Berry Global Group Inc (BERY) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Berry Plastics earnings call. (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. 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 resins, 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.

And now I'd like to turn it over to Mr. John Rich.

Thank you, Mark, and good morning, everyone. Thank you for joining us today for the Berry Plastics fourth quarter 2011 conference call. Throughout this call, we'll refer to the fourth fiscal quarter as the September 2011 quarter.

I am pleased to announce that Berry Plastics' performance for the September 2011 quarter and the full fiscal year 2011 were significantly improved from the results reported in the same periods in 2010. The year-over-year improvements were achieved primarily through pricing actions to capture the value of our products, aggressive cost reductions and manufacturing process improvement. Additionally, working capital reduction programs and close management of capital spending also contributed to reducing the Company's overall leverage.

Other major accomplishments in the quarter included closing on the acquisitions of the SBC division of Rexam PLC, and LINPAC Packaging Filmco, Inc.

The quarter sales were $1.229 billion, an increase of 6% from the $1.154 billion of sales reported in the September 2010 period.

Adjusted EBITDA for the quarter was $200 million, which was a $9 million increase from the September 2010 ending period.

Sales for the full fiscal year 2011 were $4.561 billion, an increase of 7% from the fiscal year of 2010 sales of $4.257 billion.

Adjusted EBITDA for the fiscal 2011 was $750 million. Adjusted EBITDA excluding pro forma adjustments for the full fiscal year 2011 was $656 million, an increase of 21% from the $541 million we reported for fiscal 2010.

Profit, as measured by adjusted EBITDA, excluding pro forma adjustments, improved in every business segment from the same period in 2010.

Specific detail on periodic changes to net sales and adjusted EBITDA will be further detailed by Jim.

While we were pleased with the improvement in our businesses, we remain focused on improving our productivity, increasing our operating efficiency, efficiently passing through raw material cost changes and ensuring that our selling prices are recovering the value that our products deliver to the market.

We experienced relatively weak consumer demand during the quarter. Volumes in our rigid plastics business were down slightly as a result of weaker consumer demand and our proactive measures to reduce material usage. In our flexible businesses, volumes were lower than 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, as measured by our EBITDA in our flexible businesses, which includes films and tapes, improved by nearly 50% in the September 2011 quarter versus last year and were up nearly 40% for the full fiscal year 2011 versus 2010.

Some of the more commoditized portions of our film businesses had excess capacity due to weaker demand. We recently announced that we would close film plants in Elizabeth, New Jersey, and Vancouver, Washington, to bring our capacity more in line with current demand.

As we've outlined before, significantly improving the profitability of our flexible businesses was one of our primary goals for 2011. We are pleased with the results that we have achieved in 2011. There is still much to do to further improve these business segments.

Now, looking forward to the December 2011 quarter, there is some concern that the economy will continue to remain weak, which might have a negative impact on our volume. We expect that volumes will remain soft in the December 2011 quarter, similar to the pattern we saw in the recently ended September quarter. In addition, the December-ending quarter is typically the weakest for us due to the normal seasonality of our business.

At the same time, the consumer nature of our customers and products typically protects the Company from large cyclical swings in volume and commodity prices for plastics resins and other goods often decline, as global demand softens. If these conditions play out as they have in October and November, we would expect that Berry's financial performance in the December quarter would improve modestly from the prior year period.

On the business development front, we're very excited about the acquisition of the Rexam Specialty and Beverage Closures business and LINPAC Packaging Filmco Corporation. We feel these acquisitions not only complement our already broad product offerings, but are also in line with our goal to continue reducing our debt leverage.

The Rexam business will fall under our Rigid Closed Top Division and the Filmco business will fall under our Specialty Films Division. While there are is much more work to do, it's our expectation that by rapidly implementing the synergies we have identified, focusing intensely on productivity and innovation and leveraging our historical relationships with customers that these businesses will improve their profitability in the near future.

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

Thanks, Jon. I would like to begin by reviewing key September 2011 quarter financial statistics.

As Jon mentioned previously, total net sales for the quarter were $1.229 billion compared to $1.154 billion of net sales for the September 2010 quarter, an increase of $75 million. During the quarter, higher selling prices of $135 million and acquisition volume growth of $43 million were partially offset by a decline in base business of $103 million.

Adjusted EBITDA was $200 million for the quarter, reflecting an increase of $9 million from the $191 million reported in the September 2010 quarter. Adjusted EBITDA, excluding pro forma adjustments, was $188 million for the quarter, reflecting an increase of $35 million from the $153 million recorded in the September 2010 quarter.

The following comparisons will focus on major components of this year-over-year quarterly EBITDA improvement of $35 million. When compared to the prior year, the selling prices versus raw material cost relationship improved by $19 million. Manufacturing operations improved $15 million, acquisition volume added $4 million and decreased SG&A expenses contributed an additional $4 million.

Once again, when compared to the prior year, the selling prices versus raw material relationship improved $19 million, manufacturing operations improved $15 million, acquisition volume added $4 million and decreased SG&A expenses contributed an additional $4 million and these improvements were partially offset by a negative net price adjusted organic sales volume impact of $7 million.

In the Rigid businesses, adjusted EBITDA increased $15 million overall. Decreased sales volume of 2% was primarily due to decreased market demand in containers and closures. This lower base volume resulted in an EBITDA decline of $1 million.

The relationship of net selling price to raw material costs resulted in a $2 million EBITDA improvement. Acquisition volumes added $4 million of EBITDA and improved manufacturing added $11 million of EBITDA. This was partially offset by higher SG&A costs of $1 million, primarily driven by increased accrued performance compensation.

In the Specialty Films business, adjusted EBITDA increased $11 million overall. The relationship of net selling prices to raw material costs resulted in a $12 million EBITDA improvement. Lower SG&A costs resulted in an additional $6 million of EBITDA. This was partially offset by lower vase volume, which resulted in a $7 million EBITDA reduction for the quarter.

In the Tapes, Bags and Coatings business, adjusted EBITDA increased $9 million overall. Decreased sales volumes of 8% 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 base volume resulted in an EBITDA increase of $1 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 $4 million of EBITDA. This was partially offset by higher SG&A costs of $1 million, primarily driven by increased accrued performance compensation.

As of October 1st, 2011, the Company had cash on hand of $42 million, an unused borrowing capacity of $417 million, providing a significant amount of liquidity totaling $459 million. As a reminder, the Company has no material financial maintenance covenants associated with our debt facility. Also, our debt amortization is approximately $32 million per year and our first material debt maturity does not occur until 2015.

This concludes my financial review of the September 2011 quarter and at this time I'd like to turn it back to Jon.

Thank you, Jim. In summary, we're extremely proud of our accomplishments in 2011. I'm also very excited about the new opportunities that will be available to us next year as we take further steps to enhance our business and best position Berry for continued success.

As I've said before, an important part of our overall strategy has been to increase the value of Berry's flexible plastics business as a part of our total portfolio. Berry is the only major plastics packaging company with extensive capabilities in both rigid and flexible packaging.

During 2011 we made significant improvements to the financial performance of our flexible businesses, but more importantly we embarked on the creation of innovative new technologies at the interface of rigid and flexible plastics designs that will lead to breakthrough new packaging concepts for our customers.

In order to accelerate our timeline for further enhancing our flexible businesses and bringing these exciting new technologies to the marketplace, beginning January 1st, 2012, we're reorganizing our current flexible films businesses of Tapes, Bags and Coatings and Specialty Films into two new divisions. These new divisions will be named Flexible Packaging and Engineered Materials.

The purpose of structuring our businesses in this manner is to significantly enhance our current product portfolio in the finished flexible packaging space. This move will also allow us to leverage our unique innovation capabilities at the interface of rigid and flexible technology and to serve our customers with innovative packaging solutions.

The newly created Flexible Packaging Division will be led by Larry Goldstein, who, prior to this promotion, served as Berry's Executive Vice President of Product Management for our Rigid Open Top Division. Tom Salmon, the current President of our Tapes, Bags and Coatings Division, will now lead our Engineered Materials Division. Both Larry and Tom have extensive industry knowledge and proven leadership experience which will serve them well in their new roles.

Dave Corey, our current Specialty Films President, has elected to retire in April of 2012. Until that time, he'll be working with me to effect a smooth transition. We want to thank him for the outstanding leadership he has demonstrated in both integrating Pliant with Berry and then driving tremendous results in 2011. We wish him our best in his retirement.

So, in conclusion, our results from fiscal year 2011 were consistent with our plans to grow the business by supporting our customers improving our business competitiveness and reducing our debt levels. As mentioned previously, we're excited about the recent acquisitions of the Rexam Specialty and Beverage Closures and Filmco businesses, as they will complement our current producing offerings, while also establishing Berry in markets that we do not have significant presence in.

As we move ahead, we are confident that the people at Berry will continue to drive our results and achieve our goals, as they always have.

I want to thank you for your continued interest in Berry Plastics and I want to take this opportunity to wish all of you a happy holiday season and a prosperous new year in 2012. And now we're ready to answer your questions.

Certainly. (Operator Instructions). Our first question comes from the line of Michal Marczak from UBS. Your question, please?

Hey, guys, happy holidays.

Hey, Mike.

Thanks for your comments, Jon, about volumes. You've previously talked about moving a portion of your business to shorter-term contracts, then I think a quarter or two ago you gave us an update on where you stand. Could you give us a sense of the percentage of contracts that are now on shorter-term contracts in your business?

I'm not going to comment on the exact percentage. As I've said before, we're in the business of providing exciting packaging concepts to our customers, but we're not trying to arbitrage movements in the commodity resin play.

During the September ending quarter, we continued to make what I consider to be good progress in moving customers towards our goal of 30-day resin lags or less. I don't know, Jim, do you have a follow-up comment on that?

No, I would just tell you, this is a long process because we continually have contracts that expire and it's also a negotiating process with our customers. So we are making progress. Once again, it's going to take some time to get there.

Got it. So, I guess, historically, you've talked about a resin lag of, I guess, it's 30 days through inventory and 30 days through cost of goods sold. Is that still a good proxy?

Yes, I would say that's correct.

Got it. Thanks. And I guess, Jon, you mentioned as part of your targets reducing your debt leverage. Do you have a target in mind?

Yes, I have a target in mind. I think this year, if you look at it on an unadjusted basis, I think we took the leverage from about 7-mid, 7.3, where we were at the end of 2010. I think we're going to be right around a 6.0, 6.1 leverage number at the end of the year. We're extremely proud of that progress. It was driven by, of course, significantly improved EBIT earnings and also we had a great year on free cash flow and reducing working capital.

We'd like to continue to reduce that number down into a number that, hopefully, is in the mid-5 range or lower as we look at next year.

That's very helpful. Thank you. And, maybe, one final question. You -- your guidance on this quarter, I guess, the December-end quarter, was very helpful. So, I guess, when I think about the $138 million you posted last year and add on the Rexam acquisition, how much of the pro forma cost reduction in the calculation -- right now it's around $35 million -- do you expect to achieve, if not the quarter, at least in the first half next year? Thank you.

I think my comments on the December ending quarter were sort of specific to our business on the same basis as 2010, not including the recent acquisitions. We expect the recent acquisitions will be accretive to that and we think we're on target to achieve the synergy objections that we defined when we made the acquisitions. So, hopefully, that clarifies that.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Bruce Klein from Credit Suisse. Your question, please?

Hi, good morning. I'm wondering if -- I mean, you've exited some and shed some lower-margin businesses. Do you expect, I guess, that to continue? It sounds like you're closing some resin-- some film, I guess, capacity. But, I guess, what are your thoughts there?

And secondly, just volume trends. Have you seen any noticeable difference, it doesn't sound like, in the last few months? I'm wondering with regard to backlog in your products, also, how that weighs in to your outlook?

We have made significant progress in terms of aligning our flexible business portfolio where we would like it to be. There may be some slight further things to do, but we've made a very large step forward in the progress that we've outlined for ourselves this year.

I think in terms of volumes, again, what we see is about what you read in the newspapers, sort of a very, very slow recovery in economic activity. We still see consumers being cautious and so I think our position on the volume forecast would be consistent with what you read in the newspapers about economic activity. We think it will still be weak.

Hey, Bruce, I would comment that we identified and recognized customers last year where we didn't feel like we were getting the value, okay? So that was an opportunity for us to streamline our operations and improve our margins by reducing some of our lower-margin customers. We've done a pretty good job through the year of doing that and I will tell you that, that same opportunity to reduce -- we're not inclined to reduce at the same level, because we're much more pleased with where we are with our customers today.

Thank you. Our next question comes from the line of Richard Kus from Jefferies. Your question, please?

Yes, hi, guys. Can you talk a little bit about, when you look at the volume declines, how much of the base decline is related to the softer economy versus strategic actions that you guys have taken?

I think when we look at the base economy and overall consumer demand, we think our rigid businesses are a very good reflection of what we think that is. We think we've been holding our market share and, if anything, taking a little bit of market share on the rigid side.

Overall, our volumes there are down a couple percent, but we think that part of that is due to the proactive steps that we've taken in lightweighting our products and continuing to sort of try to drive material efficiency. So, I would say net consumer demand might be down 1% or something like that.

Okay.

On the rigid side.

Okay. And then as you guys continue to look at your Specialty business, how much further do you think you need to go to get to a margin that justifies the value that you guys provide?

Well, again, I think as Jim commented we have taken the lion's share of the steps that we think were necessary to sort of attack the chronically unprofitable business that we had.

I think the steps that I talked about at the very end of my comments in terms of reorganizing our flexible businesses to focus on innovative new packaging technologies and higher value-added flexible applications are going to be important to us as we move ahead in 2012.

Okay. And then lastly, can you guys talk a little bit about how you view the acquisition landscape currently, whether or not there are any interesting opportunities out there?

I would tell you that it seems like almost day there are acquisition opportunities out there. We haven't changed our strategy here.

Basically, we evaluate acquisition opportunities. We are very selective about acquisition opportunities that we would pursue further. We have adopted the strategy of looking for deleveraging acquisitions and ones that -- or ones that would help us deleverage when you consider what the business can do for Berry.

So I would say -- here's what I would say. The opportunities continue to exist. We continue to watch them carefully and be very selective about ones that we make.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Tarek Hamid from JPMorgan. Your question, please?

Thanks and happy holidays.

Thank you, Tarek.

On CapEx, CapEx in 2011 was down substantially over 2010, I think a little over $60 million. Sort of any broad expectations for 2012? Was it closer to the '11 number or the '10 number?

Yes, we have it -- I think it's -- we put a number in the K. I think we're looking at $210 million, which is a higher number than this year. I think we came in around $160-ish million this year. We advertised a higher number. Some of that is because it has gotten pushed off until next year and some of it's because we had the Rexam and Filmco acquisitions that it's a higher number.

But we're pleased with the number where we are. As Jon mentioned, we do have opportunities for organic growth and we'll see where that takes us as we go through the year, but basically $210 million is the number that we put in the forecast.

Great. And then, I think this was sort of asked before, but maybe to touch it again, do you have a sort of pro forma first quarter '11 number that we should be thinking about as comparison to the first quarter of 2012?

No, we have not done that.

Okay. Fair enough.

But we're constantly striving to improve the business.

Appreciate it, thank you.

Thank you. Our next question comes from the line of Roger Spitz from Bank of America. Your question, please?

Thanks. Hey, guys. Could you remind us what the Rexam synergies target is? And why does the annualized cost savings look like it went up only $3 million to $39 million in the September 2011 from $36 million in July 2011? I would have thought that might have been higher, given the Rexam acquisition closed in September?

Roger, this is Mark. For the first -- the first part of your question, in the $39 million we've got $14 million for Rexam at the end of September and $2 million or synergies for Filmco. To answer your question, the reason for the decline in the base cost reduction is just achievement. They're rolling through the -- they're rolling into the actuals.

Okay. So that implies you actually collected a fair amount of cost savings in the fiscal fourth quarter, ending September?

Correct.

Or achieved that. Excellent.

Going forward, do you expect any severance or other costs, cash restructuring costs or cash costs to get those savings in business optimization expense in fiscal 2012?

As we taken on new projects and look at other ways to improve the business, those usually are associated with a certain amount of cost, but I don't we're into any major increases that we would expect.

Okay. I mean like, for instance, of $39 million, can we think about that as maybe a 1 to 1 times, dollar for dollar, to achieve or 50 cents on the dollar or any guidance you can provide there?

Yes, I think it's in that range, Roger. You're in the right ballpark.

Okay, very good. Thank you very much.

Thank you. Our next question comes from the line of Jack Wagner from MJX Asset Management. Your question, please?

Good morning and happy holidays. Going back to the weak consumer demand and the lower -- concerning the lower volume. Have you seen any change in the ordering from your customers? Are they holding on to less inventory? Are they giving you shorter notice on ordering any of your -- any of your products?

There's always the normal sort of end of the year activities that most companies look at putting the right inventory levels in. I wouldn't say that we've said anything that would represent a change in normal behavior. Likewise, I think consumer demand would be -- we haven't seen anything that really would signal a significant change in consumer spending?

So, sequentially, you haven't seen any change in sort of the consumer type of spending or consumer demand over, say, the last couple of quarters?

The consumer started to tighten up around the middle of the year and get more cautious. That's consistent with what you read about economic activity. Consumers -- again, as represented by our business in consumer packaging -- we think that consumers are still cautious and demand is likely to remain sort of similar to the September-ending quarter, albeit adjusted for the normal seasonality whereby the fourth quarter is usually a weaker quarter.

Okay, regarding the acquisitions, can you share with us the acquisition multiples that you paid for LINPAC and Rexam?

Consistent with Jim's statement, we believe they're going to be net deleveraging to us, after synergies within a 12-month period.

But you can't give me any specific acquisition multiples?

We haven't reported that.

Okay. All right, thank you very much.

Thank you. (Operator Instructions). Our next question comes from the line of Jeff Harlib from Barclays. Your question, please?

Hi, guys. Just on the pricing in resins, can you just talk about if there's been any increase in pricing on your non-contract business, given the weak volumes in many areas, and also, how you're seeing resin now? Is it still softening and have you had to start to adjust your prices downward?

-- talk about resin prices, because those are fairly transparent in the marketplace. We saw a significant rise in resin prices in the first half of the calendar year 2011. Those peaked kind of in the summer, perhaps similar to what we saw with consumer demand. In the second half of the year as demand weakened oil prices went down in the third quarter to around $80 a barrel, we saw resin prices decline some.

Now oil prices going back up again to around $100, we've seen some flattening of that and here at the end of the year we don't know, really, where oil prices will go in 2012, so I can't speculate on the forward perspective.

I think with regards to pricing, the only thing I can comment there is that we're out there every day trying to be competitive and also trying to make sure that our pricing reflects the value that our products deliver to our end customers and we'll take the appropriate steps there.

With regard to the resin prices and its absolute basis on pricing, we have contract lags, like most packaging companies.

Right, okay. And just on the flexibles reorganization, is there some product areas that you're looking to either move into that you haven't been in or what areas do you see the growth areas?

I think, first of all, this is an important step for Berry Plastics. It's a step consistent with what we've been talking about, what we need to do with our flexibles businesses. As Berry has become almost an equal size flexible plastics packager and rigid plastics packager, as those businesses came together at Berry, we did realize some opportunities for cross-selling to customers, but the huge advantage which we've come to realize is the creation of innovative new technologies that are at the interface of rigid and flexible plastic packaging.

I think as we move into next year we'll have an opportunity to talk to you about some of these very, very exciting concepts, but we think that there's a great opportunity for Berry to be an innovation leader in the creation of dynamic new packaging solutions that'll incorporation both flexible materials and rigid materials and, frankly, Berry is in an extremely unique position to capitalize on that, based on the asset base that we have.

So, we're really excited about this. The new org structure is designed to help accelerate the financial realization of what we're trying to do.

Okay. And just lastly, you talked about the December quarter being modestly ahead of the prior year. Recent quarters have shown a pretty meaningful year-over-year improvement. I'm just wondering if there are some other costs you're incurring or some other issues or maybe you're being conservative?

Again, the good news is, as we have started to get into periods where we were improving the business significantly, the comps on a year-over-year basis are going to get a little tougher. We welcome that challenge.

Again, I think we're going to be -- we're taking the steps that are appropriate to continue to improve the financial performance of our business.

Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Rich Yu from Citigroup. Your question, please?

This is actually [Jake]. I work with Rich. I just wanted to confirm that you said you're targeting mid-5 times leverage, or so next year? Thanks.

We started around -- on leverage, we started -- we ended up 2010 about 7.3. We think we're going to finish up calendar year 2011 in the very low 6 range. With that sort of just extension of the progress that we've made, we would hope that would put us into the mid-5 range next year, but I'm not giving out a specific target.

Yes and I would caveat that, because there are a lot of things that go into that. We had a great year in terms of working capital this year. In an inflated market, we were able to hold that and actually improve substantially. So, what happens with resin prices makes a big difference, because, you know, if working capital becomes a use, our capital spending, we've given you a forecast, that number could change depending on what happens with organic growth initiatives in the business.

So, there's a lot that goes into that number. Not -- it's not just the EBITDA side. It's also on the debt side, here, as well.

So, we, directionally are -- expect to improve the number, but we're not going to commit to a number.

And, again, I would just say that we're anticipating, like in 2011, 2012 should be another good year for the generation of free cash flow.

Okay. Thanks a lot.

Thank you. (Operator Instructions). And I'm not showing any further questions in the queue at this time.

Thank you very much, operator. Well, then, let me just conclude, again, by thanking all of you for your continued interest in Berry Plastics and, again, once again, I wish all of you a very joyous and happy holiday season and a prosperous 2012 and we'll talk to you at the next conference call.

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