Berry
Plastics Group, Inc. (BERY, $50.90): “Profitable Packing is the Game, Berry
Plastics is the Name”
By:
Andy Krueger, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by myself,
and it expresses my own opinions. I am not receiving compensation for it and I
have no business relationship with any company whose stock is mentioned in this
article.
Summary
• Berry Plastics Group, Inc. (NYSE:BERY) manufactures value-added
plastics for consumer packaging, hygiene, health & specialty products and
engineered materials globally; however, the majority of revenue exposure (86%) is
derived in the Americas.
• BERY’s CEO Jon Rich
will retire as CEO in February 2017, although he will stay on with the company
as the Executive Chairman.
• The acquisition of AEP
was announced August 25 for $765 million in cash and stock and has a target
close date of February 1.
• BERY’s diverse set of
products defend against the slowdown in consumer spending and the food service market.
• Expectations for 2017
include additional reduction of debt to a sub 4x net debt/adjusted EBITDA,
adjusted FCF of $550 million and organic sales volume growth of 1%.
Key
points: BERY announced Jon Rich’s February 2017 retirement
plans on September 30. During the time
since the announcement, the board of directors elected Tom Salmon to the fill
the role of President and COO of the company.
Salmon will take over a company with annual revenues of $6.5 billion,
21,000 employees and 115 facilities globally.
Salmon joined the BERY team as part of the Covalence acquisition in 2007
when he was reassigned to serve as President of the Engineered Materials
division. After eight years of service
in this position, Salmon became the President of Consumer Packaging, BERY’s
largest segment. Rich has fully indorsed
Salmon publically.
The AEP acquisition is
being funded using 50% cash and 50% stock.
BERY’s motive for the acquisition is twofold: AEP’s business provides a
nice complement to the existing Engineered Materials division at BERY, and the
acquisition will help lower BERY’s debt-to-earnings ratio. BERY paid a 43% premium for AEP shares
compared to the $77 closing price on August 24.
BERY offers a very
diverse set of products, from plastic cups to pill containers, protecting the
firm from a slowdown in select end markets.
The weak consumer spending environment and weakness in the food service
market poses some near-term threat to BERY; however, the more stable end
markets of consumer packaging and health, hygiene & specialty will be able
to counterbalance the slowdown from the previously addressed factors.
The reduction of debt
remains a top priority at BERY and the firm plans to achieve a sub 4x net
debt/adjusted EBITDA figure before the end of 2017 by increasing the adjusted
FCF earned by the firm and using the increase in FCF to pay down debt. The adjusted FCF target of $550 million is
pending the successful close of the AEP acquisition on February 1; any delays
could reduce this estimate. Companywide
organic sales volume growth of 1% is projected to be achieved through 3% growth
from the Health, Hygiene, & Specialties division, 1% from the Engineered
Materials division, and -1% from the Consumer Package division.
Source:
FactSet
What
has the stock done lately?
Since Rich made his
retirement plans public, BERY’s stock maintained its strong performance, up 15%
to date. BERY put together another
strong quarter in fiscal Q4 as the company reported record highs in sales and
operating EBITDA for any Q4. A shift in
strategic initiative to use assets to produce additional high-margin products
instead of lower-margin products within the Specialty division caused volumes
to decrease as margins and EBITDA increased for the segment and the firm. Largely driven by the favorable tax
accounting from the tax receivable agreement and NOLs from the Avintiv
acquisition, BERY’s Q4 EPS of $0.73 beat the Street’s estimate of $0.59. Unused NOLs of $500 million should continue
to favor BERY in future reporting periods.
Past
Year Performance: BERY closed the acquisition of Avintiv in
October 2015 and since exceeded management’s expectations as synergy targets of
reducing material and SG&A costs have already been surpassed with
additional synergy opportunities yet to come.
BERY used diversification of product offerings to smooth the effects of
inconsistent demand in certain end-markets over the past year. Avintiv continues to have a positive effect
while the AEP acquisition looks to perform just as well.
My
Takeaway
BERY’s commitment to
achieving a lower amount of debt on the firm’s books will make the company more
flexible in the M&A market and ease investors’ concerns of tying up too
much capital in interest payments.
Management has not released any news indicating the AEP close will be
delayed; however, the financial benefits will be felt largely in 2018 as the
additional $85 million in cash flow will be offset by the costs of the
acquisition.
BERY poses to lead their
competitors in organic growth due to the firm’s scale and M&A activity as
these factors provide pricing power and market consolidation opportunities for
BERY greater than those experienced by the company’s competitors. I expect these factors to continue to drive
BERY’s share price higher as the firm’s leveraged business model continues to
produce above average FCF and returns for investors. I recommend that the AIM Equity fund maintain
its position in Berry Plastics Group, Inc.
