Berry Global Group Inc (BERY) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, welcome to the Berry Plastics earnings conference call. At this time all participants lines 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 conference call is being recorded. I would now like to turn the conference over to Mark Miles, you may begin.

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 nonGAAP financial measures, including EBITDA and adjusted EBITDA. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and nonGAAP 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 and cost of plastic resin, the impact of changing environmental laws, changes in the level of the Company's capital investment, the result of integration of acquired business, our reliance on unpatented know-how and trade secrets, and the risks set forth in the Risk Factors cautionary statement regarding forward-looking statements, and other sections of our reports filed or furnished with the Securities and Exchange Commission.

You should not place undue reliance on our forward-looking statements, we undertake no obligation to update any forward-looking statements to reflect changes in the underlying assumptions or factors, new information, future events, or other changes. Additional important information about the Company's business is set forth in the Company's various filings with the SEC, and the information discussed today should be considered alongside of the information contained in those filings. Finally, as you know Berry Plastics Group Inc., the parent of Berry Plastics Corporation has begun the registration process with the SEC for purposes of its initial public offering. In accordance with Securities Laws, we are currently in a quiet period that limits our ability to discuss certain aspects of the IPO process and the Company.

Thank you for your understanding, and now I would like to turn it over to Jon Rich.

Thank you Mark. Good morning everyone. And thank you for joining us today for the Berry Plastics second quarter 2012 earnings call. Throughout this call we will refer to the second fiscal quarter as the March 2012 quarter. I am pleased to announce that our performance for the March 2012 quarter continued our trend of significantly improved results when compared to the same period last year. The year-over-year improvements for the March quarter were achieved primarily as a result of better mix of base products sold, aggressive cost reduction actions implemented throughout 2011, and continued in the current quarter, manufacturing process improvements, sourcing savings, realized synergies, and a tail wind from lower resin prices in late 2011. We did see a modest increase in working capital as resin prices rose throughout the quarter, and working capital also increased due to the normal seasonality of our business.

Quarterly sales were $1.183 billion, an increase of 7% from the $1.104 billion of sales recorded in the March 2011 quarter. The growth in sales was from a combination of acquisition sales, and higher prices, partially offset by lower volumes on the base business. Adjusted EBITDA excluding pro forma adjustments was $196 million for the quarter, reflecting an increase of $39 million from the $157 million recorded in the March 2011 quarter. Specific detail on periodic changes to net sales and adjusted EBITDA will be further detailed by Jim.

We are very pleased with the improvement in all of our businesses and the continued deleveraging we have demonstrated for the last five quarter. This is consistent with the strategy we announced over a year ago. As we progress throughout 2012 we remain committed to increasing our productivity and operating efficiencies, while adjusting our selling prices to recover the cost of market movements in the price of our raw materials. We did continue to realize relatively weak consumer demand for products utilizing our packages during the quarter. Physical volume was down 7% from the prior period adjusted for acquisitions, principally as a result of actions that we took in 2011 to shed certain low margin businesses, and weaker overall demand. Base volumes in our rigid plastics businesses were down 4% versus the same period in 2011. This volume decrease reflected our ongoing efforts to shift to lighter weight products, as well as soft demand.

Base volume in our flexible businesses were down 10% versus the same quarter of 2011. Flexible volumes were also affected by the softness in the economy, but were primarily lower as a result of executing on our strategy throughout 2011 to price for the value of our products, while allowing competitors to take business where margins have been chronically unattractive. The execution of this strategy has been successful and has contributed to the Company's financial improvement. Last quarter we announced that beginning January 1st 2012, we would reorganize our flexible film businesses of tapes, bags, and coatings, and Specialty Files into two new division. The new divisions names Flexible Packaging and Engineered Materials were structured in a matter to significantly enhance our current product portfolio in the Finished Flexible Packaging space. I am pleased to report that this reorganization has progressed very smoothly, the move allows us to further develop our unique innovation capabilities of the interface of rigid and flexible technologies, and serve our customers with innovative packaging solutions.

With regard to raw materials, lower resin prices in the latter part of 2011 provided a moderate tail wind to earnings in the March quarter. However plastic resin prices rose sharply at the beginning of this year driven principally by increases in oil prices that occurred at the end of 2011, and short term supply constraints due to chemical asset turnarounds. As we have discussed already, consumer demand in North America remains stubbornly weak, and is weakening even more in certain other parts of the world. As a result, while there is always no certainty to our view on resin prices, it appears that we have reached the peak of the current cycle of higher resin costs, and for the moment oil and resin prices are beginning to indicate some movement lower. Regardless of what happens to resin prices, we are now better positioned to handle the impact of swings in plastic prices more than we have been historically, because we have shortened the pass through time frame on many of our indexed customers.

We continue to be very excited about both of the acquisitions of the Rexam SBC division and Filmco, which were completed in the last half of calendar 2011. The integration of these businesses remains on track and is in line with our expectations. The Filmco business which is the smaller of the businesses is fully integrated. The Rexam business has now converted to Berry's IT systems in all of its domestic locations. Synergy realization is helping to boost margins on a consistent basis, and we expect to see continued improvement as we progress through the year. It is also important to note that we have not experienced any disruptions with customers with the transfer of business from Rexam locations into Berry facilities, and the realignment of equipment throughout the Berry systems. Both acquisitions fit nicely into our existing platform, and we look forward to developing additional opportunities as we grow these businesses.

And now I will turn it over to Jim for more details on the financial results. Jim.

Thanks, Jon. I would like to begin by reviewing key March 2012 quarter financial statistics. As Jon mentioned previously, total net sales for the quarter were $1,183,000,000 compared to $1,104,000,000 of net sales for the March 2011 quarter, an increase of $79 million. During the quarter higher selling prices of $34 million and acquisition volume growth of $119 million, were partially offset by a decline in price adjusted base volume of $74 million. Adjusted EBITDA excluding pro forma adjustments was $196 million for the quarter, reflecting an increase of $39 million from the $157 million recorded in the March 2011 quarter.

The following comparisons will focus on major components of this year-on-year quarterly EBITDA improvement of $39 million. When compared to the prior year, the selling prices versus raw material cost relationships improved $21 million, manufacturing operations improved $7 million, and acquisition volume added $17 million. These improvements were partially offset by a negative net price adjusted organic sales volume impact of $5 million, and increased SG&A of $1 million, driven primarily by higher Research & Development spending. In the Rigid businesses adjusted EBITDA increased $26 million overall. Decreased sales volume of 4% resulted in an EBITDA decline of $2 million. The relationship of net selling price to raw material costs resulted in an $11 million EBITDA improvement. Acquisition volume added $16 million of EBITDA, and improved manufacturing added $1 million of EBITDA.

In the flexible businesses, adjusted EBITDA increased $13 million overall. Decreased sales volume of 15% resulted in an EBITDA decline of $3 million. The relationship of selling prices and raw material costs during the quarter resulted in an EBITDA increase of $10 million, and acquisition volume added $1 million of EBITDA. Continued focus on operational improvements contributed $6 million during the quarter. This was partially offset by higher SG&A costs of $1 million. As of March 31st 2012 the Company had cash on hand of $32 million and unused borrowing capacity of $417 million, providing a significant amount of liquidity totaling $449 million.

As a reminder the Company has no material financial maintenance covenants associated with our debt facilities. Also our debt amortization is $34 million per year. This concludes my financial review of the March 2012 quarter, and at this time I would like to turn it back to Jon.

Thank you, Jim. We were pleased with our results for the March ending quarter. In the last quarter we took steps to reorganize our business units as I described earlier, which will focus our attention on creating innovative new packaging products, especially at the interface of rigid and flexible plastic technologies.

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 continued interest in Berry Plastics. Now we are ready to answer your questions.

Thank you. (Operator Instructions). Our first question is from Joe Stivaletti of Goldman Sachs. Your line is now open.

Good morning. First I was just wondering if you could talk about resin versus selling prices as we have moved here into the June quarter. I guess the question is, did the higher market prices of resin in the March quarter flow into your income statement very much, or should we expect to see more of that in the June quarter, and just trying to see if your selling prices are keeping pace with that?Obviously, it is a very big swing, very positive in the March quarter, so just trying to get a handle on where that stands?

Jim detailed nicely the results that we have achieved historical in terms of recovering resin prices. We have worked with our customers to try to shorten the lag period, and we have had success in that. Resin prices did rise especially at the beginning of the quarter, first calendar quarter in January and February, and typically they flow through our inventory in about a 60-day period. And I am not going to comment on pricing actions in a go-forward manner, but I think you can assess our historical actions and draw your own conclusions.

Right. Right. Okay. And then I know there are limits to, I didn't know if you could comment on, as it relates to the IPO, in terms of any reasonable expectations on timing there?

We are not going to make any comments regarding the IPO because we are in the quiet period with the SEC.

Okay. And the only other thing I was just wondering if you had any update on your plan as it relates to the Holdco loan, I know that you have, an entity has bought back most of that. Has there been any change there or any plans that you could share with us on that?

There hasn't been any change Joe. We really can't comment on the future actions there.

Okay. Alright. Thank you.

Thank you. The next question is from Michael Marczak of UBS. Your line is now open.

Good morning, guys.

Good morning.

Jon, maybe if you could touch, give us a little more color on what you saw in terms of volumes. The negative 7% physical volume decline. Was that principally from weaker overall demand, and how much of that was from you walking away from the business?

I think we detailed some of that. I think we are seeing a couple of things. One is I think if you look at our results compared to the prior period last year, a lot of the decline in demand was due to voluntary actions that we took to withdraw from chronically low margin business in our flexible side. I think if you look at the rigid businesses, we saw two things there.

One was we continue to lightweight products and there is always a drive to try to reduce weight and we tend to look at those businesses on a pound basis, but secondly, I think if you look at the various market segments as recorded by independent groups like Nielsen, and so forth, I think demand in grocery in the first quarter was, continued to be weak as consumers continue to fight through the period of high gasoline prices and pressure from the sort of chronically slow recovery from the recession,offset by some gains in other segments.

And, Michael, I would tell you that what I just mentioned on the call is that on the rigid side of the business our volume was up around 4%. And the other side of the business would have incurred a higher amount. So that gives you an idea that on the flexible side of the business is where we were shedding the volume, and raising prices to improve our margins.

Got it. And I guess part of that 4% was you just lightweighting some of your products, so it wasn't just a 4% reduction demand is that the way to think about it?

I would think of it as more [bid].

Got it. And I guess as you look through the quarter, Q2, did you get a sense that volume trends are improving?

There is a normal increase and seasonality in our business that occurs. And that trend is normal, we saw volumes increasing in the March ending quarter, due to normal seasonality in our business, offset some by certain weaknesses in some segments like groceries, but the normal seasonality increase in volumes in our business is occurring.

Okay and I guess finally in the cash flow statement the $52 million cash used from inventory build, is it fair to assume that the majority of that came from increased in resin prices or was some of that due to seasonality where second quarter is a strong quarter for you guys? Thank you.

It is both. Resin prices rose in the quarter and that flowed in through our inventory, but we also normally build inventory in the first quarter in anticipation of the normal seasonality for things like drink cups, and so forth, which increase in volume significantly as the spring and summer season approaches. So we typically grow inventories in the first quarter.

Was that maybe in terms ever magnitude was it half and half in terms of two buckets, or was one bucket larger than the other?

I can tell you in terms of just between AR and inventory and AP combined, working capital has generally been in the $4 million to $5 million per penny. So you can look at CMAI or CDI and do that rough math to get that break down.

That is very helpful. Thank you.

Yes. You are welcome.

Thank you. The next question is from Bruce Klein of Credit Suisse. Your line is open.

Hi. Good morning. I was wondering just on the volume. I understand the volume comments. I am wondering if there are any other specific areas where there is (inaudible-microphone inaccessible)?

Bruce, we are having a hard time hearing you.

Oh, I am wondering on the volume side if there is any other specificity you can provide with regard to various segments whether its supermarkets, or any other segment, and then I am wondering on the market share, do you think like you said, I don't know if you lost any because you voluntarily wanted to lose some, because was it poor margin or any other volume or share comments you would make in terms of major customers are off or anything like that?

With regard to segments, I think I have covered that. I think we saw some weaknesses in grocery, which again, has been reported by others. And the normal seasonality in the rest of our business offsetting that. On the flexible side of our businesses if you look at the year-over-year comps, those are being impacted by the strategic actions that we took last year. Those steps were largely completed in the December ending quarter of 2011, and so we have completed the vast majority of the steps that we intended to take, and we would anticipate that things would improve as we now move forward with a base of business that we are pleased with.

And then Solo and Dart getting together, do you think any indications that you are seeing that you anticipate on your side?

Other than we noticed that they merged together, we don't have any comments about that.

Okay. Thanks, guys.

And, Bruce, I did want to clarify on the l volume I think earlier we mentioned 15% on flexible, and that should have been 11%, so I just wanted to clarify that as well.

Okay. Thank you.

Thank you. Our next question is from Roger Spitz of BofA Merrill Lynch. Your line is open.

Hi. Thank you. I noticed in the MD&A, all segments but the rigid closed top benefited from margin expansion. Could you talk about what was happening in rigid closed tops that did not benefit as well?

Can you repeat some of that?

Sure. Just looking at the MD&A it suggested that three of your four segments benefited from margin expansion with prices rising faster than raw material costs, except for rigid closed top, but you didn't mention that presuming that it didn't get that benefit, could you discuss that, please?

Yes. The rigid closed top is an area of the business that we had made some acquisitions, and we haven't really talked about those margins, but that received the benefit of that business and that is a business that we are in the process of improving as we speak.

On an organic basis without Rexam, did rigid closed top benefit from the margin expansion?

They had some, yes. I mean, Roger they had some modest expansion, they did.

Okay. And is BP Parallel LLC part of the bond restricted group?

No, it is an unrestricted subsidiary.

Okay. Thank you very much.

Thank you. (Operator Instructions). Our next question is from Jeff Harlib of Barclays. Your line is open.

Good morning. Could you talk about where you stand with the new product initiatives you talked about, between rigid and flexible that you are developing and also just, other areas of potential growth in the engineered materials and flexible segment?

Obviously we have to be careful about that we make regarding new products because of the SEC quiet period. I would just say that, the normal course of business here, things are proceeding as we would anticipate.

Okay. And do you see, with your current portfolio areas of growth in engineered materials and flexibles?

We anticipate that the business would grow off the base that we currently have having completed all of the strategic steps that we wanted to take at the end of last year.

Okay. Okay. And CapEx for this year still in the little over 200 range?

Yes. 210.

Okay. Okay. That is all I have. Thanks.

Thank you. (Operator Instructions). There are no further questions at this time.

Well again, I would like to thank all of you for joining us for today's call, and we look forward to talking to you again at the end of the next quarter. Thanks, everybody.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.