Description

Meant to get this out late last week when BERY was trading sub-$60, but the epic market rotation has fueled small value stocks over the last couple days. This write up is intended to be a quick hitter on why BERY is finally interesting after a rough start to the year. I will refer my fellow VIC members back to Venetian’s Jan. 2024 write up and Quads1025 Nov. 2020 write up for solid overviews of the Company.

What’s happened since Venetian’s Jan. 2024 write up? BERY had been in a strategic review process of its HH&S business since fall of 2023. We had high expectations for BERY entering 2024 and assumed the HH&S business would be sold for a healthy multiple where the Company would use proceeds to delever the balance sheet. However, in conjunction with fiscal Q1 earnings in February, BERY announced they would be spinning the HH&S business via a Reverse Morris Trust (RMT) structure with Glatfelter Corporation (GLT). The market did not take this news well as BERY’s stock traded down 12% on the day of the announcement. The transaction placed BERY in the penalty box and essentially put the stock price in “DEAL PURGATORY” until the transaction is consummated. With the large selloff in the stock price BERY’s valuation compressed into the low-7x NTM EBITDA multiple with a low-teens NTM FCF yield.

I believe BERY’s tenure in deal purgatory is quickly coming to an end as we approach the conclusion of their fiscal year on September 30^th. I estimate the transaction with GLT is consummated some time in September or October and look to fiscal Q3 earnings in early August for better line of sight on the process. With the transaction approaching completion I highlight several key points that give me optimism for BERY’s performance over the next 6-12 months.

Key Points:

1. Spin Completion: HH&S deal completion which will yield an ~$1 billion in proceeds that will be used for delevering the balance sheet in the next few months.
2. Return to positive organic volume growth: BERY (like many of its packaging peers) has gone through a terrible destocking period over the last 3 years which has resulted in BERY reporting negative organic volume growth for 11 straight quarters. 
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     • Company Filings
   • Based on BERY’s Q2 earnings call and subsequent diligence with management and the sellside, I anticipate BERY returning to positive organic volume growth in fiscal Q3 and Q4 this year which should be a major catalyst for the stock price / valuation. CEO Kevin Kwilinski highlights conviction in organic volume growth returning:
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   • 1. Peers AMCR and SEE reported progress on organic volume growth last quarter which resulted in meaningful moves in their stock prices.  AMCR was up 10% on the day of earnings as it received significant follow through after the quarter, while SEE was up 9% on the day of the earnings.
3. Non-core Asset Sales - BERY is actively pursuing a portfolio pruning strategy where they are evaluating the sale of non-core assets. The Company mentioned the evaluation of $1b in potential proceeds from these non-core asset sales, but suspect that could be conservative given a potential slip up from BERY’s CEO during the Q&A section of the last earnings call where he mentioned an additional $1b plus not including HH&S divested businesses. 
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4. Working Capital Cycle Unwind – BERY’s working capital cycle historically uses cash during the 1^st half of its fiscal year before seeing the FCF generation come to fruition in the 2^nd half. BERY’s reaffirmed guidance of $800-$900 of FCF for this fiscal year means the Company will generate ~$1.2 billion of FCF in fiscal Q3 and Q4 after burning ~$300mm of cash during 1H.
5. Continued productivity optimization –BERY has offset struggling organic volume growth over the last two years with productivity initiatives including facility closures and cost takeouts. I estimate the Company has consolidated / rationalized 40-50 facilities globally, while they are simultaneously working on taking $165mm of costs out of the business. We expect margins to improve sequentially as volumes recover – which the CFO alluded to on the last earnings call.
6. Large capital return story – over the next 6-12 months BERY will be in a position to either reduce its debt load meaningfully, repurchase stock, or increase its dividend with its capital base. Proforma BERY should have somewhere in the range of $3-$4 billion of capital to use for these opportunities.
   • Current cash on BS - $494mm
   • HH&S proceeds - $1b
   • 2H 2024 FCF - $1.2B
   • Non-core asset sales - $1 billion (conservative potentially)
   • Total - ~$3.6 billion for debt reduction, buybacks, dividend increases

All in I believe BERY is attractively positioned for the stock to perform well over the next 6-12 months on the back of the HH&S transaction being completed, organic volume returning to the Company, continued optimization of the business, along with a significant amount of capital coming into the business which can be returned to shareholders. BERY is trading at a very attractive relative valuation compared to its rigid and flexible packaging peers and I believe the proforma company (ex HH&S) should trade much closer to its peer set.

Once the HH&S transaction is complete BERY should be an ~80% consumer non-discretionary packaging Company with an EBITDA margin profile that closely resembles (if not better than) most of its peers mentioned above. AMCR is BERY’s closest competitor in terms of business composition and end market exposure yet BERY trades at a 3 turn discount relative to AMCR despite having better margins. 

I suspect as execution on the items mentioned above unfolds BERY will begin rerating publicly or I estimate the slimmed down business would be an attractive acquisition target if the stock price / valuation does not rerate. Below, I highlight a proforma valuation of BERY (ex HH&S) segment. I assume the capital returning to the business accrues to the balance sheet and the proforma valuation does not account for returning capital to shareholders via debt reduction or share repurchases.

Catalyst

• 6 months of catalyst 
• Fiscal Q3 earnings August 2nd - return to positive organic volume growth, unwind of FCF generation, line of sight on HH&S spin completion 
• HH&S spin is consumated
• Fiscal Q4 earnings in November - continued volume growth and FCF generation
• Large amoubt of capital to potentially be returned to shareholders
• Rerating in BERY's valuation