Berry Global Group Inc (BERY) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. 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 be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce our host for today, Mr. Dustin Stilwell, Head of Investor Relations. Sir, please go ahead.

Good morning and welcome to Berry Plastics earnings conference call. Joining me from the Company today I have Jon Rich, our Chairman and CEO; Jim Kratochvil, our CFO; and Mark Miles, our Treasurer.

During this call, we will be discussing some non-GAAP financial measures, including operating 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 and the cost of plastic resin; the impact of changing environmental laws; changes in the level of the Company's capital investment; the result and 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 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 the information contained in those filings.

I would now like to turn it over to Jon Rich.

Well, thank you, Dustin, and good morning, everyone. Thank you for joining us, and welcome to the Berry Plastics first-quarter 2013 earnings call. Throughout this call, we will refer to the first fiscal quarter as the December 2012 quarter.

Our agenda for this morning is to review the Company's financial performance for the December 2012 quarter and provide some preliminary thoughts on fiscal 2013. In a moment, Jim will report on our financial results, capital structure and key balance sheet items, after which I will close with comments on our key strategies and provide insight into Berry's outlook going forward. We will then open the call to answer any questions you may have.

As noted in our press release, despite the continuation of challenges related to the overall economy, Berry achieved an operating EBITDA record for any December quarter. As we've commented on prior calls, our December quarter is historically our slowest period given the seasonality inherent in our drink cup business and related products. Our December quarter was modestly impacted by challenges related to Hurricane Sandy and increases in our expenditures on research, development and commercialization of several innovative packaging concepts, which I'll describe later in today's call, the benefits of which will be recognized in future quarters.

In spite of the softness in certain segments of our served markets, Berry continues to outperform year-over-year numbers.

The year-over-year improvements for the December quarter were achieved primarily through manufacturing improvements, aggressive cost reduction actions taken in the current quarter as well as throughout 2012, sourcing savings and pricing actions taken to capture the value of our products. We anticipate that working capital reduction programs and close management of capital spending will continue to contribute to the reduction of the Company's overall leverage as it did in 2012. Going forward we will continue to place a strong focus on free cash flow.

Berry achieved sales of $1,072,000,000 and operating EBITDA of $173 million for the December 2012 ending quarter. I am pleased to report that we generated $44 million in adjusted free cash flow during the December 2012 quarter. Our operating EBITDA increased 5% versus the same year period on sales that were 6% lower and physical volumes that were essentially flat compared with the prior year period.

Adjusted net income per share for the December 2012 quarter was $0.08 compared to an adjusted net loss per share of $0.05 for the same prior-year period. Operating EBITDA margin as defined by operating EBITDA divided by net sales was strong for the quarter at 16%, up 2% from the prior year quarter. The reduced year-over-year sales were primarily attributable to the pass through of lower raw material costs versus the prior year.

While we're pleased with our performance, the economic environment in the packaging sector faced in calendar 2012, as well as in our December quarter, remains subdued. As we forecasted during our September quarter conference call and as witnessed in the current quarter, Berry felt the effects of sustained weakness of nondurable goods, primarily caused by weak demand for packaged food products at grocery personal care goods and certain certain other product markets.

Consumer demand for packaged food goods in the US was down on average about 1% in the December ending quarter compared to the same period in 2011. Overall demand for packaged food goods began to decline in the middle of 2011, and while the rate of decline slowed, consumers remain cautious. The primary driver of the lower demand has been the significant increase in overall food prices which occurred over the same time period. Conversely, demand within other segments that we serve continues to grow in line with US GDP grades.

Overall, we believe our volumes in the recently completed quarter were in line with or better than the market, and net of the strategic decisions we took to withdraw from certain low margin business, we had a slight gain in market share.

We maintain our view that plastic packaging will continue to outperform and gain share against metal, glass and paper substrates. The strategic decisions to exit certain chronically unprofitable business early in fiscal 2011 were realized throughout calendar 2012 and are evident in the 5% year-over-year increase in operating EBITDA on relatively flat volumes during the December 2012 quarter versus prior year. These actions are mostly completed by December 2011, and going forward in calendar 2013, our year-over-year volume comparisons should reflect normal business activity. Net of these strategic decisions, our volume this year has grown approximately 1% to 2%.

Turning now to raw materials. Plastic resin is Berry's primary feedstock and comprises approximately 50% of our cost of goods sold. Over the past several years, Berry has taken actions to more effectively manage raw material volatilities through shorter contractual resin price change pass throughs, quicker responses to resin price moves and reduced usage of raw materials through light weighting and scrap reduction. Resin escalators/de-escalators are contract provisions that allow change in our selling prices based on resin price fluctuations.

Let me point out that approximately 70% of our resin cost increases are passed through to our customers within 60 days, and 95% is passed through within 90 days. Our selling price arrangements related to resin costs are comprised of 25% market-based pricing, 35% monthly pass through, 10% bimonthly and 25% quarterly.

Raw material costs for our principle inputs, polyethylene and polypropylene, fell in the first half of calendar 2012, and in general were more stable in the second half of the year.

As we enter 2013, we are seeing significant increases in resin prices, especially for polypropylene, which we believe is primarily a result of short-term supply outages. If you remember calendar 2011 and 2012, which started similar to this year, resin prices spiked up in the first two months before dropping later during those years. It remains to be seen if current demand levels will support these increases through the latter half of 2013.

Due to the shortened escalators highlighted previously and other steps being implemented, the recent resin volatility will have only a modest negative impact on our fiscal second quarter. While future resin prices are always unpredictable, Berry has and will continue to work to shorten the lag time in recovering higher resin prices as they occur.

Now on the acquisition front, we continue to be very pleased with the positive contributions of both our recent additions of Stopaq and Prime Label & Screen. These acquisitions provide highly innovative and complementary technologies to our existing product suite. Acquisitions such as these broaden our existing product lines and leverage our unique expertise to provide solutions at the interface of rigid and flexible plastics.

And now I will turn the call over to Jim who will provide more specific details on Berry's financial results. Jim?

Thank you, Jon, and good morning, everyone. I'd like to comment first on our consolidated results from the December 2012 quarter and then discuss the segment results for the quarter.

Please make note that throughout my commentary when I reference our Rigid business know that this consists of both our Rigid Open Top and Rigid Closed Top segments. My comments surrounding our Flexible business will include our Engineered Materials and Flexible Packaging segments.

As we mentioned during our last conference call, one of our primary focuses is reducing the Company's leverage. During the quarter, we used proceeds from the IPO and to pay off our 11% senior subordinated notes. Upon retirement of these notes at the end of the December 2012 quarter, our net debt was $3,943,000,000 compared to $4,384,000,000 at the end of the September 2012 quarter. Our current 4.9x leverage is a result of continued focus on margin expansion and generation of free cash flow, as well as our principle strategy to reduce overall leverage so that it ultimately resides in a 2x to 4x range.

In line with this strategy, earlier this week Berry announced that we intend to obtain $1 billion in commitments of incremental first lien senior secured term loans to redeem our second priority senior secured floating rate notes due in 2014, our first priority senior secured floating rate notes due in 2015 and our 10 1/4 senior subordinated notes due in 2016.

This refinancing is currently underway and is going extremely well. As a result, this morning we announced our intention to increase the pursuit commitment to $1.4 billion and also redeem our 8 1/4 first priority senior secured notes due in 2015.

I'd also like to point out and we are very pleased to report that Berry's corporate family rating received an upgrade from Moody's by one notch. The refinancing at the end of the day will improve our free cash flow dynamics of our business as we replace more expensive debt with lower cost debt and extend our maturity profile. We look forward to ramping up the syndication just after this call.

Looking at adjusted free cash flow defined as cash from operations less net additions to property, plant and equipment in the December 2012 quarter, we had positive adjusted free cash flow of $44 million. Going forward we will continue to focus intently on maximizing free cash flow by closely managing the use of working capital, alongside investing for future growth. Our investments in property, plant and equipment are forecasted to be approximately $230 million for fiscal 2013 with much of the increased funding, new growth initiatives, international expansion and new product launches.

Net sales for the quarter were $1,072,000,000 compared to $1,137,000,000 for the December 2011 quarter. The 6% sales decline was primarily attributable to lower selling prices due to the pass through of lower resin costs versus prior year, and as Jon mentioned earlier, after factoring in the Company's decision to strategically exit certain chronically unprofitable businesses, our volumes have grown 1% to 2%.

Despite the fact that volumes remained flat for the quarter throughout most of the packaging markets, our operating EBITDA and earnings performance continued to be strong. Specifically, adjusted net income per share for the December 2012 quarter was $0.08 compared to an adjusted net loss per share of $0.05 in the same period in 2011. Operating EBITDA was $173 million for the December 2012 quarter, reflecting an increase of $9 million or 5% from the $164 million in the same period in 2011. Berry's overall operating EBITDA margin improved from 14% in the December 2011 quarter to 16% in the December 2012 quarter. Again, this increase reflects manufacturing improvements, aggressive cost reduction actions taken throughout 2012, sourcing savings and pricing actions taken to capture the value of our products.

Turning to our business segments, in the Rigid business, net sales decreased by 10%, primarily resulting from lower selling prices as a result of lower raw material costs and a modest reduction in physical volumes during the December 2012 quarter. Operating EBITDA decreased 2% overall. The decrease resulted from the relationship of net selling price to raw material costs due to the pass through timing of raw materials, along with a modest increase in SG&A due to additional research, development and commercialization spending in the December 2012 quarter. Operating EBITDA margin for the Rigid business increased to 19% in the December 2012 quarter compared to 18% in the same period in 2011, primarily related to the decrease in raw material costs year over year and investments in innovation during the December 2012 quarter.

In the Flexible business, net sales decreased by 1% resulting from lower selling prices as result of lower raw material costs, partially offset by a modest improvement in physical volumes. Operating EBITDA increased 21% overall. This increase primarily resulted from improved manufacturing performance, acquisition volume, and the relationship of net selling price to raw material costs, partially offset by increased SG&A costs due to additional research, development and commercialization spending. Operating EBITDA margin for the Flexible business increased to 13% in the December 2012 quarter compared to 10% in the same period in 2011.

Turning to our balance sheet, Berry maintains more than ample liquidity, which is enhanced by businesses that generate substantial free cash flow. At the end of the December 2012 quarter, the Company had cash on hand of $32 million and unused borrowing capacity of $413 million, providing a significant amount of liquidity totaling $445 million.

As a reminder, the Company has no material financial maintenance covenants associated with our debt facility.

Also, our annual principle obligation on our debt is approximately $37 million per year.

This concludes my financial review of the December 2012 quarter, and at this time I would like to turn it back to Jon.

Well, thank you, Jim. As we move forward, we remain focused on and continue to pursue initiatives in support of our key strategic objectives. These include continuing to reduce our debt leverage, innovating exciting new products for our customers, growing our business internationally, and identifying and executing on value-adding acquisitions.

As mentioned by Jim, we continue to reduce overall leverage through generation of substantial free cash flow, increasing our earnings, working capital management and effective oversight of our capital expenditures. Our goal is to reduce our leverage one half turn per year targeting, as previously mentioned, the 2x to 4x leverage range.

Over the last two years, Berry has invested significantly in creating innovative and differentiated new products for our customers. We built a new marketing and design center, as well as an expanded R&D facilities at our Evansville headquarters. We have a state-of-the-art rapid prototyping capability that allows us to turn new packaging concepts that we develop with our customers into models within 24 hours. We have increased our investments in R&D and marketing and recently expanded our corporate innovation team in order to accelerate break-through technologies.

Many of the new packaging concepts we are developing are at the interface of traditional Rigid and Flexible designs. Berry's strength in both areas uniquely positions us to take advantage of this new emerging field within the plastics packaging space.

One new product category that we're particularly excited about are packages for applications that require thermal management, things that have to be kept hot or cold. For example, coffee cups, soup bowls, ice cream containers and so forth. Berry's exciting new solution to this problem incorporates a new material concept, together with new plastics packaging manufacturing technologies, to create packages that will keep hot food and drinks hot and cold things cold.

In our vision of the future, the days of not being able to hold onto a hot cup of coffee or requiring a sleeve over wrap just to grip the cup will soon be a thing of the past.

Berry will offer our new thermal management packages under the trade name Versalite. Versalite packages will have outstanding insulating properties; can be printed with high definition graphics that convey our customers' brands and messages; will be produced with low carbon footprints and energy requirements; will be recyclable in communities where polypropylene recycling facilities exist; and will be cost competitive with other premium packages that serve the insulated packaging segment today.

In the last quarter, we've continued to test Versalite with consumer focus groups who consistently rate Versalite a superior solution for hot and cold applications. Our validation work with customer development partners remains on track.

We announced last quarter the opening of a manufacturing plant in Madisonville, Kentucky that will be dedicated to the Versalite product line. Production equipment is being installed in the first half of 2013 with startup anticipated during our September ending quarter. By year-end, we will have significant capacity to produce Versalite hot and cold cups with a full line of the most common sizes.

We anticipate the first commercial sales in the last part of the year.

The second innovation that we're excited about is the all-plastic barrier package that will be an alternative to traditional glass and metal containers or plastic containers with metal or foil lids for food products that have extended shelf life. The all-plastic solution offers lighter weights, lower costs, resealability and microwave cooking, all while maintaining the barrier properties required for shelf stability.

Berry will offer containers for these applications under the trade name Barricade, while our revolutionary lid technology will be marketed under the trade name NUSEAL. We expect the first product in this family to be commercial in the first half of 2013. Berry has already filed for more than 20 patents on the Versalite, NUSEAL and Barricade product platforms.

While we're excited about our breakthrough new product platforms, the spirit of innovation runs throughout all of our businesses. Our current pipeline is robust. We've had significant product line wins with our personal care products, sealant and barrier films, laminate tubes and with our Ruffies branded trashbags.

We continue to work closely with our customers to create standout new packaging that will attract consumers, enhance the brand image of our customers, improve the form function and ease of use of the package, reduces the overall cost and is compatible with our commitment to the environment and the communities where we work and sell our products. Many of our new packages will be coming to retail stores across the country in 2013.

As mentioned in our previous earnings calls, we will also continue to focus the focus of growing with our existing customers to introduce technology-based value-added products in overseas geographic regions will have faster economic growth. Berry will proceed with a disciplined approach and will pursue growth opportunities that will be at or above our current operating margin average.

Along with this strategy, I'm pleased to announce that Jeff Thompson, who previously served as our Chief Legal Officer, has been named Executive Vice President of our International Business Development Group.

Now I'd like to share some comments about our view of the coming March quarter, which is seasonally our second weakest quarter and our outlook for fiscal 2013.

We believe that overall economic activity will improve this year. But for the first calendar quarter, we will be only slightly stronger than what we have witnessed over the previous four quarters. Specifically the January market increases in polyethylene of $0.05 and polypropylene of $0.15, as I described earlier, will generate a modest headwind in the March 2013 quarter, although we've already taken actions to pass these price increases through to our customers.

In addition, last year's March 2012 ending quarter was very strong for Berry and was positively impacted by falling resin prices that occurred at the end of 2011. Taking these factors into account for our March 2013 quarter and assuming that volumes improve in line with GDP forecasts, we still anticipate a modest improvement in our operating EBITDA versus the prior year.

Our operating EBITDA projections remain on track for fiscal 2013. To the extent that volume does not recover or deteriorates further, Berry is prepared to take the necessary cost actions to maintain appropriate profitability growth for the year.

Now I'm pleased to announce that in January Rick Rickertsen joined our Board of Directors. Rick is the managing partner of Pine Creek Partners based in Washington DC. Rick brings a wealth of knowledge gained from 25 years of experience in the financial and private equity sectors. His insight will prove beneficial as we move the Company forward, and we are very pleased to have him join our Board.

And finally, with one full quarter as a public company under our belt, Berry remains focused on our key strategies discussed today, and we will continue to relay our progress to you in upcoming quarters.

Despite challenges, our results are consistent with our belief that we continue to gain share in the marketplace. This is enhanced by our focus on operational improvements and proactive pursuit of cost avoidance and cost reduction programs. We fully expect that our strategies of continuing to pursue high return on investment projects, reducing overall debt, broadening our product portfolio and growing in emerging markets will enhance shareholder value and drive the Company's results throughout 2013.

As always, I am confident that the people at Berry will continue to achieve our goals as they always have.

I thank you for your continued interest in Berry Plastics, and now we're ready to answer your questions.

(Operator Instructions). Ghansham Panjabi.

Hey, guys. Good morning. Hey, can you just touch on the volume trajectory intra-quarter across your major product lines during the calendar year fourth quarter? And also if you could break that out by the major end markets like food, personal care, etc.? Thanks.

Yes, I think so. As Jim described, Rigid volumes in the December ending calendar quarter were slightly down, Flexible volumes were slightly up, and for the total Company, we think we were essentially flat on volume versus the prior-year period.

Was there any deviation during the quarter?

No.

And if you parse that out by food, personal care, etc.?

Yes, if you look at food and personal care, again, as I described, food -- we think food, packaged goods in the quarter were down about 1%. We think Berry looked very similar to that.

One important trend that's happening at Berry on volume is that throughout calendar 2012 we continued to work through the strategic decisions that we had taken to withdraw from certain chronically unprofitable businesses. That led to constant increases in our year-over-year comparisons on volume, and we expect that this year will look more normal compared to the marketplace.

Okay. And then just another question, if I could. On Versalite, Jon, how do you think the volatility in polypropylene just based on what we have seen in the last -- so far this year and probably into February as well, how does that affect your customers' adoption rates for the product, if at all?

Again, our customers are and the consumers that we market tests with all are extremely excited about the portfolio of performance properties, balanced with the cost competitiveness of it, and it's a tremendous value-added product, and we don't anticipate that the current moves in polypropylene will have any impact on that.

Okay. Great. Thanks so much.

George Staphos.

Hi, everyone. Good morning. Jon, I wanted to come back to the volume question. So the up slightly in Flexible, down slightly in Rigid, was that your view of underlying volume, or was that your view of volume, including the impact of volume you've walked away from?

Yes, we were flat on a total basis, right?

Okay.

That's including all the comps, right? So we think net of those comps, we were slightly up and had a slight gain in market share.

Okay. That's great. Do you think then -- I know you're wrapping up the program in terms of having walked away from business and repriced. Are we more or less done with that as we sit here today? So first calendar quarter, second fiscal quarter, we shouldn't be talking about that anymore, or is this something that really doesn't get wrapped up until the end of this quarter?

No, I think we're through with that, and so the comps should reflect normal market activity.

Okay. Next question - I saw some commentary that you're investing in Evansville around the all-barrier plastic package. Could you -- if that's a correct source of information, can you comment as to what is behind that? And then the related question for both, the all-barrier plastic package, Barricade, and Versalite, timing-wise should we expect that you are commercially selling product that is showing up in your P&L by the fiscal fourth quarter of this year or fiscal first quarter of 2014? My guess would be the first quarter?

Actually, I think we should have the first product sales in that family in sort of the fiscal third quarter. We're just lining out the first piece of equipment as we speak, and those are sort of in the normal startup phase.

But I would also remind you, George, that the Barricade NUSEAL line is going to be more customer-specific than the common SKUs that occur on Versalite. So each incremental addition of a new product will be really attractive to us, but not of the scale likely of the Versalite one. But the first sales should conclude in the third fiscal quarter.

Okay. That's great, and I think it was a $30 million investment in Evansville. Can you comment on that?

Part of that was equipment to produce the specific product, and again, I don't want to get ahead of my customers. So I'm going to let them speak first. Part of it was some infrastructure changes we needed in Evansville in order to bring in more raw material feedstocks, and we were very pleased that the city and county here supported that with an expansion of our rail access.

Okay. Last question and I'll turn it over. Just so that we're all on the same page, you cited an expectation of modest improvement in your adjusted EBITDA this quarter versus the last quarter for our analysis. The last year, what figure are you using for adjusted EBITDA for that comment?

I'll let Mark comment on that.

Yes, let me look, George. I think it's [196], George.

[196] is the number I remember.

That's what I've got, too. Thanks.

Alex Ovshey.

Thanks. Good morning. So the commentary around the new products certainly comes across as quite exciting. Jon, would be able to just talk about the size of that market, especially for Versalite, and how you see it developing and the size of the profit pool, and how much of the profit pool Berry can capture over time?

Well, again, I think it's -- one thing to remember, we're obviously focused on hot and cold cups and containers. Let me just talk about hot cups for a moment. That market in the US and around the world is larger than the traditional cold cup market that Berry has played in with its thermoformed drink cups.

You know, we estimate that approximately 10 billion one-time use coffee cups are used by the Tier 1 and Tier 2 retailers in North America. We think that market on a global basis could be more like 30 billion to 35 billion.

One thing we really like about is that hot cups tend to be more standardized SKUs than cold cups, so that I think will make it easier for us to penetrate.

We think we're going to be very, very competitive in terms of the offerings that we have and again. So then the question just is how much of that current market space can we penetrate, and I think I'll leave that to future discussions as our customers work through their qualification. I can just tell you that consumers and customers that we're working with remain extremely excited about that product.

Thanks, Jon. And then are you guys mentioned that Sandy had an impact on fee results in the December quarter, and also you had some incremental costs tied to the new product development. Is there a way for you to be able to quantify what the Sandy impact was? And then the new product development costs, should we see those flow through the P&L through the balance of fiscal 2013 until we actually begin to sell the new products? How is that going to flow through the P&L?

I'll let Jim comment on that.

First of all, in Hurricane Sandy we had nine plants that were affected in the system, and we estimate that the cost of that was somewhere between $3 million and $4 million in the number of plants that were down for a period of time.

In terms of the R&D costs, we saw in the quarter we just completed about $5 million associated with its R&D costs and additional costs that we have to bring some of the products to commercialization that we have been talking about. And those costs are continuing in our system. They're not going away. They're continuing in our system, and they will help us roll out these products.

Thanks very much, Jim. Thanks, Jon.

Scott Gaffner.

Good morning. How are you? I could've used a Versalite cup this morning. The paper cup I think, Jon, I think I got up to three or four seconds this morning on the paper cup.

We can't wait for you to be able to go to a retail store near you and purchase one.

Absolutely. We talked about the investments in new capacity. I think you mentioned always right-sizing capacity for demand. I think there was some closures in the quarter as well. Can you just sort of talk about the overall net capacity adjustment throughout the quarter?

I think we took some of those steps prior in the year. I don't think we made any significant steps in the fourth quarter, and in general I would tell you, as I said before, we have completed the strategic actions that we intended to take, and we think that our portfolio is balanced, and we look forward to the growth here in 2013.

Okay. And then just going to your comments on volumes, you said you'd like to see the volumes improve in line with GDP growth. And volumes were flat in the fourth quarter or your fiscal first quarter. GDP was up about 2.5%. So is that commentary based off of lower food inflation, allowing underlying consumption to get up to a level that's in line with GDP, or just what do you think it is that gets us sort of back in line with GDP growth versus where we were in the fiscal first quarter?

I think a couple of factors. First of all, many prognosticators have sort of estimated the first quarter at 2%. That's kind of what we think. We're just going along with the common wisdom. I think the fourth quarter US GDP figures came out just a couple of days ago and again reflected sort of a weakness in non-durable goods. Even though the whole GDP report was skewed by a number of factors like government spending, the one we focus on is non-durable goods.

Historically, non-durable goods and GDP fall right on top of each other. 2012 was unusual in that non-durable goods were weak. That's consistent with what we saw in other surveys of packaged food goods.

When that's happened historically, it typically doesn't last very long. And so it's our anticipation as jobs continue to recover, the economy continues to recover, albeit at a modest rate, that that will lead to increases in non-durable goods relative to GDP, and we think that should provide favorability.

Particularly I feel good about that for the whole calendar year 2013. We'll have to see how the first quarter develops.

Thank you. Good luck in the quarter.

Thanks.

Joe Stivaletti.

Good morning, guys. Just a couple of little things. On the -- as you talk about acquisitions and your leverage and whatnot, I just was wondering if you would consider any kind of are you considering acquisitions that would be of a large-scale, and if so, what would your comfort level be in terms of moving your leverage up temporarily? To what level would you be comfortable doing that? I mean we've made so much progress in bringing that leverage down during the past couple of years. Just was trying to understand how you think about that.

I'll let Jim comment because he will never let me raise the leverage.

Joe, I'll just tell you that, you know, our focus has been on deleveraging, and we have been able -- within the confines of that, we've been able to make some acquisitions that have helped us to achieve that goal of deleveraging. So we are very cautious about at this point of making an acquisition that would significantly increase our leverage. That's not our number one priority at this point. We want to get to the range of 2x to 4x. Okay. That's basically where we are headed.

That's not to say we won't make acquisitions or look at acquisitions. But I don't think in the near term our focus is on any major type of acquisition that will significantly increase our leverage.

Okay. And then just quickly on your refinancing, I was just curious if you could shed some light on your decision to move heavily from fixed rate bonds or long-term bonds, I should say, into bank loans, as opposed to issuing new bonds? I just was curious about how you thought about that and made that decision.

Mark will comment on that.

Hey, Joe. It's more market-based, Joe. We're happy with our bank investors, as well as our bond investors. So we're open to both markets, and we'll evaluate each refinancing opportunity with what we view the most favorable market for Berry is at that time. But we're happy with both markets and continue to look at both. This one just fit better for the bank financing.

Okay. Thanks a lot.

Chris Manuel.

Good morning, gentlemen. A couple questions for you. First, when you speak -- you spoke a little bit about moving internationally, and you appointed someone to head efforts there more formally. Can you talk about the pace of how that could play out, or do you anticipate that being as a follow-up more acquisition-related, or can you do that smaller and greenfield with select customers? Can you talk maybe a little bit about how you would anticipate that happening? What portion of the portfolio might be international if we look forward five years, 10 years, etc.?

First of all, there's a number of reasons why Berry has tremendous opportunities to grow geographically. First of all, a large portion of our customer base is the global multinational packaged goods companies. What we're going to do is focus on Latin America and Asia, Southeast Asia and China. We're going to work with our existing customer base to bring technology-based, value-added products into those regions that can hold Berry's average net operating margins or higher. So we're not interested in just becoming the fourth piece of commoditized capacity in the region. We're going to focus on differentiated value-added packaging, and I think you've already heard today some of the exciting concepts we have there.

And acquisitions, we are really more focused internally on the organic side. I think down the road we'll have to see if acquisitions make sense. But right now we are focused on our differentiated technologies.

Okay. That's helpful. Two last questions. First is, when we look at the different businesses, if I heard you correctly, you are most of the way or finished at this point with walking away from less profitable business and getting pricing more where you want it.

As we look at an example of Flexible Packaging margins that are still [1-ish], [2-ish], very low single digits, hasn't necessarily -- it has shown a little bit of improvement, but not a lot of improvement. Can you maybe talk to us a little bit about what the destination might be there? Is this business longer-term only going to be a low-single digit business, or can it begin to approach kind of corporate average levels or some of your other pieces?

First of all, I just want to make sure look our Flexible Packaging business this year was a double-digit operating margin business. It was [10 plus] and has moved dramatically.

The thing we're most excited -- there's two things we're excited about with Flexible Packaging. One is, if you walk through any grocery store in America, you will see that consumer preferences and trends on the shelf are shifting towards Flexible Packaging, so it's going to be a faster growing segment. And the thing we're most excited about is this interface of Rigid and Flexible technologies.

Down the road, as you walk down the grocery store shelf, you're going to see packaging that looks completely different than what you see today because that interface of Rigid and Flexible will allow you to have form, function, lower costs combining the best of both technologies. As we move down those two paths, I am very confident that our Flexible Packaging business should start to approach -- our goal is, you know, 15% margins, and I don't see any reason why we shouldn't be able to get there over some period of time.

Okay. And I think I was referring primarily to the EBIT margin so, but --

The EBIT margin, yes, that's okay.

But referring on EBITDA, it still shows 400 or 500 basis points to get to the (technical difficulty) level you are at.

We should be able to raise the EBITDA margins 400 or 500 basis points in the coming years, right?

Yes, that's helpful. That still gets me where I'm looking for. Okay.

The last question I had was with respect to resin. If -- can you remind us of what the help was potentially in your 2Q last year, and what you might anticipate looking at both increases in polyethylene and any increase that is out there for polypropylene, what the headwind might be this year just so we get a sense of what the year-over-year differential is? Can you maybe help us with that?

Jim will comment on that.

Yes, we had about -- the tailwind we had last year coming into the year was from lower resin prices in the fourth calendar quarter of 2011 was in the neighborhood of $8 million to $9 million-ish that we benefited in 2012 in the first quarter. And as we look forward to the quarter we are in today, there's a headwind, based on where resin prices have gone up to already, probably in the neighborhood of $5 million. Okay. So we had tailwind last year, and we have a little bit of headwind.

Now I would remind you also that if you look at the last couple of years, we had resin prices that shot up rapidly in the quarter that we're in, and then they declined fairly quickly in the back half of the year. So we don't know what's going to happen this year, but without underlying demand, it is likely that we'll see similar cycles, so.

Thank you, gentlemen.

Mark Wilde.

Just kind of following on Chris' question about the offshore growth, it sounds like with the announcement this morning of moving your General Counsel in charge of sort of offshore initiatives and just other things we've heard over the last kind of three or four months from you that the focus on international growth for Berry is increasing. Is that correct, and could you talk about where you might see kind of targets over the next three to five years for international presence?

Yes, look, again, I want to reiterate the strategic objective of Berry because they are in the prioritized order. Number one, continuing to focus on deleveraging. Number two, these very exciting new product offerings that we're rolling out. Number three is international, and number four is bolt-on value-adding acquisitions. So that is the prioritization with inside the Company.

I think we see like everybody more attractive growth rates in certain parts of the world. The other thing is we have tremendous relationships with our customer bases who are already in those regions. Frankly, we have been governor that has controlled the rate at which we can grow overseas because we have been and remain very focused on doing it only where we can remain at or above our net average operating margin for the entire Company. That's going to require us to focus on value-added differentiated packaging, and I think we've got a number of great opportunities there. I'm not going to comment on that. We have obviously an internal target. I think as we start to grow there that will become more transparent.

That's fine. I applaud the margin and capital discipline because it seems like we've seen a lot of companies go both South into Asia and end up with some pretty low margins.

The other question I had this morning is --

Let me just make a comment on that. Because, look, I've had a lot of international experience in my business career, and that has helped me to focus on the fact that there are great opportunities overseas. But if you start with too low of a margin, recovering that is extremely difficult. So I can assure you that Berry is not going to take those steps.

Okay. The other question I had is just capital for some of the new business initiatives. Can you give us the amount of capital that you're putting into, say, the Versalite and the Barricade this year and whether that's moved in the last three to six months?

All of it is increasing, but I'm not going to give a specific number for competitive reasons. (multiple speakers). It's in the forecasted $230 million for the fiscal year.

Okay. Very good. Good luck in the second quarter and the balance of the year.

Thanks very much.

Anthony Pettinari, Citigroup.

Good morning. You discussed your view that you might be gaining some share absent your strategic decisions to exit businesses. And my question is, when you look at the Rigid, Flexible and Engineered businesses, where are you gaining share, and are the share gains -- I mean are these primarily coming from existing plastics-based competitors, or you know to what extent are they driven by substitution from glass, metal, paper?

I think that is a very good question. I think the thing you have to remember about Berry is both our scale and the breadth of the served industry markets that we play in. So we detail that out and have a very clear understanding of where we think we're winning. It falls in some cases in all of those categories. We have some exciting wins in the Flexible side. We have some wins in certain market segments in the Rigid side. We continue to be very very pleased with thermoformed drink cups. It's a great market. We're doing a great job in certain segments there. But -- and there is still shifting from alternative materials. So I would say we're winning against competitors in our space, and we're continuing to see shifts towards plastic as the trend has been for years. But it's a complex dynamic.

Okay. And when you think about alternative materials, maybe looking a little bit more long-term over the next two to three years, where do you see the most opportunity to take share from? Is it glass, metal, paper, and what are the categories where you think there's most opportunity for maybe a longer-term perspective?

So with our -- I think I spoke already about Barricade and NUSEAL, these barrier technologies. That is bargaining opportunities to switch glass, metal and spiral wound cardboard into plastic. There's tremendous opportunities for form function improvements, cost savings and customer brand enhancements. So we think all three of those areas are good targets for our new product technologies.

Okay. And then maybe just a final question on the financial side. On working capital management, as we look to 2013, I was -- can you provide any color on how we should think about how much working capital could be a source of cash into the year and how we should think about your working capital build as we move through the year if the seasonality is impacted by any of the initiatives on working capital that you're taking?

It's a little bit of a complex question because it's the internal projects that we have that we're working on to lower working capital and provide a source. And then we also have, you know, what happens with the resin market in particular because, as resin prices have gone up, that's going to put some pressure, you know, in the short-term on our working capital, which would be returned to us to the extent that it comes back. So we're not -- net net, we're not expecting to have a major source of cash from working capital today based on what we see.

Thank you. I'll turn it over.

Bill Hoffman.

Good morning, Jon. I wonder if you could just talk a little bit more about the Versalite. If you are investing in plant and equipment here in Madisonville, Kentucky, can you just give us some sort of concept of how much new business you have contractually sort of set up? And I'm not talking about exact numbers. But does it qualify for 75% operating rates at that kind of plant with future growth, or like how do you look at that?

Again, I think I commented already, Bill, it is good to hear from you. I commented already on the scale of the market size, right? So we're working with both Tier 1 and Tier 2 retail customers. I'm not going to get ahead of them in terms of their customer qualification processes.

I would describe that the initial volumes that we're -- capital equipment that we're putting in is big for us compared to other product lines that we're in, but still very, very small compared to the served industry market. So I think if this thing really catches on, it will provide an exciting opportunity for us to continue to invest and expand our production capacity. And I'm not particularly concerned about selling out the current tranches that we're investing.

Sorry. Do you have contracts at this point, or is that something --?

We are working with customers, but I'm not going to comment on it beyond that.

Okay. Thank you. That's it.

Again, I would like to wrap up today by thanking everybody for joining us on the call today. We thank you for your continued interest in Berry Plastics, and we look forward to talking with you again at the end of our second fiscal quarter. Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.