BERY - Berry Plastics Group

[Castanza]

Looks like a great result with strong organic growth. I own just a little unfortunately (recently bought some shares).

One thing that caught my eye is increasing intangibles QoQ from $8.323B to $8.459B - where do those come from? They are writing off intangibles with amortization to the tune of $75M every quarter. is this a currency effect from the rising GBP or EUR? I guess that must be a reason because I dont they purchased anything. It's not really material but more of a curiosity question.

 

Has to be. (8459 - 8323 = 136m)

 

Net cash from investing activities (22m)

 

Consolidated Overview - 50m, 7m

 

Consumer Packaging International - 44m, 6m

 

Engineered Materials - 7m

 

[kab60]

In their presentation they set a leverage target of 3-3,9xebitda. With their debt costs I really hope they hit 3,9 and go nuts on the buybacks. Makes no sense to try and hit 3, unless they are very confident a major deal might come up, and I really don't think that is at all in the cards. Easy to see this trade towards 70-80/share, when they start buying back shares.

[BG2008]

Looks like a great result with strong organic growth. I own just a little unfortunately (recently bought some shares).

One thing that caught my eye is increasing intangibles QoQ from $8.323B to $8.459B - where do those come from? They are writing off intangibles with amortization to the tune of $75M every quarter. is this a currency effect from the rising GBP or EUR? I guess that must be a reason because I dont they purchased anything. It's not really material but more of a curiosity question.

 

Good question. I'm guessing currency as well given size of change and the UK acquisition.

 

What a quarter!  11% organic growth for a company that normally targets GDP level growth.  I haven't dug in but I'm assuming some of that was pass thru of material inputs as opposed to volume.  Still, running at over $1bn of FCF on a sub $8bn market cap is a winner in my books.

 

These are volume figures not dollars.  But that 11% had more days in the quarter. They broke it out and there is about 7% organic volume (true organic).

[BG2008]

I thought about buying some LEAPS in BERY recently when it traded below $50.  But my PTSD prevented me.  Perhaps, when you've been with a name for 3-4 years and it's been flatish, that's probably a decent time to buy some LEAPs. 

[thepupil]

Can still buy the $80 Jan 2022 for $1. 20 bagger or bust.

 

I’ve got about 60 bps in them and a wild and crazy 175 bps in the $65’s.

 

today, I sold a smidge of March $50’s that I bought during the great de grossing for $2. Very small stuff, but a nice couple week multibagger.

[LC]

I thought about buying some LEAPS in BERY recently when it traded below $50.  But my PTSD prevented me.  Perhaps, when you've been with a name for 3-4 years and it's been flatish, that's probably a decent time to buy some LEAPs.

 

I looked too a few months ago based on one of your posts, but the IV was too high at that time.

Then I was planning on buying more recently but got lazy and distracted by GME YOLOs :D

 

Point is: well done to you for sticking with the investment and sharing along the way!

[dwy000]

I thought about buying some LEAPS in BERY recently when it traded below $50.  But my PTSD prevented me.  Perhaps, when you've been with a name for 3-4 years and it's been flatish, that's probably a decent time to buy some LEAPs.

 

I looked too a few months ago based on one of your posts, but the IV was too high at that time.

Then I was planning on buying more recently but got lazy and distracted by GME YOLOs :D

 

Point is: well done to you for sticking with the investment and sharing along the way!

 

Berry reminds me of the Christopher Browne quote:  "Value stocks are about as exciting as watching grass grow, but have you ever noticed how much your grass grows in a week?"

[thepupil]

if i interpret this correctly, Berry is using $750mm cash on hand to pay down its $5.4 billion of term loans to $4.6 billion.

 

They are replacing the term loan X which matures in 2024 ($446mm) and the Y in  July 2026 ($4.1B) with a single new term loan Z which will be $3.9 billion in size and mature in July 2026. Both of those loans are at L+200, compared to the talk of L+175, so not much in the way of interest rate savings from rate.

 

I'm assuming they'll actually launch another bond rather than use cash on hand to make the loan repayment (perhaps a 1.125% of 2025 to go with their 1.57% of 2026 and 0.95% of 2024).

 

All part of Berry's methodical transition from a company funded at high leverage levels using leveraged loans and HY bonds, to lower leverage levels using fixed rate debt at 1-2%. I don't know all the particulars of why they need to to what and in what order, but just alerting that the de-leveraging/ terming out continues.

 

 

 

 

LAUNCH: Berry Global $3.88B TLZ for Reprice; Call Feb. 22

By Lara Wieczezynski

(Bloomberg) -- Lender call Feb. 22 at 11am ET. Commitments due Feb. 25 at 5pm ET.

Borrower: Berry Global

$3.881b 1L TL-Z maturing July 2026

Price Talk: L+175, 0%, Par

Call: 101 SC 6 months

Repayment: $750m less fees and expenses

Current Ratings: Ba3/BB+ (corp); Ba2/BBB-, RR2 (1L tranche)

UOP: Replace co’s TL-X maturing 2024 and TL-Y maturing 2026 and form a new repriced TL-Z maturing 2026

Co. may at its option issue other secured debt to fund a portion of the transaction

Co. was last in market in Dec. 2019 with $4.25b TL-Y paying L+200, 0%

Bookrunner: GS (left)

 

 

[dwy000]

25 bps savings on the interest rate doesn't seem like much - but when you figure it's over $3.9bn of debt, that's $9.75M per year or $48M over the life of the debt.  Not life changing but everything is a step in the right direction!

[DooDiligence]

Not a BERY shareholder, but found this plastic recycling "splainer" interesting:

 

New plant-based plastics can be chemically recycled with near-perfect efficiency

 

*** The one disadvantage of the new materials Mecking identified was their cost. Ethylene is the “cheapest building block of the chemical industry,” he said, so, "Competing with conventional polyethylene at the current market and legal framework conditions is very difficult.”

 

Mecking and his colleagues are conducting ongoing research into using their new plastics for 3D printing, an initial application he said would be exciting for further developing the material and eventually scaling up its production. ***

 

https://academictimes.com/new-plant-based-plastics-can-be-chemically-recycled-with-near-perfect-efficiency/

 

---

 

A slightly more detailed paper on the subject concludes the same:

 

High-performance plastic made from renewable oils is chemically recyclable by design

 

"economic considerations overshadow these endeavours. Plastics used in industry, such as HDPE, are produced on the multimillion-tonne scale, and usually sell at US$1–3 per kilogram. It would be unreasonable to expect a new plastic to be cost-competitive immediately, but such price issues make the introduction of new plastics highly challenging."

 

www.nature.com/articles/d41586-021-00349-9

[thepupil]

I'm assuming they'll actually launch another bond rather than use cash on hand to make the loan repayment (perhaps a 1.125% of 2025 to go with their 1.57% of 2026 and 0.95% of 2024).

 

BERY is doing a "tap issue" which I had no idea until today what that is, where they are issuing more of their existing 1.57%'s of 1/2026.

 

Given the huge move in rates, BERY will have to issue at a HUGE discount of about 0.4% since the bonds are at 99.6%. Oh no!!!!

 

lets' get more <2% fixed debt while we can!

 

$Benchmark Tap of BERY 1.57% 01/15/26 IPT +110-115

Coupon: 1.570000

Issuer: Berry Global Inc (BERY)

Exp. Ratings: BBB-/BBB- (S&P/Fitch)

Format: 144A/Reg S with reg rights, senior secured first lien

CoC 101, 1-month par call, MWC

UOP: The Company intends to use the net proceeds from this offering to prepay certain existing BGI term loans and to pay certain fees and expenses related to the refinancing of such term loans and this offering. To the extent that the initial purchasers and/or their affiliates are lenders under its Term X Loan maturing 2024 and/or its Term Y Loan maturing 2026 which are being prepaid in connection with this offering, such initial purchasers and/or their affiliates will receive a portion of the net proceeds from this offering

Settlement: March 3, 2021 (T+3)

Denoms: 2k x 1k

Bookrunners: Citi (B&D), GS, WFS

Information from person familiar with the matter, who asked not to be identified because they're not authorized to speak about it

 

A tap issue is a procedure that allows borrowers to sell bonds or other short-term debt instruments from past issues. The bonds are issued at their original face value, maturity, and coupon rate but are sold at the current market price. A tap issue is also referred to as a bond tap or tap sale.

[longlake95]

If bond investors are willing to lend BERY $$$ at 1.57%, but BERY equity holders are pricing the equity at a 12% FCF yield ----> someone is wrong in this set-up. Should the bond guys be demanding higher rates?....or should the equity holders be happy with at 6-7% yield...not 12%

 

[DeepSouth]

If bond investors are willing to lend BERY $$$ at 1.57%, but BERY equity holders are pricing the equity at a 12% FCF yield ----> someone is wrong in this set-up. Should the bond guys be demanding higher rates?....or should the equity holders be happy with at 6-7% yield...not 12%

 

To be fair, unsecureds trade at 2.7%, but the point remains.

[dwy000]

Either the bonds are way too expensive or the stock is way too cheap.  My money is on the stock.

[valueinvestor]

If humans were able to act accordingly to the laws of mathematics...

[thepupil]

If bond investors are willing to lend BERY $$$ at 1.57%, but BERY equity holders are pricing the equity at a 12% FCF yield ----> someone is wrong in this set-up. Should the bond guys be demanding higher rates?....or should the equity holders be happy with at 6-7% yield...not 12%

 

I hear you, but the bonds only have to worry about defaults whereas the stock has to worry about the long term growth prospects for plastics.

 

BERY can refi in 5 years is a different statement than “Berry will have >0% organic growth and adapt to changing societal views/uses regarding plastics”

 

I think what’s going on with the liability side is a big positive because BERY is locking in super low cost debt for 5 years and can use the interest saving to invest in growth or return capital. But cheap debt doesn’t really “prove” anything.

 

My money’s on the stock as well. I’m probably being too short term here, but it’s specifically in the Jan 2022 options. If this doesn’t re-rate if/when they prove they can sustain the level of growth and in the <4x levered range, I think I’m missing something

 

[thepupil]

If humans were able to act accordingly to the laws of mathematics...

What does this mean?

[Spekulatius]

If bond investors are willing to lend BERY $$$ at 1.57%, but BERY equity holders are pricing the equity at a 12% FCF yield ----> someone is wrong in this set-up. Should the bond guys be demanding higher rates?....or should the equity holders be happy with at 6-7% yield...not 12%

 

I hear you, but the bonds only have to worry about defaults whereas the stock has to worry about the long term growth prospects for plastics.

 

BERY can refi in 5 years is a different statement than “Berry will have >0% organic growth and adapt to changing societal views/uses regarding plastics”

 

I think what’s going on with the liability side is a big positive because BERY is locking in super low cost debt for 5 years and can use the interest saving to invest in growth or return capital. But cheap debt doesn’t really “prove” anything.

 

My money’s on the stock as well. I’m probably being too short term here, but it’s specifically in the Jan 2022 options. If this doesn’t re-rate if/when they prove they can sustain the level of growth and in the <4x levered range, I think I’m missing something

 

What is a really the longer term risk here? Berry is a packaging business, not a plastic business. If plastic is at some point phased out for something more environmentally sustainable, like a plant based degradable polymer, then Berry would just use this input material instead of hydrocarbon based polymer and they should be fine.

 

It might shift some competitive dynamics, but the business by itself is not going away. The bigger risk is with producers of polymers like DD, BASF and  Lyondell who need to adapt, but the users of polymers should be fine.

[thepupil]

True, I think that’s ultimately the bet here.

 

but tough to imagine a perfectly smooth transition.

 

I mean if Berry has no real long term secular risks it’s a $100+ stock, no?

[longlake95]

Thanks all for the feed back. Just trying to work this through the grey matter. Yes there is "equity" risk, business risk risk etc... but that's my point a 6-7 or 7-8%, whatever, should be enough premium to demand for the business risks of BERY not >11%. Just seems like another beach ball filling with air that's been held underwater, eventually it has to scream higher toward fair value...no?

[Spekulatius]

True, I think that’s ultimately the bet here.

 

but tough to imagine a perfectly smooth transition.

 

I mean if Berry has no real long term secular risks it’s a $100+ stock, no?

 

Yes, it could be at some point:

https://twitter.com/theunemployeda1/status/1363609288913149952?s=21

 

Note, I was too stupid to recognize this company, despite owning a few shares.

[dwy000]

I suspect the disconnect is the amount of leverage and concerns about interest rates.  Private equity has made tons of money in this industry by levering up to 7x.  Public markets hate leverage.  Other than cable theres not too many industries where they are comfortable with an ongoing 5x leverage.

 

In a rapidly rising interest rate environment, having $10bn of debt can take a big whack to cash flows.  Even if they have interest locked for 4-5 years, thst debt needs to be taken out in 3-4 years.  If the new bonds are at 6% instead of 2% it has a big impact on cash flow - especially in a GDP growth company where it can't be buried by rising sales and operating income.

 

Either way, this is about as stable a business as you can find for the foreseeable future so I'm more than happy to take a 13% yield and have them buy back stock or make more acquisitions.

[kab60]

Sure higher interest rates would be a negative, since this model works beautifully with high amounts of leverage. But it's not like it would be critical in any way or form. They'll probably be generating more than 1B of FCF going this year and going forward, so if they wanted to they could just pay down debt, when it matures. Obviously, that would make no sense, but I think the reason it gets no love is due to ESG and high perceived leverage. I don't care about that, because frankly it's a huge opportunity. Same thing with Altria. These companies can create a ton of value for shareholders going forward by eating themselves. If they don't do that, they're pretty dumb, and one seriously has to question management. I think the easiest way to make a safe return in this environment is to launch a SPV and go activist on anti-ESG stuff like Altria, British American Tobacco (seems we actually might have gotten on there) and Berry and just tell the folks to buyback their own shares aggressively or get out. It's such a frickin' no-brainer, and when the ESG-tide eventually turns because results starts crapping and fiduciaries decide they wanna make money, BOOM. :)

[valueinvestor]

If humans were able to act accordingly to the laws of mathematics...

What does this mean?

 

Just a pithy comment. As others mentioned bonds trade at ~2% while equity FCF trades at ~12%. I haven't seen this for a while. Sometimes saw the inverse bonds would trade at ~10% and equity FCF trades at 3-4%.

[Spekulatius]

If humans were able to act accordingly to the laws of mathematics...

What does this mean?

 

Just a pithy comment. As others mentioned bonds trade at ~2% while equity FCF trades at ~12%. I haven't seen this for a while. Sometimes saw the inverse bonds would trade at ~10% and equity FCF trades at 3-4%.

 

Isn’t this common? With bond yields where they are and investment grade companies borrowing for <2% many many stocks have a wide spread to their equity FCF yield.

Admittedly, the yield spread for Berry is one of the widest, but there are lots of other cases in pharma , defense, tobacco, materials etc.