Description

Company description (there are numerous write-ups on VIC for further background): Berry Global (formerly Berry Plastics from the period before “plastics” became a pejorative!) is a leading global supplier of a broad range of innovative rigid, flexible, and non-woven products used every day within consumer and industrial end markets. Berry, a Fortune 500 company, has over 48,000 employees and generated $12.6 billion of pro forma net sales in fiscal year 2019 from operations that span over 290 locations on six continents.

Simply put Berry Global, warts and all, is a cash machine and that makes it a good thing to own in times like these. The company, as demonstrated in its quarterly earnings presentation this morning, is relatively recession resistant and perhaps even has an element of counter-cyclicality in its cash flows; falling oil prices (hello May 2020!!) give it at least a working capital benefit along with a pricing edge over non oil based materials if not an outright small lasting cash flow bump. In the medium term, the company is mostly indifferent to oil prices given that most of its customers contracts feature a pass through mechanism for changes in input prices over varying lagging durations.

“Organic Volumes” vs actual cash flow: For Berry, depending on your point of view, the OV/Cash Flow discussion represents the bad and the good news of the story. The bad news is that, with some exceptions, the company tends to miss its volume guidance. Like every quarter and year except here and there. The company has never REALLY been able to explain why and talks about concepts foreign to the layperson such as “lightweighting” which is supposed to mean its customers are doing more with less in their packaging or some such thing. In reality, my guess is a decent chunk of the business is exposed to traditional CPG categories and companies that don’t really grow. In addition, BERY is exposed to some degree to the industrial economy which also doesn’t really grow anymore.

On the other hand, Berry ALWAYS beats its FCF guidance. Per p. 14 of their recent presentation http://ir.berryglobal.com/static-files/649a7979-0680-45bf-bb77-2dcd7eb5206f and yes, subject to their “adjustments” some of which actually have hurt their reported free cash flow, they have beaten their free cash flow guidance every year for the last 6 years. Unlike many companies, this company actually is built to pump out relatively consistent cash flow. Guidance for 2020, which they published this morning and which contains no assumption of COVID recovery, is for FCF north of $800mm. “Normalized” FCF is for $900mm backing out some integration expenses and whatnot. This on a market capitalization of just over $5bn, making this a very cheap stock on FCF. 

Debt: The “but” on this story has always been and continues to be the balance sheet. I think it’s actually ok all things considered. Following a re-leveraging up to purchase RPC International (seemed like a cheap deal but i don’t really have a view), the company currently has net debt to EBITDA of around 4.7x 2020 guided EBITDA. They plan to get it under 4x in the next two years and today claimed to be “ahead of schedule” on the plan. This sounds like a lot of debt and it is. That said, the details are in your favor. The debt comes with no financial maintenance covenants (don’t look at me, i didn't give them the $$!!) and no near term maturities. Berry also has $953mm of cash on hand and an undrawn revolver with capacity of $850mm. In short, there are zero liquidity issues here given the above, the resilience of the cash flows and the short term benefit to the company of oil being down.

Current Environment: The company broke things down in nice round numbers today about 2020 operating trends assuming no recovery from the present. 65% of the overall business is in end markets that are either advantaged by current trends (stockpiling of certain categories of food items, health care products etc). This cohort in aggregate is expected to grow volumes by mid-single digits in this environment. 

On the bad side, the remaining 35% of the company will shrink by “double digits” in the current environment. This includes sales into food service (20% of co but a lot of drive through type products) as well as auto, industrial, school and hospital end markets. As a whole, these dynamics will take volumes from up LSD to down LSD this year but cash flow should be similar to prior expectations. The company expects any lessening of COVID social distancing conditions to be net accretive to cash flow.

Summary: balance sheet, covid and all, i don’t see why this company should trade at < 6x normalized FCF which should grow some overt time.

Catalyst

value is its own catalyst..... also debt paydown