BERY - Berry Plastics Group

[BG2008]

Earnings out, market doesn't like it.  And then this little nugget... I don't know what to make of it.  Maybe their Health and Hygiene Division will actually show some organic volume growth now. 

 

Berry Global Increases Production to Aid in Coronavirus Protection

 

https://www.businesswire.com/news/home/20200131005586/en/Berry-Global-Increases-Production-Aid-Coronavirus-Protection

[Gregmal]

Earnings out, market doesn't like it.  And then this little nugget... I don't know what to make of it.  Maybe their Health and Hygiene Division will actually show some organic volume growth now. 

 

Berry Global Increases Production to Aid in Coronavirus Protection

 

https://www.businesswire.com/news/home/20200131005586/en/Berry-Global-Increases-Production-Aid-Coronavirus-Protection

 

Eh, wishful thinking. I thought last week maybe Dupont would get an intsy weentsy little bit of love for this stuff too.

 

https://www.envirosafetyproducts.com/coronavirus-protection.html

 

Of course, not that the bottom line would move, but in the same knee jerk way Lakeland goes apeshit for no good reason once every 5 years or so on a fear/speculation driven rally.

 

I also thought a few years back Heineken was a nice way to play the CBD/pot rally with their CBD drinks..nope only pos NBEV.

 

If only we were so lucky...

[Spekulatius]

Earnings out, market doesn't like it.  And then this little nugget... I don't know what to make of it.  Maybe their Health and Hygiene Division will actually show some organic volume growth now. 

 

Berry Global Increases Production to Aid in Coronavirus Protection

 

https://www.businesswire.com/news/home/20200131005586/en/Berry-Global-Increases-Production-Aid-Coronavirus-Protection

 

Probably down at move the needle. For news to move the stock, low float is paramount. I thought Berry’s earnings were OK, but it seems that low resin prices aren't their friend. All the chemicals are hurting and polyethylene prices are in the tank. I don’t think it’s a sell supply glut either - considering that chemical are canaries in the coal mine I don’t think the economy will do that great, at least not the manufacturing sector.

[LC]

Canyon Partners Sends Letter to Berry Global's Board of Directors

 

https://finance.yahoo.com/news/canyon-partners-sends-letter-berry-230000756.html

 

As described below, Canyon believes that Berry should immediately take the following steps: (1) publicly announce that it has hired an investment bank or other financial advisor to develop a clear plan of action toward accelerated deleveraging; (2) commit to achieving an investment grade rating (and cease M&A activity other than deleveraging transactions); and (3) get in front of environmental, social and governance ("ESG") trends and correct market misperceptions about sustainability.

 

Berry management responded with the usual boilerplate.

 

[thepupil]

I bought a little of this after they announced sales would be up for the quarter. it's only up 13% or so since then and is still quite attractive in my opinion at 15%+ FCF yield and likely going higher over time, should de-leverage rapidly with Covid INCREASE in earnings/volume.

 

does anything in earnings give anyone pause?

 

this seems almost too easy and I feel like i'm missing something. I know people don't like levered companies right now, but rapidly de-levering ones with low cost debt and prodigious free cash flow don't seem like the worst of things to buy.

 

the debt market doesn't seem to see much risk.

[longlake95]

my only worry here is the debt, as you mentioned. If they actually pay it down, and don't go buy something else, I will be more comfortable. They like to talk about how they make everyday, predictable use products that provide stability to the earnings, then let's see that translate to the owners. How about a dividend? They can still grow, but a divvy will force Salmon to be a little more conservative with the FCF.

 

 

[kab60]

I liked the results and think management does a good job allocating capital. A dividend would be the last thing I'd want as a shareholder. Do a deal, lever up, paydown debt - rinse and repeat. If they start having trouble finding suitable targets that move the needle they can hopefully pivot to opportunistic buybacks.

[LC]

anyone look at the options? seem pricey.

[longlake95]

ya, that works until it doesn't. How much value have they created since they were floated? I don't think a small divvy is too much to ask while we wait for the debt>deal>do again algorithm plays out - I like to get paid to wait - that's all.

[Gregmal]

I like to see a better balance. Dont need dividends but if you are an acquisition-centric company, some combo of preferably buybacks plus dividend and debt pay down is what I want to see. If nothing else a bit of a hedge. Acquisitions are always dangerous, and sometimes all you need is one bad one to completely fuck your shareholders.

[thepupil]

I think the two responses illustrate an interesting phenomenon that applies to Berry (and virtually all a lot of public real estate*)

 

To the private equity type, Berry is underlevered. 4x-5x is nothing in PE, below average (pre-covid at least). I looked at some deals in 2018/19 at 8-9x leverage with generous addbacks. I'm not saying that's correct and I think that some deals were just nucking futs, but just providing perspective.

 

To public equity types, Berry is scarily levered, because corporate publicly traded blue chip America is soooo much less levered than PE.

 

Berry throughout much of its public life has taken the PE approach, lever up, buy companies, which makes sense given its Apollo roots and may be rational, but its leverage prevents a re-rating and scares off traditional buyers of public equities, leaving the stock to wallow in perpetual value fund land owned by schmucks like me and you all.

 

But they've gotten religion and are telling folks they're going to de-lever even if it's not the best use of capital. In a perfect world, I'd have them run it like a buyout and do divvy recaps and size it for the risk. But in this world, I think their shift in thinking is fine. De-lever it all the way so that timid public market participants don't have to talk about the leverage so much.

 

*Example: See ALEX thread. I said it was low leverage because it was 30-45% LTV and 15% debt yield for low cap rate assets, first comment on it said "6x EBITDA seems high". See PGRE call yesterday where REIT analysts are all like "when are you going to de-lever from 8x and Albert was like "never bro". See SLG presentations and conference calls "we are less levered than private market and you all keep rattling on about leverage". Part of this is that EBITDA takes into account G&A and debt yield/LTV does not. G&A is a real expense so you need to look at both, I'm just pointing out the dichotomy. 

[BG2008]

I think the two responses illustrate an interesting phenomenon that applies to Berry (and virtually all public real estate*)

 

To the private equity type, Berry is underlevered. 4x-5x is nothing in PE, below average (pre-covid at least). I looked at some deals in 2018/19 at 8-9x leverage with generous addbacks. I'm not saying that's correct and I think that some deals were just nucking futs, but just providing perspective.

 

To public equity types, Berry is scarily levered, because corporate publicly traded blue chip America is soooo much less levered than PE.

 

Berry throughout much of its public life has taken the PE approach, lever up, buy companies, which makes sense given its Apollo roots and may be rational, but its leverage prevents a re-rating and scares off traditional buyers of public equities, leaving the stock to wallow in perpetual value fund land owned by schmucks like me and you all.

 

But they've gotten religion and are telling folks they're going to de-lever even if it's not the best use of capital. In a perfect world, I'd have them run it like a buyout and do divvy recaps and size it for the risk. But in this world, I think their shift in thinking is fine. De-lever it all the way so that timid public market participants don't have to talk about the leverage so much.

 

*Example: See ALEX thread. I said it was low leverage because it was 30-45% LTV and 15% debt yield for low cap rate assets, first comment on it said "6x EBITDA seems high". See PGRE call yesterday where REIT analysts are all like "when are you going to de-lever from 8x and Albert was like "never bro". See SLG presentations and conference calls "we are less levered than private market and you all keep rattling on about leverage". Part of this is that EBITDA takes into account G&A and debt yield/LTV does not. G&A is a real expense so you need to look at both, I'm just pointing out the dichotomy.

 

I recommend buying some OTM puts on publicly levered companies like Berry.  If you can underwrite to a 15% levered FCF with no upside for price appreciation, than a 2-3% put protection means you're underwriting to a 12% return without re-rating of multiple.  I'll provide some deeper insights into Berry later on today.  There are some moves by the company to make BERY more public shareholder friendly.  This includes managing expectation better and investing in growth rather than running it more like a traditional PE shop. 

[kab60]

ya, that works until it doesn't. How much value have they created since they were floated? I don't think a small divvy is too much to ask while we wait for the debt>deal>do again algorithm plays out - I like to get paid to wait - that's all.

Quiet a bit of value... They floated at 16/share. And I'd venture it is cheap.

 

Reason I don't like a dividend is it risks handcuffing management somewhat. If they wanted to do a divy, they should do specials like Transdigm. History shows they delever quickly post deals.

 

But pupil definately has a point. Their model works better privately, since a lot of public investors seem to have some arbitrary leverage rules. I think it'll rerate when they get to 4x. But I'd love if instead they said fck it and borrowed 2xebitda and instead did a massive tender when they get there and if the price is right.

[krazeenyc]

thepupil and BG2008 -- are you sure you guys are not multi accounting! lol

 

Are you the same person?

[BG2008]

I can assure you that BG2008 and ThePupil are 2 different individuals

[thepupil]

I can assure you that BG2008 and ThePupil are 2 different individuals

[Jurgis]

I can assure you that BG2008 and ThePupil are 3 different individuals

[BG2008]

ya, that works until it doesn't. How much value have they created since they were floated? I don't think a small divvy is too much to ask while we wait for the debt>deal>do again algorithm plays out - I like to get paid to wait - that's all.

Quiet a bit of value... They floated at 16/share. And I'd venture it is cheap.

 

Reason I don't like a dividend is it risks handcuffing management somewhat. If they wanted to do a divy, they should do specials like Transdigm. History shows they delever quickly post deals.

 

But pupil definately has a point. Their model works better privately, since a lot of public investors seem to have some arbitrary leverage rules. I think it'll rerate when they get to 4x. But I'd love if instead they said fck it and borrowed 2xebitda and instead did a massive tender when they get there and if the price is right.

 

So if Berry were to trade at 12x P/FCF on a FCF of $900 to $1bn in 1.5 years, it would imply a share price of $80 to $89.  This would imply a 5 bagger to a 5.6 bagger in roughly 10 years on a seemingly commodity product with 0-2% organic volume growth.  It makes you wonder if this really is a commodity products company or something that is truly different and have scale advantages.  What do I know? I've been a bag holder for 3 years. 

[BG2008]

I think the two responses illustrate an interesting phenomenon that applies to Berry (and virtually all a lot of public real estate*)

 

To the private equity type, Berry is underlevered. 4x-5x is nothing in PE, below average (pre-covid at least). I looked at some deals in 2018/19 at 8-9x leverage with generous addbacks. I'm not saying that's correct and I think that some deals were just nucking futs, but just providing perspective.

 

To public equity types, Berry is scarily levered, because corporate publicly traded blue chip America is soooo much less levered than PE.

 

Berry throughout much of its public life has taken the PE approach, lever up, buy companies, which makes sense given its Apollo roots and may be rational, but its leverage prevents a re-rating and scares off traditional buyers of public equities, leaving the stock to wallow in perpetual value fund land owned by schmucks like me and you all.

 

But they've gotten religion and are telling folks they're going to de-lever even if it's not the best use of capital. In a perfect world, I'd have them run it like a buyout and do divvy recaps and size it for the risk. But in this world, I think their shift in thinking is fine. De-lever it all the way so that timid public market participants don't have to talk about the leverage so much.

 

*Example: See ALEX thread. I said it was low leverage because it was 30-45% LTV and 15% debt yield for low cap rate assets, first comment on it said "6x EBITDA seems high". See PGRE call yesterday where REIT analysts are all like "when are you going to de-lever from 8x and Albert was like "never bro". See SLG presentations and conference calls "we are less levered than private market and you all keep rattling on about leverage". Part of this is that EBITDA takes into account G&A and debt yield/LTV does not. G&A is a real expense so you need to look at both, I'm just pointing out the dichotomy.

 

Some key takeaway from Berry's quarterly earnings

 

1) Holycrap - Volume is up this past quarter.  We have people staying home and they are guiding to a 2% organic volume decrease in FY 2H 2020.  They confirmed $800mm of FCF.  Just wow!  65% of the business is staples, think food containers, medical wipes, drapes, etc.  Volume is actually up.  35% is more cyclical, auto, industrial, and institutional can liner (garbage bags).  Can liners historically have been non-cyclical, but most schools are closed. 

 

2) There is more evidence that once Berry acquires a company, their margin expansion is structural, not fleeting.  If you look at AEPI's EBITDA margin prior to the acquistion, it ranged from high single digits to low teens.  A few years after the deal, Berry still sports a 17-18% EBITDA margin in their engineered materials' division where AEPi makes up a big chunk of the EBITDA.  This is largely due to larger scale in purchasing both resin and other materials, being able to pass through resin price increases faster, and running leaner.  It is fascinating to see a company actually execute on a roll up and see how AEPI went from a "chunky" and lower margin business to much smoother and higher margin business inside of Berry.  Mind blowing! Don't get me wrong, I haven't made much money owning Berry.  It's been extremely frustrating to own in the last few years. But I think the market is starting to appreciate how unique of a business it is. 

 

3) Despite having no organic growth, Berry is actually a potential compounder.  A compounder's definition is that it earns a high return on capital and it can deploy capital and earn a high return as well.  What is counter intuitive is that Berry has no organic growth.  Okay maybe 1-2% organic.  It is obvious they earn a high return on capital.  $600mm of cap ex on a $2.1-2.2bn EBITDA business means cap ex is only 27-28% of EBITDA.  Note that this is a higher level than what they have run.  Management team is appeasing public equity holders.  I think the right way to run Berry is to run it with high return on capital which is to be okay with 1% organic volume decline.  But this is the public market and people get freaked out over 1% volume declines.  Well, they have new bosses and everyone thinks that Berry's management team is clownish. 

 

4) Shifting viewpoint - So they finally reported organic volume increases during this quarter after promising people that they will.  I get the sense that they are starting to guide more conservatively so that they can beat.  For example, they just lowered interest expense by about $25mm because LIBOR has dropped by 50bps.  I think the sentiment will change from "clown management team to wow wonderful business that only drops 2% volume in a sh$t show of an economic back drop".  Also, people appreciate a steady cashflow machine during a recession.

 

5) How does this go wrong?  I think if they somehow do worse than 2% organic volume decrease in 2H FY 2020.  This would require that supply chain or customers having issues such as plant closures etc. 

 

6) Timing - Should get to 4x debt/EBITDA in next 6 quarters.  FCF will likely be somewhere between $900-$1bn by then.  The bridge is $800mm in FY 2020, then another $75mm of synergy in 2021 and debt paydown of $1.3bn which should lead to $52mm of interest savings.  So $900mm after adjusting for 21% tax rate.  Historically, they tend to under promise on synergy and extract more.  FCF this year will likely be more than $800mm. 

 

7) Valuation - At 10x EV/EBITDA or a 12x P/FCF for a 4x EBITDA levered business, this implies $94 or $84 per share.  The key thing here is that Covid 19 has already punched this company in the mouth and they are projecting 2% volume decrease for 2H FY 2020 and then growing volume afterward.  I am not sure if you can ask for me in an investment.  Okay, okay, you can have a Saas company that still grew 20% during this period.  But  you are paying 7.2x FY 2020 FCF.

 

8) FY 2020 FCF yield of 13.8%

[BG2008]

I can assure you that BG2008 and ThePupil are 3 different individuals

 

Jurgis,

 

Again you are right.  BG2008 and ThePupil are three minds that occupies two different bodies.

[BG2008]

Just want to bump this thread as I think Berry is still quite interesting here.  I don't think I have seen such a "bond like" company

 

Also, just want to highlight IPL plastic which Berry could buy in a couple years.  Right now, they are simply in deleveraging mode.  There are rumors that three PE firms are after IPL plastics.  I think a 80/20 allocation between Berry/IPL makes a lot of sense.  I have also noticed that Berry has been one the forefront of issuing press release on recycling and more sustainable collaborations between Berry and their customers.  If Berry can convince people that they are sustainable in the long run, I don't see how this company doesn't trade at a 15x P/FCF at 3x debt to EBITDA or 11x EV/EBITDA.  Unlike most consumer brand companies, Berry has a long run way to consolidate smaller mom and pops.  The synergies are real.  Large consumer stables are losing shares to smaller and nimbler startups. But Berry outcompetes the smaller guys due to their scale advantage. 

 

This will be controversial.  Before Google, Instagram and Twitter, brand reduces search cost.  Now brand is a bit of a liability as people (or assholes like me) associate them with lower quality (fillers, additives, preservatives, etc).  Because plastics packaging carries no brand, the scale advantage persists.  I'll say something else that is also controversial.  In the new age of Amazon and tech disruption, the companies that have the most moat maybe those that have lower gross margin and very large scale advantage.  I doubt any tech start wants to muscle their way into the packaging business.  Getting customers will likely be very costly.  Increasingly, I want to own companies that are either fast tech with the brightest people or companies with moats such as rock pits, plastic packaging with large scale, distribution businesses with route density, and multi-family housing in NIMBYist markets. 

[longlake95]

I looked at IPL some time ago. Decided to pass. I'll dust off the file.

[Castanza]

BG2008, curious if you've ever looked at ($WST) West Pharmaceuticals? Definitely pricey right now, but a well run company with seemingly good working relationships with large consumer and pharma companies (think syringes, toothpaste caps, and Aleve bottles). Growing fcf, revenue, and low/manageable debt.

[BG2008]

I looked at IPL some time ago. Decided to pass. I'll dust off the file.

 

Grizzly Rock has a pretty good report on it.

[BG2008]

Paying of $150mm of notes at 5.5%, saving $8.25mm of int expense a year.  It doesn't move the needle in a bigly way, but if they can retire $800mm of debt at a 4.5% rate, that would equate to a savings of $36mm a year pre-tax of course

 

On June 23, 2020, Berry Global, Inc. (“BGI”), a wholly owned subsidiary of Berry Global Group, Inc. (the “Company”), elected to redeem in full the $150 million aggregate principal amount remaining outstanding of its 5.50% Second Priority Senior Secured Notes due 2022 (the “Notes”) in accordance with the terms of the indenture governing the Notes. As specified in the Notice provided to the holders of the Notes, the Notes are called for redemption on July 23, 2020 (the “Redemption Date”). The redemption price for the Notes shall be equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date. BGI intends to fund the redemption amount with cash on hand.