due to large, 1-time capital investments in the prior year. Our capital expenditures are forecasted to be approximately $185 million for fiscal 2011. As a reminder, the Company has no material financial maintenance covenants associated with our debt facilities. Also, our debt amortization is approximately $32 million per year and our first material debt maturity does not occur until the second half of 2014. This concludes my financial review of the June 2011-ended quarter. At this time I'd like to turn it back to Jon.

Thanks, Jim. In summary, we are pleased with the quarter as we were able to increase our sales and earnings while expanding our operating margins in the face of rising raw material inputs. And we generated significant positive free cash in the quarter. Our results were consistent with our plans to grow the business by supporting our customers, improving our business and reducing our debt leverage. As mentioned previously, we are excited about the Rexam Specialty and Beverage Closure Business as it will complement our current product offerings while also establishing Berry in markets where we do not have significant presence today.

We look forward to leveraging our combined innovation and know-how in order to continue to cultivate long-term customer partnerships. As we move ahead, I am confident that the people at Berry will continue to drive our results and achieve our goals as they always have. I thank you for your interest in Berry and now we are ready to answer your questions.

(Operator Instructions) Our first question comes from the line of Joe Stivaletti from Goldman Sachs.

Good morning guys. Thank you for all that information. I just wondered one of the challenges we have in forecasting with your company is the whole price versus resin thing and how much catch up there might be. It seems like with resins flattening out, that might be a nice sequential positive for you. I just wondered if you could shed any light or give us some help as it relates to the September quarter on how much catch up you might have in terms of passing along higher raw material costs in the quarter.

We take it at the macro level. I don't know if we will be able to give you any quantitative information on it. But as I said before in the comments, we expect that resin prices will decline sequentially in the September quarter from the June ending quarter. We also anticipate that physical volumes will be in a relatively weak economic environment similar to what we saw in the June ending period. With those two factors in hand, I think it will provide a slight margin advantage to us in the third quarter as we discussed.

Joe, just to add a couple things to that. First of all, the high price resin that we experienced in the quarter we just finished will carry over somewhat into July. Index prices jumped up at the beginning of the quarter and we will get some benefit of those in August because of the roll off of the high-priced resin. And then basically, September should continue to be somewhat beneficial, but as Jon mentioned, volumes are -- have been relatively soft. If you think it is hard for you guys, it is just as hard for us to understand that flow-through.

I would just caution that our visibility in the current dynamic environment that we are in trying to forecast oil prices out beyond next week is extremely difficult. We think our transparency to the third quarter is as we've stated, but beyond that we have very little transparency to oil prices.

Right. I understand. You indicated you thought you would see your September quarter improvement in earnings year-over-year. Do you expect that you will be able to show improvement on a sequential basis when you pull everything together?

That would be our goal but, again, I think it will depend on the exact nature of the volumes here for the rest of the quarter.

The only other thing I wanted to ask you about is have you shared on the Rexam acquisition you said it would be deleveraging. Have you shared what the EBITDA you are acquiring is and the types of synergies and benefits you expect to get on the heels of combining that with your existing assets?

We haven't discussed that and we are not going to discuss that at least until the close.

And what is the latest thinking on when, specifically, when that would probably close?

It is going through the normal review process now. We hope that, that will be completed in the near future. But the timing of that is kind of up to the review process.

Okay. Thanks.

Thank you. Our next question comes from the line of Gary Madia. Please state your company name as we didn't get it on the recording.

Gleacher and Company. Just a couple of questions. I know that you referenced it in your prepared remarks as well as --

Once again. We didn't hear who this was?

It is Gary Madia with Gleacher and Company. Can you hear me?

We are having a hard time hearing you a little bit.

I will speak up. I know in the queue -- the 10-Q that was filed as well as in your prepared remarks, I know you are referenced a couple of times improved manufacturing. Obviously, it was evident in the margin improvement and the absolute improvement in the numbers. Can you flush that out a little bit for us and provide us some insight as to what is really going on there?

Again, I think at the macro level I would say that are engineering people and our operations employees have done an outstanding job in the first half of the year intensely focusing on productivity. We've seen very significant improvements in both our rigid businesses and are flexible businesses. But frankly it just is getting down to the grassroots of each operation that we have and looking at how we improve material efficiencies and labor efficiencies.

The other thing, we made heavy capital investment last year. And across all of our businesses and we are realizing the benefit of those capital investment this year as well.

Is that pretty much what is going on in the year-over-year improvement that we are seeing in the rigid open business?

It is a combination of capturing the value of our products in the marketplace with the pricing, outstanding productivity and some improved mix.

So, as it speaks to the strategy that you talk about I think in your first prepared remarks, is this just a function of -- in product that you think you are value add making sure you are capturing the appropriate margin and if the margin isn't there, exiting the business? Am I being too simplistic?

Clearly the strategy we have embarked on now, I think in our rigid plastics business we have historically had a tremendous portfolio of innovations and working with our customers on design. And that flexible half of our businesses, clearly we had some businesses that were chronically unprofitable and we've made decisions to exit those businesses or decline in them if they don't meet our margin expectations.

And just one final question. I'm not sure if you'll address it. I know that you increased the revolver and I know the original comments regarding the Rexam acquisition said source of funding cash and revolver, are you willing to give us any sense as to how that break down might look pro forma?

In terms of --

How much of the revolver do you anticipate using to bridge the Rexam acquisition?

I think, Gary, it is more -- I think the rough math would be -- our liquidity was, I don't have the exact number in front of me, but call it $630 million something at the end of the quarter. You would then add the $150 million that we talked about of additional capacity that becomes available, and then you would deduct the roughly $360 million purchase price to arrive at liquidity of somewhere around $400 million. Pro forma for the acquisition.

Certainly, we will use our cash first and then we will go into revolver.

Okay. That is all I have. Great quarter guys. Thanks.

Thank you. Our next question comes from the line of Jeff Harlib from Barclays Capital.

Hi guys. You have obviously done a very good job on recovering raw material cost increases and pricing. Can you update us on shortening the pass-through lags, the impact of hardship contracts et cetera, in the quarter?

I think as we had discussed in the past beginning in the fall of last year, we have been talking to all of our customers about the value of trying to move this to 30 day lag periods. Berry is a value added manufacturer of packaging materials and we are not boil arbitrageur's and we think it is the fair thing to do. We continue to make progress on that quarter by quarter. The percentage of people on 30 days is increasing. But it comes down to a dialogue with each one of our customers about the right way to conduct our business between us.

Okay. And just on the Rexam acquisition, can you talk about the fit with Berry's closure business and a little bit more color on how those businesses fit together?

Yes. We are really excited about that because it is right in our strike zone. In terms of the closure side of the business. It will be absorbed into our closed top division. But in terms of the products they produce and how that marries up with us, not only from the sales and marketing side, but also into production manufacturing side, it really is a good fit for us.

Again, as we said before, I think there is a great opportunity for us to improve the performance of that business and leverage the synergies of our know-how with theirs, so we think it is a very exciting opportunity.

The technology is very close.

Okay. And then if you could update us on CapEx expectations for next year roughly in any major projects and then lastly just how your acquisition pipeline looks.

Let me address the CapEx question and Jon will talk about the acquisitions. We don't expect to have any huge increases in CapEx at this point going into next year. So, I would say that we are probably going to look at a higher number because we've got now the Rexam acquisition from what we did this year, but other than that it should be relatively in line in terms of using a number for your forecast models. You shouldn't see any large increase.

With regards to acquisitions, I think we have been hopefully consistent with our stated strategy here. We are extremely focused on deleveraging Berry's balance sheet. We continue to make good progress on that. I was pleased with the progress we made in the first half of the year. We will continue to look at opportunities that are consistent with that strategy of trying to continue to reduce our leverage, but if there are acquisitions similar to the one that we are doing with the Rexam that continue to enhance the value that Berry can deliver to our customers, we will continue to pursue those.

Okay. Thanks.

Thank you. (Operator Instructions) Our next question comes from the line of Michael Marczak from UBS.

Good quarter. Historically you've given us the year-over-year percent of change in volume's as well as pricing by segment. I think you mentioned that the tapes business was down 13% year-over-year. Could you run through the segments and give us that information?

In terms of volume I think we covered that in the text, but we would be happy to -- specifically with tapes, I think the key event there was that we strategically exited some sheeting business in that segment --

Our volume was down 13%. It was primarily driven by exiting businesses. We were in some unprofitable businesses. The sheeting business in particular was a very difficult business and that was a flex business. And exiting that was very helpful to us in terms of the selling price versus material mix and that was the largest contributor to the decreased volume in that particular segment.

Maybe just a couple comments about the business. One is we are in -- one part of the businesses in the pipeline service and repair segment that we call our CPG business. That business continues to see its book of business increase. We are very excited about the growth of that business. And the other part of it is the tapes part of that business is while it is in a sort of cyclical business related to construction, actually we have seen the tape business stabilize and margins in both tapes and our pipeline service businesses are improving nicely. So, we were very pleased with the performance of our tapes business in the first half of the year.

I apologize. So -- I will go back. Did you give out, in the quarter, the percentage change in pricing as well as volumes for rigid open top, rigid closed top on the sales line?

Rigid volumes combined. We haven't split them out, but we are 2% down.

Got it. All right.

Just for clarity there. That volume number is pounds based and, as Jon pointed out in the commentary, part of the reduction in pounds of 2% is driven by improvements in our light weighting of the products.

Okay. Maybe going back to the flexible packaging business. Jon, in the past you have talked about focusing on the manufacturing operations and margins are significantly better but the business continues to struggle. Can you give us some perspective on what the key drivers of the under performance have been? Is it your plant footprint that you're working on, is it the product portfolio? Is it the competitive landscape? Or significantly lower volumes?

I think the main contributor is, first of all, we've had an intense focus on just at the grassroots level of productivity and our productivity processes and I commend our people for that. The other thing, as Jim mentioned, was last year we made some significant capital investments. Some of those investments were just starting up and we probably went through some normal start up headaches that you do when you put any kind of big process in like that. But I would say the vast majority of the savings that we are seeing is just grassroots focus, intense focus on our Six Sigma processes and so forth that are driving productivity on every line that we have.

Okay. I guess the last one if I can. The weakness in your volumes that you mentioned had spilled into the September quarter. Do those volumes accelerate, decelerate or stay about even April through June?

Question? You faded out.

I'm sorry. Trying to get a sense of what happened to volumes in the quarter.

A comment about volumes. We think volumes weakened in the quarter consistent with weaker consumer demand. On the rigid side of our business we think we gained some market share, but the volumes were down due to the light weighting and weaker consumer demand. On the flexible side of the business volumes were also weaker in the quarter, but there we had some strategic decisions to proactively withdraw from chronically unprofitable businesses and so at a macro level may have lost a little share. But we didn't lose share in any segments that we were targeting for growth. So, overall we think the economy was just weak in the second quarter and I think you are seeing that playing out in the GDP figures that were announced.

Got it. Thank you. Good luck in the quarter.

Thanks.

Thank you. Our next question comes from the line of Tarek Hamid from JPMorgan.

Thanks. You talk a little bit about order patterns as you sort of turned in from June and July. Any real change in order patterns or still consistent with the Q2 level?

I think it is really pretty consistent. Again, this business is pretty stable since we are in consumer packaged goods, so when you see changes in order patterns, that are relatively modest compared to other segments, so I wouldn't see -- there is not any erratic behavior here. What you were seeing is what you read which is a generic weakening in the economy. We've seen that play out in our orders but nothing unusual in our order patterns.

Great. And then on the working capital side, specifically on inventory, you guys did a great job of managing the inflationary environment. Does that sort of imply that the cash release as we sort of enter at least a small deflationary period is going to be smaller than maybe we would normally expect?

I don't think -- of course it depends if there is deflation and how much that actually is and we are highly affected by resin. We have made a lot of -- what is really driven our improving working capital is we've had a lot of focus on it, number one. We've also put some systems in place to systematically be able to reduce our inventories during this period. So, that rate of improvement is going to decline because we have taken a lot of the improvement already out of it. So, it will continue to flow -- ebb and flow depending on what happens with our raw material inflation or deflation. I don't think, to answer specifically, if we have deflation of resin it should continue to benefit us to the extent that we have the deflation and is passed through. But it would be less.

I think, Tarek, we will also intensely focus on physical volumes here because we are, first of all, we are trying to generate some cash from working capital. And secondly, we are very focused on inventory levels in a relatively weak economy, so you will see us act appropriately.

To be honest about this, in this inflationary period just to be flat would have been amazing, but we have done I think a good job of being able to reduce it compared to the prior year. Substantially. So, we are really proud of our efforts there.

That is definitely true. One final question for me. It looks like the benefit from some of your manufacturing and process activities really picked up here in this fiscal third quarter. Are you sort of at the right run rate of those benefits as we go into the fourth quarter? Or do you expect additional benefits on a sequential basis? Hello?

Working hard to find new opportunities. I wouldn't want to quantify it. We are relentless in our focus on productivity.

Okay. So, is the current run rate a reasonable proxy for the next quarter or do you think there is a little bit more?

I think it is a reasonable proxy and we will continue to try to do more.

All right. Appreciate that. Thank you very much.

(Operator Instructions) Our next question comes from the line of Sandy Burns from Sterne, Agee.

Good morning. I guess looking at your results and others in the industry it seems that the industry has done a great job of aggressively raising prices to offset the resin spike that occurred earlier. Given the overall softness in demand and the weakness in the economy that you are talking about, are you starting to see any slippage in pricing away from the pass-through of lower resin prices?

I am happy to comment on the actions that Berry is taking and the things that are appropriate for Berry to do. I'm not going to comment on other participants in the marketplace.

Okay. So, in terms of your trade-off between volume and pricing, it sounds like you're still pretty happy with what you have been achieving then.

We are very pleased with the actions that Berry took in the first half of the year and we will continue to try to do that as we move forward.

Okay. And just a follow-up question. In looking at your various segments, it appears that the rigid closed top segment didn't seem to show the same margin improvement that some of the other -- that really all your other segments showed, both sequentially and on a year-over-year basis. Was there anything specific going on in that segment that may be ties into that or just a delay in some of the benefits that you are seeing elsewhere in the organization?

The important thing there was if you look at the comps in 2010 their margins were much higher than some other parts of our business in 2010. And so on a relative basis, I think it doesn't appear that they are getting the same margin expansion. But we are very pleased with the absolute level. There is obviously things that we work on all the time, but I think it is primarily year-over-year comps.

Okay great. Thank you.

Thank you. I am not showing any further questions in the queue at this time.

Good. Then I would like to wrap up, again, by thanking all of you for your interest in Berry Plastics and we will talk to you again at the end of the quarter. Thanks everybody.

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