BERY - Berry Plastics Group

[kab60]

Anyone took a look at this Company?

 

I believe Turtle Creek is a major shareholder and there's a really good (one of the best I've read on SA) write up here: https://seekingalpha.com/article/4215354-berry-global-undervalued-packaging-business-50-plus-percent-upside (check it out via Outline.com if you don't have a subscription)

 

Basically, Berry Plastics Group is one of the biggest producers of plastic for - among other things - diapers.

 

It's a rollup story but one where there's actually a lot of tangible synergies, since the main material is resin, and Berrys scale means it can source resin cheaper than the competition.

 

It was beaten down in October (unfortunately I wasn't aware of the Company then) due to the perceived risk of increased resin costs. But that risk is largely overblown, IMO, since they pass the cost along to their customers with a bit of a lag (if resin prices increase dramatically it's a real risk, since plastic might be substituted).

 

Anyway, they have a terrific track record of doing m&a (almost 40 deals I believe) where synergies have often brought the multiple down from some 8-9 to 4-5 x ebitda so one benefit from tangible synergies as well as a possible multiple re-rating due to private > public as well as scale.

 

It's a really boring industry (which I like), it seems to manage well in a downturn (any of you guys quitting your diapers, when we hit a recession?), and they operate in a fragmented industry with very tangible benefits from scale. There's some leverage, but they're gusing out cash, and todays market cap of 6,3b compares to guidance of 670m FCF in 2019 (they always seem to beat their FCF guidance) or a 10,5 pct. FCFE yield.

 

They've spent a couple of years doing smaller deals and bringing leverage down after they did a big one ine 14-15, so I think this is a story where earnings are gonna jump once every few years if/when they find a large deal.

 

Private equity loves the space (Carlyle-backed Novolex bought Waddington Group from Newell Brands recently) and Advent International bought Faerch Plast (for some 13-14 x Ebitda I'm told).

 

I haven't pulled the trigger, but with a +30 pct. ROIC, fragmented and boring market I think it's starting to look cheap since they should have high returns on incremental capital employed.

 

Really not sure what I'm missing, anyone else had a look?

 

[WneverLOSE]

I took a look and see (after peeking at Turtle 13F  ;D), my understanding is that the market expects plastic use to go down.

The war on plastic is real and BERY point of view is that plastic products do so much good to the world by their functionality and since it is the most economical and environmental large scale solution plastic should still grow and be used, take a look at this talk by the CEO about how he sees plastics vs alternatives and how they try to educate the public :

 

I always underestimated the rate of growth of new technologies that caught on and turned out to be viable but my ability to forecast those in advance are non existent so I can't know if the fear is logical or not.

 

Companies are trying to switch to plastics alternatives or recyclable plastics in order to be healthy and green, How recyclable are the resins berry uses ? no Idea, maybe someone here can help with that, how viable are plastic alternatives ? No idea as well.

 

Edit :

Also their moat around purchasing scale could deteriorate if suppliers of resins consolidate as well and have more negotiating power against them (Walmart for example is able to bully small suppliers but this tactic doesn't work as well with coca cola).

 

Saying that I do see the potential of great returns, even if those fears of mine materialize at a slow rate (suppliers slowly consolidating and slow move towards recycled / alternatives).

 

[kab60]

I think your points are valid, but a quick Google search seems to suggest plastics use is still growing "nicely" (and I'd expect that to continue - knowing how slow politicians are to change things). BERY is organized in three different segments and delivered 3 pct. organic growth in their most recent Q. If new technologies are needed to recycle plastics, it might increase complexity/need for investments and as usual favor the bigger players I'd think.

 

Either way, I think the political risk is hard to handicap and probably not necessary to have a strong view on given the valuation. I think it's more a matter of whether or not their margins are somehow gonna contract and increased appetite among PE firms pushes valuation a lot higher than they've been historically (I think that risk is real, considering Advent paid 13-14 times EBITDA for Færch Plast), but at the same time it seems like the market is extremely fragmented. Would be nice to know how many meaningful acquisition targets are out there, but I haven't read anything about that in the few investment reports I've seen on BERY.

 

A bit from a Plastics lobby if you're really bored: https://cdn.ihs.com/www/pdf/Plastics-Polymers-Brochure.pdf

[kab60]

Interesting development. Apollo (PE fund, former Berry owner) is buying RPC in UK for some 4,3B USD. Berry has announced they might wanna do a counter bid (but they wanna do a due dilligence first). It would potentially be a hugely transformative deal.

[kab60]

Here we go. Berry buying RPC for 6,5b USD incl. debt. Including synergies they're paying some 7xev/ebitda (while they trade at roughly 9x). Historically they've been conservative on synergies, so I'd expect the price to go down meaningfully.

 

From a PE source of mine RPC seems to be a bit of a mess, so I hope (and expect) that they know what they're doing. Apollo, which used to own Berry - and are known to be bargain hunters - also tried to take over RPC, so at least two savy buyers have done meaningsful due dilligence. RPC shareholders aren't exactly celebrating over the price paid (not much of a premium) which suggest Berry might have gotten a good deal.

 

It could be quiet transformative as it increases Berrys ebitda 50 pct. It's all debt, so leverage will go up to 5x, but they throw off cash, so that should come down quickly so I'm not at all worried about that. Considering the current environment I'd expect them to get pretty great financing terms.

[Deepdive]

Kab,

 

Can you expand on the RPC is a bit of a mess commentary?  I think a few people on VIC have also mentioned that. 

[kab60]

I don't know too much about it. I just heard from a major PE player involved in Danish Færch Plast (now owned by Advent) that it's a very mixed bag of a lot of different companies not necessarily in the most attractive segments. Judging from the margins it doesn't exactly look like it's stellar run. Which - depending on how you slice it - might actually make it more attractive for Berry (RPC has 153 manufacturing locations which intuitively sounds like quiet a lot, so there might be much higher synergies down the road).

[BG2008]

Apparently, RPC buys resin from North America.  This should allow Berry to pass along the resin purchase savings which could be 1-2% of revenue. 

[kab60]

Good write up on VIC with some incremental and interesting points: https://www.valueinvestorsclub.com/idea/Berry_Global/9901425751

 

I'm long

[longlake95]

Just about to dig into the latest Q. Boy, this is getting whacked the last couple of days. Over reaction?

Trades at 10% FCF yield...

[kab60]

13 pct FCF yield actually. And that's without all synergies from RPC (which might be lowballed). But their volume declines are obviously worrisome. And RPC not without risk.

[Spekulatius]

13 pct FCF yield actually. And that's without all synergies from RPC (which might be lowballed). But their volume declines are obviously worrisome. And RPC not without risk.

 

Leverage is 5x EBITDA pro forma RPV which is high. I also agree that an acquisition the size of RPV carries some risk. On the other hand, packaging is a business with a very good track record for rollups. I have seen way less blowups in packaging rollups than in other fields. I think there are several reasons from my layman point of view.

 

1) business is very cash generative even in a slower economy. From my casual observation there can be some volume pressure in a slow economy, but there isn’t much margin pressure, compared to other business like chemicals (where margin pressure can be severe)

2) little risk of disruption

3) economies of scale are relatively easy to achieve

4 in a downturn working capital releases (due to lower commodity cost) tends to supplement cash flow when its most needed

 

So I bought a little today (riding on BG2008 coattail ), but I need to do more work to become comfortable to make this in a major position. Yes, spray and pray I know..

 

[kab60]

13 pct FCF yield actually. And that's without all synergies from RPC (which might be lowballed). But their volume declines are obviously worrisome. And RPC not without risk.

 

Leverage is 5x EBITDA pro forma RPV which is high. I also agree that an acquisition the size of RPV carries some risk. On the other hand, packaging is a business with a very good track record for rollups. I have seen way less blowups in packaging rollups than in other fields. I think there are several reasons from my layman point of view.

 

1) business is very cash generative even in a slower economy. From my casual observation there can be some volume pressure in a slow economy, but there isn’t much margin pressure, compared to other business like chemicals (where margin pressure can be severe)

2) little risk of disruption

3) economies of scale are relatively easy to achieve

4 in a downturn working capital releases (due to lower commodity cost) tends to supplement cash flow when its most needed

 

So I bought a little today (riding on BG2008 coattail ), but I need to do more work to become comfortable to make this in a major position. Yes, spray and pray I know..

All true. I agree and made it a 10 pct. position recently with a cost basis @ 47-48. Not worried about the leverage in itself, more the volume declines and eventual negative surprises from RPC, which hasn't released audited numbers for almost a year. I thought management sidestepped too many questions on the recent CC and gave some generic statements unrelated to what they were being asked which left a somewhat bad impression because it's difficult to tell whether their challenges are cyclical or structural. They should be able to manage slowly declining volumes, which they've done so far, but it would be a hell of a lot more attractive if they could stabilize or even grow topline a bit organically (which they're signalling will happen sometime in 2020, but who knows?).

 

Anyway, according to management RPC is currently flat both in terms of revenue, volumes and ebitda, so no negative surprises thus far, and it does give me some comfort that Apollo tried to buy RPC - I quiet like their style.

 

PE generally loves this space because they can lever the hell out of these companies and synergies are quiet tangible in that a lot of it is increased purchasing power and thus lower resin prices/lower COGS. And then there are usually opportunities to consolidate locations and get utilization up. Advent bought Danish Company Fearch Flast a couple of years ago, and ATM Faerch Plast has long term debt of some 5,3B DKK compared to FY18 ebitda of 565 so 9,3xdebt/ebitda.

 

 

 

[kab60]

They recently presented at a Jefferies conference. Two points: Expect to be able to get all divisions to grow single digit (eventually?). FCF around 900m excluding RPC integration (17 pct yield?).

[BG2008]

I was listening to a Michael Mauboussin interview about EV/EBITDA and he stressed that you have to break down EBITDA into D and A.  I have actually been thinking about this a bit on my own as I have owned Berry for about two years (interesting 2 years to say the least).  Berry's value proposition in their roll up strategy is that they can pay say 8-9x EBITDA and extract a good chunk of synergy and get that multiple down to 5.3x on average post synergy.  They have cited about 5% of revenue improvement upon making an acquisition.  About 2% of revenue comes from their scale of buying resin and the other 3% comes from additional scale of buying other materials, SG&A, and being more efficient.  This got me to think about the dynamics of return on capital from these acquisitions. 

 

Say they pay $800mm for a $100mm of EBITDA that has $40mm of maint cap ex needs.  This business really generated about $60mm of NOPAT a year.  Because Berry can extract say $20mm of synergy out of the deal, this $20mm of incremental EBITDA is actually incremental NOPAT.  There is not additional maint capex related to this synergy that Berry extracts.  This is especially true for any savings related to Berry's large scale of purchasing.  That's simply an increase that flows down (except for taxes).  So the synergy that Berry extracts is a higher quality form of EBITDA.  This is probably why prior to the RPC deal, Berry is capable of generating $1.4 billion of EBITDA and only require about $350mm of cap ex.  The D in their EBITDA is only about 25%.  This is very different than some of the targets that Berry acquires where the D in the targets' EBITDA is 40% or potentially higher.  Unusually large scales allows Berry to earn a higher return on capital which allows the company to delever faster than a smaller company on their own. 

 

As I think about this, I have come to appreciate people who can extract cost savings in businesses as those savings are closer to 100% profit and often does not require capital investment. 

[kab60]

Those are some good points and one of the reasons I'm comfortable with the story. That and their track record and experience.

 

Way too often synergies and cost savings never materialize or they're impossible to identify because cold and warm water gets mixed together.

 

At the Jefferies conference management was asked how many of the synergies they actually expect would get to the bottom line - errrm, all of it, management said. Will see if/how much they lowballed the synergies.

 

Their target of 150m is 100m less than their usual 5% of revenue, but RPC was a big player already, so perhaps there's less procurements benefits than usual. On the other hand, there should be plenty of options over the coming years to improve operations.

 

I also think it speaks to the strength of the Company/industry that they're on course to do 900m of FCF on 1,5b of equity.

 

Couple of comments from Jefferies conference comment regarding RPC which gives some incremental comfort that nothing bad has dropped yet;

 

"Today, our focus is clearly on integrating RPC. The largest acquisition that we've done in our history. We're incredibly excited about it. You'll hear me make some comments in the subsequent pages, but we're well ahead of what we thought our schedule would be in terms of that integration, so pleased with that."

 

"Berry and RPC. Again, this was something that was a transaction, $6.5 billion. We completed the transaction in 4 months. Again, were it not for the type of strength and know-how Berry had from an M&A perspective, for its ability to due diligence and asset, this would not have been possible. We are thrilled with this business. We're happier today as an owner of 30-plus days than we were the day we put the bid in for the business. It has truly created a transformative scale-based global plastics and recycled packaging franchise.

 

"What's the rationale behind it. It's transformational. We're global leaders. The value creation capability for value share for our shareholders is unmatched. There's incredible industrial logic and incredible amount of synergy opportunity both in terms of procurement, rooftop, but most importantly, best practice sharing across this franchise. We're fortunate to share the same platform of converting know-how in Europe as we have in North America. Literally, a Berry technician in the U.S. can bring value in an RPC facility in Europe day 1. An RPC technician could leave a plant in Germany and bring value on a Berry site day 1. That's the type of opportunity we have, to share best practices across this global platform."

 

I think a FCF yield of 17,5 pct. is way too high. I wouldn't mind if they bought back shares instead of retiring debt.

 

[dwy000]

Way too often synergies and cost savings never materialize or they're impossible to identify because cold and warm water gets mixed together.

 

 

Soooo true!!!  How many times do you see companies adding back "one time" costs to achieve synergies - every single year. And then mgmt touts "we have achieved $300mn of synergy savings" and you are looking at it going "ummmm, ok.  But your EBITDA is only up $100mn.  Is your base business deteriorating by $200mn because you didn't mention that part during the acquisition" 

[Castanza]

I was listening to a Michael Mauboussin interview about EV/EBITDA and he stressed that you have to break down EBITDA into D and A.  I have actually been thinking about this a bit on my own as I have owned Berry for about two years (interesting 2 years to say the least).  Berry's value proposition in their roll up strategy is that they can pay say 8-9x EBITDA and extract a good chunk of synergy and get that multiple down to 5.3x on average post synergy.  They have cited about 5% of revenue improvement upon making an acquisition.  About 2% of revenue comes from their scale of buying resin and the other 3% comes from additional scale of buying other materials, SG&A, and being more efficient.  This got me to think about the dynamics of return on capital from these acquisitions. 

 

Say they pay $800mm for a $100mm of EBITDA that has $40mm of maint cap ex needs.  This business really generated about $60mm of NOPAT a year.  Because Berry can extract say $20mm of synergy out of the deal, this $20mm of incremental EBITDA is actually incremental NOPAT.  There is not additional maint capex related to this synergy that Berry extracts.  This is especially true for any savings related to Berry's large scale of purchasing.  That's simply an increase that flows down (except for taxes).  So the synergy that Berry extracts is a higher quality form of EBITDA.  This is probably why prior to the RPC deal, Berry is capable of generating $1.4 billion of EBITDA and only require about $350mm of cap ex.  The D in their EBITDA is only about 25%.  This is very different than some of the targets that Berry acquires where the D in the targets' EBITDA is 40% or potentially higher.  Unusually large scales allows Berry to earn a higher return on capital which allows the company to delever faster than a smaller company on their own. 

 

As I think about this, I have come to appreciate people who can extract cost savings in businesses as those savings are closer to 100% profit and often does not require capital investment.

 

Thanks for sharing that Bill. Very interesting approach!

[Spekulatius]

Added a third lot today like others. It’s about a 1.5% position for me. I normally don’t touch stocks with that high of a leverage, but BERY I feel should be Ok, given their history, as well as the high baseline success rate of rollups in the packaging sector.

 

The volume declines that are a concern seem to be caused by customer volume declines, not customer losses, so while a concern, it’s the better of the two cases. apparently they try to acquire new customers. The  saving from purchasing should be less with ROC, because that business had already a significant size (relative to BERY legacy), so the volume discounts should be less than with acquisitions. I think in this case, Th synergy needs to come from operation, which is a bit harder than just saving money purchasing via volume discounts. Even without synergies, as long as they don’t screw up RPC, they should be Ok.

[BG2008]

"Berry

 

Sold some of my $47.50 puts for $9.25 today (paid $1.90 for them).  In short, I am going long the stock by exiting the puts.  Looking to use the put proceeds to either buy more stock and/or calls."

 

Maybe you could expand on the Berry thread instead of here but, would like to understand your approach as I thought you were squarely long the stock.

 

Cardboard

 

I sometime use married put strategies to own securities if I think that the security will do well in the long run but may face some short term headwind.  When Berry was trading over $50 a share, I bought some $45 and $47.50 puts that expires in Jan 2020.  Why did I buy it?  Berry has 4x debt to ebitda leverage.  It will get whipsawed if the reported results aren't exactly smooth.  I buy the puts when I think they are cheap.  Generally, I have a "I'm underwriting to a 20-25% 3 year CAGR and the put acts as a 3% annual drag."  But it allows me to sleep well at night and it produces dry powder when I can buy the stock cheap.  This produces the exact inverse matching of running a L/S book.  It pays out exactly at the time when the stock is cheap.  So the shares are at $39 and my puts are worth $9 and $7 which I paid $1.9 to $1.4 for.  When I sell these puts, I am basically going long the stock at the current price.  If I don't sell the puts, I basically own a call option at $45 and $47.50.  The put buying allows me to size up positions that are attractive but maybe prone to wild swings, which is exactly what Berry has done. 

 

So that's the equivalent of me buying more Berry.  I have also taken the Berry put proceeds and gotten more Berry exposure. 

 

[kab60]

Decent set of results. This Company is gushing cash. Think the most important thing is the fact that they are guiding towards volume growth across the business in FY2020 (which they alluded to before) and that RPC doesn't contain any nasty surprises so far. Seems like the market needs to see it before it believes it. Anyway, guidance is for 800m FCF next year which is exclusive of 150m of expected synergies as well as cash costs of 90m towards WC and "other". So Berry should be on a path towards 1000m FCF on a market cap of 5,5b while bonds trade above par.

[BG2008]

Add in the fact that the $800mm will likely be used towards deleveraging which means that it will shave $40mm of debt assuming 5%, maybe less.  But that FCF could look juicier than your assumptions. 

[BG2008]

We live in a very weird world

 

EVANSVILLE, Ind.--(BUSINESS WIRE)--Dec. 12, 2019-- Berry Global Group, Inc. (NYSE: BERY) (“Berry”) announced today the pricing of the private placement launched December 9, 2019, by its wholly owned subsidiary, Berry Global, Inc. (the “Issuer”). The Issuer will issue €700,000,000 of first priority senior secured notes due 2025 (the “2025 Notes”) and €375,000,000 of first priority senior secured notes due 2027 (the “2027 Notes” and together with the 2025 Notes, the “Notes”).The closing of the private placement offering is expected to occur on or about January 2, 2020.

 

The 2025 Notes will bear interest at a rate of 1.00%, payable semiannually, in cash in arrears, on January 15 and July 15 of each year, commencing on July 15, 2020. The 2025 Notes will mature on January 15, 2025.

 

The 2027 Notes will bear interest at a rate of 1.50%, payable semiannually, in cash in arrears, on January 15 and July 15 of each year, commencing on July 15, 2020. The 2027 Notes will mature on January 15, 2027.

 

 

[BG2008]

This alone is likely over $30mm of savings in interest expense

[kab60]

Yep, strange indeed. But great for those of us who don't mind an occasional leveraged play. Very large spread/discrepancy between bond yields and some leveraged equities. This is supposed to be a long term holding for me, but I dabbled some in ETM and GTN short term. Some plus 20 pct spread between equity and bond yields before recent rally. Didn't do the math on how much Berry can save on interest, pure gravy if volume growth resumes.