BERY - Berry Plastics Group

[manuelbean]

Thank you all for your help. I like Berry, but I'm trying to find the hair on the egg so I don't get surprised later on.

 

Any idea how the revenue will fare given that Berry has exposure to Industrial and RPC to Automakers? What would be a "reasonable" decline to model?

 

[BG2008]

Thank you all for your help. I like Berry, but I'm trying to find the hair on the egg so I don't get surprised later on.

 

Any idea how the revenue will fare given that Berry has exposure to Industrial and RPC to Automakers? What would be a "reasonable" decline to model?

 

If you read the earnings transcript.  They specifically said that volumes will be down 2% in calendar Q2 and Q3 and then revert back to growth.  This is despite having 1/3 exposure to industrial and more cyclical.  The 2/3 is stables and very steady.  There is an increase in demand for mask, PPE etc.  This is a bond masquerading as an equity. 

 

Manuelbean, it seems you can use some help understanding general LBO models.  Berry is a public LBO basically.  Many value investors have issues with matching up EV/EBITDA and P/FCF and general A=L+E.  This took me a while to understand as well.  Berry is also harder to understand because they do lots of acquistiions. 

 

I think the key metric to keep tabs of isn't necessarily the totaly amount of debt outstanding.  It is the Debt/EBITDA ratio.  This is how Charter Communications look at it as well.  At the end of the day, what people cannot argue with is that the company generates FCF and lots of it.  You should use run-rate revenue, EBITDA, and FCF figures to assess this business because until they fully lapse the acquisition, it won't screen that way. 

[manuelbean]

I'm on it BG2008. Thank you very much for your help and thank you to all the others that contribute to my growth as an investor.

 

By the way, what's A=L+E?

[kab60]

No matter how one squares it, they seem to have paid a pretty high price for the RPC biz (cost versus FCF incl. synergies). But remember RPC was a business growing volumes, so one needs to look at FCF yield plus growth. And the cheap euro financing. I think the rate spread was around 2-3 pct compared to USD debt, so really cheap funding. And then there's the less interesting take that they eliminated a potential threat in Apollo as well as gaining scale which might be more important if the world ever goes circular economy and decides to fight plastic waste.

[BG2008]

No matter how one squares it, they seem to have paid a pretty high price for the RPC biz (cost versus FCF incl. synergies). But remember RPC was a business growing volumes, so one needs to look at FCF yield plus growth. And the cheap euro financing. I think the rate spread was around 2-3 pct compared to USD debt, so really cheap funding. And then there's the less interesting take that they eliminated a potential threat in Apollo as well as gaining scale which might be more important if the world ever goes circular economy and decides to fight plastic waste.

 

I disagree that they over paid for RPC.  I think they got a really good deal.  People talk about low interest rates helping equity valuation.  It is all hypothetical with these growth companies.  But with plastic packaging.  They literally borrowed all the money to do that deal and finance it with 1.0% and 1.5% debt.  When the lenders are that crazy, you have to say "I'll do the deal".  They can pay off almost of all those RPC debt before they are due with the FCF generation. 

 

If someone wants to lend me at 1.5% with 30 year maturity, I will probably just bid 20% over anyone else and buy every piece of RE in NYC.  Not the same maturity, but then you can literally pay off all that debt and retain the $800mm or whatever of post synergy that they just bought. 

 

 

[BG2008]

I'm on it BG2008. Thank you very much for your help and thank you to all the others that contribute to my growth as an investor.

 

By the way, what's A=L+E?

 

Asset = Liability + Equity

 

I see to many young investors who has a lot of trouble equating EV = Liabilities + Equity and they tend to match FCF with EV which is the wrong way to look at valuation. 

[kab60]

No matter how one squares it, they seem to have paid a pretty high price for the RPC biz (cost versus FCF incl. synergies). But remember RPC was a business growing volumes, so one needs to look at FCF yield plus growth. And the cheap euro financing. I think the rate spread was around 2-3 pct compared to USD debt, so really cheap funding. And then there's the less interesting take that they eliminated a potential threat in Apollo as well as gaining scale which might be more important if the world ever goes circular economy and decides to fight plastic waste.

 

I disagree that they over paid for RPC.  I think they got a really good deal.  People talk about low interest rates helping equity valuation.  It is all hypothetical with these growth companies.  But with plastic packaging.  They literally borrowed all the money to do that deal and finance it with 1.0% and 1.5% debt.  When the lenders are that crazy, you have to say "I'll do the deal".  They can pay off almost of all those RPC debt before they are due with the FCF generation. 

 

If someone wants to lend me at 1.5% with 30 year maturity, I will probably just bid 20% over anyone else and buy every piece of RE in NYC.  Not the same maturity, but then you can literally pay off all that debt and retain the $800mm or whatever of post synergy that they just bought.

I think it all depends on how RPC performs and whether the FCF they bought is growing. I think it is too early to say. I believe they were on par to do 670m FCF pre RPC versus around 900m incl synergies. I think that's a pretty low initial yield on their cost, but coupled with growth and very cheap debt it might be fine. They delever quickly, but if their hurdle rate is too low I'd rather they returned the cash to me so I could buy their stock at a 15 pct yield - or better yet they acted on the low valuation. I agree with previous poster that absolute ebitda growth targets for comp is dumb. But I'm also impressed with management so they get the benefit of doubt.

[BG2008]

I am baking in no growth in volumes for the company.  With the additional $100mm of cap ex that they stealthly added, maybe it will grow 1-2% organic volume over time.  Given the debt paydown announced this year and synergy yet to be capture, I can see FCF in 2021 to be $1.0bn or at least $950mm. 

 

The thing about that $670mm to $900mm is that it happened without the company writing an equity check.  They paid for it with all debt.  So if you look at that transaction like a RE investor would, it's almost like they did a 100% financed deal with no equity.  So it's actually $330mm of incremental FCF in 2 years on $0 of equity check.  In that case, the levered return is infinite which is very wonky.  Now they took debt/EBITDA from 4x to 5x.  You can probably make the argument that it requires 2 years of deleveraging to go from 5x to 4x again. So they paid for it with 2 years of FCF post acquisition.  If you look at it that way, they paid $1.8bn of future FCF (over 2 years) and grew FCF by $330mm which is a levered return of 18%.  They now also own $800mm of additional EBITDA.  There is additional terminal value in acquiring RPC. 

 

Where they could go wrong is if the whole plastic packaging business is a much faster melting ice cube than we think which is currently priced in. 

[Spekulatius]

Also, FCF is AFTER debt service payments.  So if the acquisitions were paid using debt the increase is FCF us entity accretive to equity returns.

 

Yes, that’s the key here. If you take this into account, the numbers that manual mentioned in his post aren’t actually too bad.

[manuelbean]

Also, FCF is AFTER debt service payments.  So if the acquisitions were paid using debt the increase is FCF us entity accretive to equity returns.

 

I'm not sure I understood your point. Wouldn't FCF be accretive even if the acquisitions were paid in cash? Or do you mean debt, as opposed to equity/shares?

[dwy000]

Also, FCF is AFTER debt service payments.  So if the acquisitions were paid using debt the increase is FCF us entity accretive to equity returns.

 

I'm not sure I understood your point. Wouldn't FCF be accretive even if the acquisitions were paid in cash? Or do you mean debt, as opposed to equity/shares?

 

The FCF you are referencing is for the post-merged company which means it is after taking into account the cash costs of paying for the acquisition.  If you pay with equity there are no cash costs and all operating cash flow (after capex) go to the equity holder.  If you pay with debt, the post acquisition FCF is reduced by the interest costs but it is better for equity holders because there is no new equity issued.  More cash flow for same amount of equity.

 

 

[thepupil]

May 5th $250mm @ 5.5% = $13.75mm

May 22nd $100mm @5.5% = $5.5mm

June 23rd $150mm @5.5% = $8.25mm

July 1st $200mm @6.0% = $12mm

 

$39.5mm of interest expense savings on $700mm of debt pay down.

 

 

https://www.bamsec.com/filing/137899220000023?cik=1378992

On July 17, 2020, Berry Global, Inc. (“BGI”), a wholly owned subsidiary of Berry Global Group, Inc. (the “Company”), elected to redeem $100 million aggregate principal amount (the “Redemption Notes”) of its outstanding 5.125% Second Priority Senior Secured Notes due 2023 (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 Redemption Notes are called for redemption on August 16, 2020 (the “Redemption Date”) and the redemption price for the Redemption Notes shall be equal to 101.281% of the aggregate principal amount thereof, plus accrued and unpaid interest to the Redemption Date. BGI will pay the redemption price (together with accrued interest to the Redemption Date) on Monday, August 17, 2020, the next business day following the Redemption Date, in accordance with the indenture governing the Notes. Following such redemption, the Company expects that $600 million in aggregate principal amount of the Notes will remain outstanding. BGI intends to fund the redemption amount with cash on hand.

 

I count that Berry has used $800mm of cash on hand since Q1 end to pay down their higher cost 2nd priority notes from $2.4B to $1.6B and that their weighted average cost of debt is now something like 3% (I calculate 2.99% but I could have made an error).

 

I see go forward annualized interest expense as $335mm.

 

Now this doesn't take into account their ~$3B plus of  rate hedges. I calculate those increase cost by about $50mm / year to $385mm / 3.5% (and reduce risk of rate increases)

 

 

 

 

 

[BG2008]

I wonder if this aggressive debt paydown is partly due to the management team's perception that the business is doing well and cash collection is fine.  The pace of bond redemption is nothing short of breath taking lately.  When we first went into lockdown, it was likely that they were concerned about volumes/business in general.  By now, it is probably quite clear what the demand look like.  Just my 2 cents.

[BG2008]

https://www.globenewswire.com/news-release/2020/07/29/2069401/0/en/Madison-Dearborn-Partners-Agrees-to-Acquire-IPL-Plastics-Inc.html

 

IPL Plastics gets taken private at roughly 10.5x EBITDA.  IPL has more organic growth which is very valuable.  But it has much smaller scale and has a 15% EBITDA margin for 2019 versus about 18% for Berry.  Berry probably would've bought IPL in about 2 years after they deleverage to 4x.

 

What's more important is that the buyer doesn't have scale, so there aren't a ton of synergy to extract.  Here is their page of exited packaging companies. 

 

https://www.mdcp.com/portfolio#?sectors=basic-industries

[kab60]

Nice call, BG. Appreciate your thoughts on Berry and the space.

[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.

 

Haha, I was looking over this thread to see if I mentioned anything about IPL.  80/20 Berry/IPL allocation this year.  IPL is up about 145% since I bought it.  Lots of props to Grizzly Rock's research on this company.  In hindsight, should have sized it bigger than 2%.  But that is the drawback of small cap investing.  Without a deal, they can linger in purgatory for years (which it did for a long time).  But when they work, they work very well and very quickly and in very meaningful ways. 

 

 

[BG2008]

Nice call, BG. Appreciate your thoughts on Berry and the space.

 

Happy to have added value (if any given the share prices here).  One other comment is that Silgan reported crazy high volume increases for Metal Cans and Plastic.  Perhaps there were a ton of hording by consumer during Q2 that Berry may benefit from as well.  Berry's biggest weakness is their volume figures.  If they report +2-3% for the quarter, market may react really well to it. 

 

Metal Containers

Net sales of the metal container business were a record $597.2 million for the second quarter of 2020, an increase of $21.6 million, or 3.8 percent, as

compared to the previous record of $575.6 million in the second quarter of 2019. This increase was primarily the result of higher unit volumes of

approximately 15 percent

 

Plastic Containers

Net sales of the plastic container business were a record $168.8 million in the second quarter of 2020, an increase of $14.6 million, or 9.5 percent, as

compared to $154.2 million in the second quarter of 2019. This increase was principally due to higher volumes of approximately 14 percent, partially

offset by a less favorable mix of products sold,

 

[kab60]

Results are out, looking good. Guidance raised to 830m FCF this year. Another 65m in synergies to come next year thus crossing 900m in FCF. Add expected volume growth, lower interest costs etc. and they should be on their way to do 1b FCF. on a 6,3b market cap. Looks more interesting than a bond to me...

[kab60]

Management could be better at addressing capital allocation which analysts also asked a bit about on the call. Long winded and fluffy answers. Why not just say their stock is dirt cheap, and they'd love to buy it hand over first, but first they want to get below 4xleverage? Either way, I think the most value enhancing move they could do was to lever up, sink the stock price, and make a large buyback. They borrow at 1-3 pct, equity FCF yield is around 15 pct. Not gonna happen, obviously, but their model really works best privately. Or they'd have to spread the gospel ala Transdigm and get public investors fall in love with leverage...

[BG2008]

Hitting 52 week highs.  Didn't think I would be saying that. 

[fareastwarriors]

Hitting 52 week highs.  Didn't think I would be saying that.

 

Must be all the CoBF members boosting it. :)

[BG2008]

Company needs to send me a check for my IR function

 

[thepupil]

now BG2008 got me invested in some kind of fruit company...

[BG2008]

now BG2008 got me invested in some kind of fruit company...

 

Haha.  Westrock was written up on VIC. Corrugated containers, lots of E-commerce.  Maybe interesting.  Seems like packaging generally did well during Q2.  May make sense to throw a few bps in the calls or LEAPs.  I bought a few calls due to Silgan reporting volume increases.  Look like a short term genius for now...important to stress For NOW.  In this new world of tech and dumpster fire of Enclosed mall, scale in an industry maybe more important.  I think brands are eroding, but scale, route density and a few other barriers will be more enduring.  That is unless Amazon decide to get into your turf. 

[BG2008]

Another $100mm debt redemption.

 

http://ir.berryglobal.com/node/12551/html