Berry Global Group Inc (BERY) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Berry Plastics Earnings Call. At this time all participants are in 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 today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Dustin Stilwell, Head of Investor Relations. Please go ahead.

Thanks, Allie. Good morning and welcome, everyone, 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 Corporate Controller and 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 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 results 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 SEC. 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.

On today's call Jon and Jim will provide an update on recent events and activities, an overview of our financial performance for our second fiscal quarter, and before going into Q&A Jon will provide commentary on our Outlook for the June 2013 quarter.

With that I will now like to turn it over to Jon Rich.

Thank you, Dustin. Good morning, everyone. Thank you for joining us and welcome to the Berry Plastic second quarter 2013 earnings call. Throughout this call we will refer to the second fiscal quarter as the March 2013 quarter.

Let me begin by highlighting some recent Berry news and events. First, in February, we completed a successful debt refinancing by issuing a new $1.4 billion term loan at an interest rate of Libor plus 2.5% with a 1% floor, eliminating four previous tranches of debt with interest rates as high as 10.25%. This action reduced our total annual interest expense by approximately $48 million, while pushing maturities out from 2015 to 2020. We were able to secure this attractive financing because of our improved financial results and reduced debt leverage, which resulted in a ratings upgrade by Moody's and S&P. Jim will provide more details on our capital structure during his financial overview. Second, in April, our primary shareholders, the Apollo Management and Graham Partners, executed a secondary stock offering selling about 19 million shares. I want to take this opportunity to welcome new Berry Plastic shareholders to the Company. We look forward to working with you and all of our shareholders.

The successful completion of the secondary stock offering reduces Apollo's ownership of the Company to approximately 44%. So, for the first time in our 45 year history, Berry is now an independent public Company and are no longer a controlled Company under NYSE rules. Consequently, we will be required to comply with board and committee composition rules, which we will implement over the next three to 12 months. Also in April, the Company acquired certain bottle manufacturing assets of one of our longstanding customers, [Bijong] Incorporated. As part of the agreement Berry has entered into a long-term contractual relationship with Bijong that will contribute approximately $25 million in incremental annual sales to Berry. The asset transfer creates a solution that is a win-win for Berry and Bijong. Lastly, during the quarter, we held our first annual public meeting of shareholders, during which Don Graham, David Heller, and Rick Rickertsen were reelected to our Board of Directors. I thank them for their continued service to the Company and we will continue to benefit from their guidance.

Now, turning to our financial performance. Berry achieved sales of $1.150 billion, operating EBITDA of $200 million and generated $16 million of adjusted free cash flow in the March 2013 quarter. Operating EBITDA increased 2% versus the same year period on sales and volume that were 3% lower compared with last year. Adjusted free cash flow improved by $11 million versus the prior year March period. Adjusted net income per share for the March 2013 quarter was $0.28 compared to $0.16 for the same period in 2012. Operating EBITDA margin, as defined by operating EBITDA divided by net sales, was strong for the March 2013 quarter at 17.4%, up from 16.6% in last year's quarter. Our results for the March 2013 quarter continued a trend of improvement, as earnings were higher for the 11th consecutive quarter when compared to the same period in the prior year. Our operating EBITDA was also a record for any March ending quarter in the history of the Company. The year-over-year improvements for the March 2013 quarter were achieved primarily as a result of cost reduction actions, continuing to price our products consistent with the value they deliver to our customers and strong productivity. With these steps we were able to overcome continued pressure from the sluggish economy, weak consumer demand for packaged food goods, as well as increases in the cost of plastic resin.

Next I want to make some comments about what we are seeing regarding volumes in demand for packaged goods. Lower sales revenues in the quarter versus the prior year were primarily a result of lower year-over-year physical volumes. While the overall economy remains sluggish this quarter, similar to the second half of calendar 2012, several non economic factors contributed to the volume decline. First, there were two fewer shipping days in 2013 compared to 2012, as New Year's Day and Easter fell into our quarter this year and not last year. If you adjust for the difference in shipping days, physical volume in pounds was down about eight-tenths of 1% in the March 2013 quarter compared to last year.

Second, last year the weather in the first three months of the year was abnormally warm, while this year was cooler than typical winter in many areas of the country. This primarily impacted our drink cup business at fast food restaurants consistent with what our customers have been saying in their public comments. An additional continuing factor contributing to lower physical volumes is our ongoing efforts with customers to lightweight packages for existing product redesigns or new product development. These productivity actions, which benefit our customers and Berry, typically contribute about 0.5% reduction in total volume per year. While demand in the quarter remained muted in total, Berry's product diversity helped us, as certain product segments, for example flexible personal care products, specialty containers and laminate tubes, grew more than 10%. Our tapes business also had a good volume quarter.

Last week's first calendar US GDP report was indicative of the continuation of sluggish economic activity that we have now faced for the past two years. While total GDP was up around 2% versus calendar Q4, nondurable goods, which most closely links to the markets our packages serve, rose only 1%. It was the sixth consecutive quarter where nondurable goods lagged the total GDP. Historically, nondurable goods tracks the total GDP. And while the current period of dislocation is not unprecedented, it is unusual. In past periods where this phenomenon occurred, nondurable goods typically recovers to or above GDP and then tracks to the norm. With food inflation now moderating, we hope to see food and other nondurable goods demand recover in the back half of calendar year 2013.

Our key raw materials, polyethylene and propylene, continued to experience volatile fluctuations in price during the March ending quarter. For example, polypropylene rose over 20% in the quarter. This raw material cost increase negatively impacted the quarter by approximately $2 million due to the timing lag of passing through these costs on escalator accounts. Conversely, the March 2012 quarter was favorably impacted by $8 million to $9 million due to falling resin prices at the end of 2011, yielding a $10 million swing year-over-year. This situation should reverse in the June ending quarter, as the June 2012 quarter was unfavorably impacted by $8 million due to rising resin prices in early 2012. Resin prices are likely to remain volatile and difficult to forecast for the near-term. But we believe the development of North American shale gas and the substantial capacity expansions amounts in C-2 and C-3 derivatives will likely, in the long-term, be an important positive development for Berry Plastics.

Now I will turn the call over to Jim, who will provide more specific details on various financial results. Jim?

Thank you, Jon, and good morning, everyone.

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 Jon mentioned, during the quarter Berry completed a $1.4 billion issuance of incremental first lien senior secured term loans due in February 2020. The proceeds were used to redeem our second priority senior secured floating rate notes due in 2014, our first priority senior secured floating rate notes due in 2015, our 8.5% first priority senior secured notes due 2015 and our 10.25% senior subordinated notes due in 2016. The transaction will result in a reduction of interest expense by more than $48 million annually. As future debt maturities come nearer, we will look at the best avenues to reduce future cash interest expense, enhance shareholder value and improve the Company's free cash flow position. Our net debt at the end of the March 2013 quarter was $3.983 billion compared to $4.532 billion at the end of the March 2012 quarter. Our current 4.9 times leverage, one times less than the same prior year quarter, is a result of continued focus on one of our principle strategies to reduce leverage to the 2 to 4 times range by maximizing our generation of free cash flow and improving earnings.

As Jon highlighted, net sales for the quarter were $1.150 billion compared to $1.183 billion for the March 2012 quarter. The decrease was primarily attributed to a volume decline of 3% related to a reduction in the number of shipping days, the year-over-year adverse change in weather, and reduction in raw material content, partially offset by volume gains in certain of our product lines. Despite the fact that volumes remained essentially flat for the quarter throughout most of the packaging sector, our operating EBITDA and earnings performance continued to be strong. Specifically, adjusted net income per share for the March 2013 quarter were $0.28 compared to $0.16 for the same period in 2012. Operating EBITDA was $200 million for the March 2013 quarter, reflecting an increase of $4 million or 2% from the $196 million in the prior year quarter. Berry's overall operating EBITDA margin improved from 16.6% in the March 2012 to 17.4% in the March 2013 quarter. Again, this increase reflects continued cost reduction actions, volume gains in certain of our product lines and realized synergies from acquisitions.

Turning to our business segments. In the rigid business, net sales decreased by 8%, primarily as a result of a reduction in physical volumes during the March 2013 quarter, primarily attributed to reduction in the number of shipping days and year-over-year adverse change in weather and product realignment. Operating EBITDA decreased 5% overall. The decrease was primarily related to the volume decline described earlier and a modest increase in cost associated with research, development and commercialization of new products in the March 2013 quarter. Operating EBITDA margin for the rigid business increased to 21% in the March 2013 quarter compared to 20% in the prior year quarter. In the flexible business net sells increased by 3% attributed to acquisition volumes, higher selling prices and product realignment. Operating EBITDA increased 18% overall. This increase primarily resulted from cost reduction actions taken, improvements in the relationship of net selling price to raw material costs and acquisition volumes. Operating EBITDA margin for the flexible business increased to 14% in the March 2013 quarter compared to 12% in the prior year quarter.

Looking at adjusted free cash flow, defined as cash from operations, less additions to property, plant and equipment in the March 2013 quarter, we had positive adjusted free cash flow of $16 million, despite early interest payments of $10 million in conjunction with our recent financing. This is an increase of $11 million from $5 million for the March 2012 quarter. This brought the Company's LTM adjusted free cash flow to $283 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 funding used for new growth initiatives, international expansion and new product launches.

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 March 2013 quarter, the Company had cash on hand of $16 million and unused borrowing capacity of $518 million, providing a significant amount of liquidity totaling $534 million. As a reminder, the Company has no material financial maintenance covenants associated with our debt facilities. This concludes my financial review of the March 2013 quarter.

At this time I would like to turn it back to Jon.

Thank you, Jim.

As I have discussed with you in prior conference calls, there are four key strategic activities that will drive the creation of value for Berry shareholders. Those are -- continuing to delever our balance sheet; growing organically with innovative new products; investing in international regions with high GDP growth rates; and continuing to execute on share accretive acquisitions. Let me quickly update you on our progress in each of these areas. Our goal of reducing our leverage ultimately to the 2 to 4 times range remains a top priority. We have strengthened our balance sheet and our LTM adjusted free cash was $283 million or approximately $2.40 in free cash per share, consistent with our plan. As Jim described, we have made significant progress in reducing our leverage in the past year. We have targeted to be in the mid 4 times range by the end of the calendar year, recognizing that one turn of deleveraging has the potential to create approximately $6.80 per share of equity value accretion to shareholders.

Berry has invested significantly in creating innovative and differentiated new products for our customers. We have increased our investments in R&D and marketing and recently expanded our corporate innovation team in order to accelerate the development of breakthrough technologies. Many of the new packaging concepts that 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 is 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 meet these needs. Berry will offer our new thermal management packages under the trade name Versalite. Versalite is truly a revolutionary technology. Versalite is a unique polypropylene based packaging product that we fully expect to be the first widely recyclable disposable hot cup in the US market and can be made from readily available low cost North American shale gas. Versalite will allow consumers to enjoy a hot cup of coffee without the cup being too hot to hold. It will enable our customers to display their brand image and messages in high definition graphic formats like never before, at a competitive cost compared to current offerings. The first envision market for Versalite is the 21 billion unit US premium disposable hot and cold drink cup market, which today is served with double walled or sleeve paper or paper wrapped expanded polystyrene products. We are targeting tier one and two coffee and tea retailers, convenience stores and large fast food restaurants as the first customers for Versalite.

Ultimately, we see opportunities for Versalite in distribution channels, such as sports franchises, hotels and offices where the customers brand image is critical to the product. And longer term, as we develop awareness for the Versalite brand, we will offer the product directly to consumers at grocers and big box formats. During the quarter just completed, we continued to work with development customers to commercialize Versalite. We currently anticipate the first commercial sales near the end of the September ending quarter. We expect to launch the product with a significant marketing campaign prior to the first sales. Operationally, we produced the first products in our new factory in Madisonville Kentucky. When complete, the plant in Madisonville will employ around 400 and have the capability to produce the product mix and capacity needed to meet our customer's requirements.

Regarding international expansion. During the quarter we initiated our first capital investment in Brazil, focusing on specialty closure applications for existing Berry customers. As mentioned on earlier calls, we intend entering global markets with a disciplined approach serving our existing global multinational customer base, while maintaining the Company's net average operating EBITDA margins. We are focused on growing organically in high GDP regions like Brazil and Latin America, Southeast Asia and China. We will also be mindful of value creating acquisition opportunities overseas, but only where they can be done consistent with Berry's long-standing goal of being accretive to shareholder value within one year.

Now I would like to share some comments about our view of the coming June quarter and our Outlook for fiscal 2013. We believe the demand driven by economic activity will remain similar to the environment we have experienced in the past four quarters. Seasonally, volumes continue to improve in the June quarter and we are observing typical sequential improvements in demand. As discussed earlier, raw material cost reductions should provide some tailwind late in the June 2013 quarter. Taking these factors into account for our June 2013 quarter and assuming that volumes improve in line with normal seasonality and GDP forecasts, we anticipate a near double-digit improvement in the 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. Berry remains focused on our key strategic initiatives and we will continue to relay our progress to you in upcoming quarters. Despite the ongoing weak economic environment, we are confident that Berry's ability to differentiate ourselves and offer value creating innovation to our customers will enable us to grow. As always, 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 and now we're ready to answer your questions.

(Operator Instructions)

Ghansham Panjabi, Robert W. Baird.

Just given the weather issues during the quarter, do you have a sense as to whether there is still excess inventory along the channels you sell into? I guess I am referring to the rigids business. It seems like weather across April was quite mixed too, just wanted to get your thoughts on that.

Ghansham, it is interesting, my hometown of Des Moines, Iowa, it is snowing there today on May 3, highly unusual. I think with regards to inventories at our customers, we have limited visibility to that.

I think if I had to comment on what it feels like, I would say that customers did draw down some inventories in the first quarter due to weather, but I would also note that with falling raw material prices during the quarter, I think certain customers were anticipating that there will be better buying opportunities in the second quarter.

Then on Versalite, I just scale up production, how should we think about your production capacity and how that is going to evolve over time? Also the incremental start-up or operating cost for the start ups? Thanks.

I think the factory down in Madisonville, Kentucky will have the capacity to supply a significant tranche of capacity as it comes up. And then if you think about the $21 billion served industry market, we should be able to add capacity in the 5% to 10% range of that per year going forward.

Okay, that's very helpful. Thanks so much.

George Staphos, Bank of America Merrill Lynch.

I'm out of the office today, I apologize, so I'd don't have everything in front of me as I normally would. My first question would be, you said that you remain on track for your EBITDA goals for the year and that is great. Could you specify in dollar terms what that EBITDA goal is for fiscal '13? Then I have some follow-ons.

Yes, George, as you are well aware, I think, we don't typically provide that guidance, but I think if we look at how the year is playing out, I would say that the economy and volumes remain a little more muted than I had thought at the beginning of the year. Product mix, productivity and sourcing productivity are sort of offsetting that. That is how we reached the conclusion that we are on track.

Is there a percentage growth goal that you could remind us about for EBITDA, really, it is ultimately the same question, that you have in mind as you then again say that you are on track, Jon?

Look, I think that we should be able to grow EBITDA at a higher rate than sales increases for sure. I think we are anticipating sales increases to be at GDP rates here in the coming quarters, the rest of the year. EBITDA growth should be well above that.

Have you seen any change in the competitive dynamic at all given what has been a, perhaps, a more sluggish economy and demand pull through. Or have trends been in your bigger markets pretty much as expected and it is always competitive, but no further increase in competition.

I think that is exactly right. The packaging industry is always a very competitive industry. I haven't seen significant deviations in the projections of demand growth. It looks about like it has for the last three quarters, slow but steady improvements in demand. I wouldn't say that there has been any particular significant change in the competitive dynamic, other than it is always a competitive industry and we have to work hard to serve our customers.

And then last question and I will turn it over, open top was obviously fairly weak in the quarter. I am assuming that is largely the combination of one, the shipping days, and also last year was the warm weather you would have probably had a little bit more pull through at the food service level for the deep draw cup. Was that pretty much the dynamic? And would you expect it to be up year on year in this coming quarter? Thank you.

I will let Jim comment on that.

Yes, first of all you are right about the -- in the open top business in terms of primarily affected by the drink cup business and the weakness associated with the weather. But we also had a realignment of products out of there into the flexible side on our home and party area. That was about 2% of it. Overall, the combination of those two things were the biggest contributors.

Thank you.

Anthony Pettinari, Citi.

I was wondering if you could break out how volumes trended across the four segments and then on the guidance for the quarter, you identified close to double-digit year-over-year EBITDA growth. I am just wondering if you would expect free cash flow growth to be in line with that? Or maybe to be a bit lower or is there any way that we can think about cash generation in the quarter?

Let me comment on the volumes and then I will let Jim comment on the cash flow. With regards to volumes, as I said, if you take and adjust for the change in shipping days, total volumes were down about eight-tenths of 1%. The flexible business was flat to up slightly, the rigid business was down about 1.5%. Almost all of the softness in the rigid business, the vast majority was in the drink cup business at fast food restaurants, as we discussed before.

Just in terms of volume trends, we don't see anything abnormal in terms of the normal seasonality of growth of volumes. Typically, the last calendar quarter of the year, the December ending quarter, is the weakest. The March ending quarter is typically sequentially stronger and we saw that in 2013. Normal seasonality would predict that the June ending quarter would also be stronger.

We are seeing volumes increase at the beginning of the June ending quarter, as they normally do. So, I wouldn't say that there is anything abnormal in the normal progression of volumes in the quarter. And with that I will let Jim comment on cash.

There were two things that will affect the June quarter in terms of our free cash flow. One of those is the decrease in resin prices that you see in the marketplace. That will obviously result in lower carrying value of inventory. The other one is, we had a seasonal build for inventory. We will be using up that inventory as we go through the second quarter. We expect to have positive improvements free cash flow as a result of both those two items.

Then you had discussed the timetable for sales and the opportunity for Versalite. I was wondering if you could share any similar thoughts on Barricade and that product family.

Barricade and New Seal remain on track. We should have first sales of the Barricade New Seal system, first sales will be in the New Seal product lines in the second half of the year. I would say on Versalite and Barricade New Seals we will have some sales in the latter half of calendar 2013, but they won't be material to Berry's total sales, with sales growing in 2014.

Okay. That is helpful. I will turn it over.

Chris Manuel of Wells Fargo Securities.

Congratulations on a solid quarter. If I could dig in for one second into a couple of the segments. As you report the different pieces and I look at the flexibles piece in particular, it looked like you had record margins, the biggest margins I have got as I look back through history.

Can you maybe talk a little bit about what you're seeing or doing within there and I understand maybe some of that is some re-segmenting you discussed. As you look forward over the next year or two, what is the target within that sector or within that segment that you think you can accomplish?

I think we have done a very good job in our flexibles business and I commend the leadership teams that we have in place there. As you know and we have discussed in past conference calls, we made some good strategic decisions a year ago or so to sort of prune those portfolios and shift the mix to higher value products. That is paying off for us.

Secondly, in our engineered materials business we had a very good quarter. There's some parts of that business which serve more industrial and durable goods markets, like housing and auto and our tapes business. We are seeing a nice rebound there. We have a very good pipe maintenance business, Sealed For Life. They had a solid quarter. I think there is still opportunities for us to improve margins in the flexible side a couple of points.

Most of that is going to come from the flexible packaging business, as we continue down the path of introducing new packages that are at the interface of rigid and flexible technologies. And as we continue to accelerate the rate of growth of more value added flexible packaging in the food segments and others. So, we probably got a couple more points. They have done a great job, really pleased with the performance of those businesses.

One last question. When you look at your 230 CapEx this year, so two parts to this question, one is early thoughts as you look to 2014, can you maintain that capital level and still facilitate some of the growth in the new products that you have talked about. And then two, do you have a sense that you can share with us as to what portion of that is remaining here domestically and what portion of that is building out some of your international presence? I think you mentioned a couple new facilities internationally. Thank you.

First of all, relative to sustaining the CapEx going forward, this year we have a certain amount that is built in for innovation, new products. Our ability to hold that number will be tied into how fast some of these new innovations take hold and how much we have to invest. So, that aside, we feel pretty confident that we will be able to hold the number.

Now relative to the international, we have made a relatively small investment, have committed a relatively small investment this year. That also could pick up depending on the amount of interest and success we have in our international initiatives. Those would be the two caveats to being able to sustain the same number we have this year.

Okay. Thank you.

Al Kabili, Macquarie.

I wanted to just clarify on the commentary on the normal sequential seasonal volume lift that you get and what that implies for the year-over-year volume change?

With regards to the sequential nature of the volume increases, those are normal. Obviously, the first calendar quarter of '13 volumes were weaker than 2012 for the reasons that we have discussed, weather shipping days and others.

So, how that plays out for the remainder of the year, we are anticipating that the weather will, that summer will come, as it always has, and that those volumes should increase. But whether or not we can recover the misses that, on a year-over-year basis, that occurred in the first quarter, that remains to be seen.

And any sense as far as April, how that has trended? I know the weather still hasn't been great, but any thoughts on or anything you can update us on April trends?

Historically, you see sequential improvements in volume in the second calendar quarter. I would say April is consistent with that.

Jon, I know as you were walking away from business, that kind of masked some of the gains that you thought you were getting in the underlying end business. Now that we are lapped that through that, what is your outlook on the ability to maybe continue to gain some share relative to the market?

Clearly, that is our goal. We are trying to accomplish that by having differentiated and innovative packaging solutions for our customers that will help them excite consumers, help them display their brand images at retail shelf and so forth. The first calendar quarter of the year was muted economic activity. As I said in my comments, nondurable goods have been especially weak here.

But I think there is some trend here with lower food prices, the rate of inflation on food has started to diminish. And it is our expectation that nondurable goods and food volumes will increase here, even in a flat GDP environment. So, I am cautiously optimistic, but I don't have a crystal ball in terms of forecasting economic activity any better than anybody else.

I guess the last question is if we could, on my end, is just on engineered materials and you saw some pretty nice improvement year-over-year and I was wondering if you could help us walk through how sustainable you think that is? I imagine tape sales may have been helloed by the housing market, maybe there is some efficiencies there, but maybe help us with how we should be thinking about that?

Feel very good about that part of the business, Tom Salmon and his team have done a fantastic job in engineered materials. I think tapes and the pipe maintenance business will continue to see favorable economic dynamics.

On the core side of our film businesses, I think we have now positioned that business to where we are -- even within those segments there are value added parts of those businesses and that is where we play. I think we should be able to hold that business for the rest of this year. Feel pretty good about that.

Okay, terrific. Thanks and good luck rest of the year. Thanks.

Thanks.

Joe Stivaletti, Goldman Sachs.

Yes, most of the numbers questions have been answered, but I was just wondering if you might talk a little bit more about your perspective on potential acquisitions in terms of what areas are most interesting and also now that you are a public company with a currency there, could you talk about the likelihood that you would do anything substantial or would they be more likely bolt-on type small tuck-in acquisitions?

Hi Joe, this is Jim. Let me answer that. Relative to the acquisitions, our strategy really hasn't changed for the last few years. We are very -- continue to be interested in making acquisitions that make sense for the company. We are -- we want those to be accretive to equity, as well as deleveraging.

Our favorite kind have been carve out of from larger companies, because we have a competitive edge there relative to financial sponsors. So, that has worked pretty well for us. That doesn't close the door if one were to come that made sense and we needed to go to the market and raise equity to help with that. But, at this point in time, we are continuing to focus on when we have opportunities. There is no one specific area that we are zoned in on.

We look at them as they come. And as you know and as we have said for a long time now, we look at far more than we get serious about. So, it has to fit within a number of different criteria. So, the deleveraging continues to be important to us and once again, we are focused on making the right kind of acquisitions at the right time.

Great. Thank you.

Mark Wilde of Deutsche Bank.

I am sorry if I got on a little late, so I may hit something that you have provided color on already, but I was just curious with regard to Madisonville, did you give us a sense of what the unit capacity looks like there? Hello?

Yes, can you hear me?

Can you hear me? I can hear you, yes.

I can hear you fine, thanks. Sorry about that. What I said was that we are trying to target the 21 billion unit high-end double wall paper and paper wrapped EPS markets for Versalite. I think we should be able to add capacity in the sort of 5% to 10% of that target range per year. We have capacity. We have the capability eventually at Madisonville to sort of hit that kind of range.

I am just trying to get a sense in terms of a sales base out of there if you were to fully optimize what you're putting in at the start what that would mean in terms of sales. I think you have talked a bit about margins there in the past.

I think for the remainder of this year, sales will ramp up as we get started. I think, assuming the sort of 5%, 5% to 10% of that target capacity run rate by the end of '14, that is probably in the 5% range is a good place to look.

But no sense of what a sales base might be?

Yes, we have a good sense internally, but we are not communicating that to our competitors.

Second, Jim, you mentioned a couple of things with the weakness in the open top. I caught the first one, which was just the drink cup issue. What did you say the second issue was?

We realigned some products, we just move them from divisions. There was about 2% on our home and party that moved from rigid to flexible.

Then, finally, a little bit more color on that facility you talked about down in Brazil.

Yes, we have an existing facility in Sorocaba, Brazil, which is south of Sao Paulo.

I want to clarify one thing. It was really 2% of all our -- it is really 5% that moved of that, not 2%.

Okay.

So, back to Brazil. We have an existing facility in Sorocaba. We are expanding that as part of this acquisition. We have a great readership team down there and so it is a perfect fit for us.

What exactly are you doing there, Jon?

We are going to make specialty closures for bottle applications. So, it is a specialty closures opportunity with a couple of existing customers that we already have on a global basis that we know well.

Okay. Very good. Thank you very much, good luck through the balance of the year.

Thank you.

Aaron Weitman of Appaloosa.

Just a couple of quick questions. In terms of, I guess, non-growth CapEx, what is the number we should be using. Is it about $100 million?

The maintenance CapEx that we use for keeping our facilities up is between $70 million and $80 million. Between that $70 million is a decent number.

Then in terms of, I guess, this New Seal Barricade product, what is the potential sales you think you can hit if we look out to 2014, 2015?

I think I talked about the sort of scale that we're looking at on the Versalite side. The exciting thing about New Seal and Barricade is that the served industry market potential for that is about five times the size of the sort of hot cup market that we are targeting. There is really four different sort of degrees of barrier applications. There is non barrier, low barrier and then ultra-high barrier.

The whole concept is to target current packaging applications that are in spiral wound cardboard, glass or metal packages. Now, since these are barrier applications, we have to make sure that our packages have the demonstrated shelf stability that our customers require. So, I think it will grow in a little bit slower than the Versalite, but ultimately will have the opportunity to be significantly bigger.

Okay. Thank you.

I would now like to turn the conference back over to management for any closing remarks.

Again, I want to take this opportunity to thank everybody for joining us on the call today. We appreciate your interest in Berry Plastics and we look forward to talking with you again at the end of the June quarter. Thanks, everybody.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.