Author Topic: BERY - Berry Plastics Group  (Read 5884 times)

kab60

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Re: BERY - Berry Plastics Group
« Reply #10 on: July 31, 2019, 11:00:29 AM »
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

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Re: BERY - Berry Plastics Group
« Reply #11 on: July 31, 2019, 03:58:16 PM »
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 isnít 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..
To be a realist, one has to believe in miracles.

kab60

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Re: BERY - Berry Plastics Group
« Reply #12 on: July 31, 2019, 11:09:30 PM »
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 isnít 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

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Re: BERY - Berry Plastics Group
« Reply #13 on: August 15, 2019, 01:09:52 PM »
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?).
« Last Edit: August 15, 2019, 11:50:58 PM by kab60 »

BG2008

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Re: BERY - Berry Plastics Group
« Reply #14 on: August 15, 2019, 09:34:11 PM »
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

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Re: BERY - Berry Plastics Group
« Reply #15 on: August 16, 2019, 01:38:59 AM »
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

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Re: BERY - Berry Plastics Group
« Reply #16 on: August 16, 2019, 08:34:47 AM »
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

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Re: BERY - Berry Plastics Group
« Reply #17 on: August 16, 2019, 11:38:23 AM »
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

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Re: BERY - Berry Plastics Group
« Reply #18 on: August 16, 2019, 02:59:33 PM »
Added a third lot today like others. Itís about a 1.5% position for me. I normally donít 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, itís 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 donít screw up RPC, they should be Ok.
To be a realist, one has to believe in miracles.

BG2008

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Re: BERY - Berry Plastics Group
« Reply #19 on: September 06, 2019, 12:41:09 PM »
"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.