Berry Global Reports Second Quarter 2019 Results

 

Berry Global Group, Inc. (NYSE:BERY) reported its second fiscal quarter 2019 results, referred to in the following as the March 2019 quarter.

Second Quarter Highlights
(all comparisons made to the March 2018 quarter)

  • RPC Group Plc shareholders voted to approve Berry’s offer; acquisition expected to close early in Q3 of calendar year 2019
  • Net sales of $1.95 billion in the quarter
  • Consumer Packaging sales growth up 6 percent in the quarter
  • Operating income of $185 million in the quarter
  • Operating EBITDA up 1 percent to $354 million
  • Net income per diluted share of $0.55
  • Adjusted net income per diluted share of $0.84
  • Cash flow from operations up 29 percent to $170 million in the quarter
  • Reaffirmed fiscal 2019 free cash flow guidance of $670 million

Commenting on the quarter, Tom Salmon, Chairman and Chief Executive Officer of Berry stated, “We generated record operating EBITDA for any March quarterly period of $354 million. Our adjusted net income per diluted share was in line with the prior year quarter at $0.84 and we reported a significant improvement in free cash flow.

“Specifically by segment, our Consumer Packaging division delivered strong sales growth of 6 percent in the quarter, which was largely led by our foodservice products. We continue to be encouraged by the momentum of this division, delivering six consecutive quarters of positive sales growth. Within our Health, Hygiene & Specialties segment we recorded an improvement of 39 percent in operating income as well as a 6 percent improvement in Operating EBITDA, primarily as a result of the Clopay acquisition. Inside our Engineered Materials division, while our March results were weaker than expected, we completed the qualification of alternate and new raw materials and improved our cost position and service to customers. The fundamentals of this business remain strong and we are now better positioned for growth in these attractive markets. Additionally, we continue to be excited about the Laddawn acquisition which has been inspiring new ways for us to look at our core business as a vehicle to enhance growth, as well as, our customer experience.”

March 2019 Quarter Results

Consolidated Overview
March Quarter
(in millions of dollars) Current Prior $ Change % Change
Net sales $1,950 $1,967 $(17) (1)%
Operating income 185 188 (3) (2)%

The net sales decrease of $17 million from prior year quarter is primarily attributed to organic sales decrease of $72 million and a $22 million unfavorable impact from foreign currency changes, partially offset by acquisition net sales of $77 million. The organic sales decrease is primarily attributed to a 3 percent base volume decline and decreased selling price of $5 million.

The operating income decrease of $3 million from prior year quarter is primarily attributed to an $11 million impact from the base volume decline, a $6 million increase in business integration related to the proposed RPC acquisition, a $5 million unfavorable impact from foreign currency changes, and a $4 million increase in selling, general and administrative expense, partially offset by a $10 million improvement in price cost spread, acquisition operating income of $9 million, and a $4 million decrease in depreciation and amortization.

Engineered Materials
March Quarter
(in millions of dollars) Current Prior $ Change % Change
Net sales $628 $655 $(27) (4)%
Operating income 74 94 (20) (21)%

Net sales in the Engineered Materials segment decreased by $27 million from prior year quarter primarily attributed to an organic sales decline of $62 million, partially offset by acquisition net sales of $36 million. The organic sales decline is primarily attributed to a 7 percent volume decrease due to customer destocking and supply disruption related to material qualifications and decreased selling prices of $18 million.

The operating income decrease of $20 million from prior year quarter is primarily attributed to an $8 million unfavorable impact from price cost spread, an $8 million impact from the base volume decline, and a $5 million increase in selling, general and administrative expenses attributed to inflation.

Health, Hygiene, & Specialties
March Quarter
(in millions of dollars) Current Prior $ Change % Change
Net sales $683 $706 $(23) (3)%
Operating income 57 41

16

39%

Net sales in the Health, Hygiene & Specialties segment decreased by $23 million from prior year quarter primarily attributed to an organic sales decline of $43 million and a $21 million unfavorable impact from foreign currency changes, partially offset by acquisition net sales of $41 million. The organic sales decline is primarily attributed to a 6 percent volume decline as a result of customer destocking, weakness in baby care, and customer product transitions in hygiene.

The operating income increase of $16 million from the prior year quarter is primarily attributed to acquisition operating income of $8 million, an $8 million impact from improvement in price cost spread, a $6 million decrease in business integration expenses, and a $4 million decrease in selling, general, and administrative expense. These increases were partially offset by a $7 million impact from the base volume decline and a $4 million unfavorable impact from foreign currency changes.

Consumer Packaging
March Quarter
(in millions of dollars) Current Prior $ Change % Change
Net sales $639 $606 $33 6%
Operating income 54 53 1 2%

Net sales in the Consumer Packaging segment increased by $33 million from prior year quarter primarily attributed to organic sales growth. The organic sales growth is primarily attributed to a 3 percent volume improvement and increased selling prices of $14 million.

The operating income increase of $1 million from the prior quarter was primarily attributed to a $10 million improvement in price cost spread, a $4 million impact from the base volume increase, and a $3 million decrease in depreciation and amortization. These increases were partially offset by a $12 million increase in business integration costs primarily related to the proposed RPC acquisition, and a $4 million increase in selling, general and administrative expense.

Cash Flow and Capital Structure

Our cash flow from operating activities increased by 29 percent to $170 million for the quarter ended March 2019 compared to $132 million in the prior year quarter and was $1,050 million for the last four quarters ended March 30, 2019. Adjusted free cash flow for the quarter and last four quarters ended March 2019 was $78 million and $715 million, respectively.

Our total debt less cash and cash equivalents at the end of the March 2019 quarter was $5,374 million. Adjusted EBITDA for the four quarters ended March 30, 2019, was $1,426 million.

Share Repurchase Program

In the June 2018 quarter, the Company announced that its Board had unanimously approved a new $500 million share repurchase program. The new share repurchase authorization allows for the repurchase of shares, from time to time, through open market purchases, privately negotiated transactions, Rule 10b5-1 plans, and any other purchase techniques deemed appropriate in accordance with applicable securities laws. The timing and amount of repurchases will depend on market conditions. The share repurchase program has no expiration date. The Company repurchased $18 million of shares outstanding during the March 2019 quarter. At the end of the March 2019 quarter, $393 million of authorized share repurchase remain available to the Company.

RPC Group Plc Acquisition

On March 8, 2019, the Company issued an announcement pursuant to Rule 2.7 of the UK City Code on Takeovers and Mergers disclosing the terms of an all-cash firm offer for the entire issued and to be issued share capital of RPC Group Plc (RPC). Pursuant to the offer, RPC shareholders will be entitled to receive 793 pence in cash for each RPC share (implying a value of approximately £3.3 billion, or $4.3 billion using the exchange rate at the time of the offer). Aggregate consideration will be approximately £5.0 billion, or $6.5 billion, including refinancing of RPC’s net debt, using the exchange rate at the time of the offer. This represents an approximate 8.3x pre- and 7.0x post-synergy multiple calculated as transaction purchase price divided by adjusted EBITDA using RPC’s reported financials from the last 12 months as of September 30, 2018, including expected cost synergies of $150 million. Combined net sales and operating EBITDA would be approximately $13 billion and $2.4 billion, respectively. Excluding the expected annual cost synergies of $150 million, the combined cash flow from operations and adjusted free cash flow would be approximately $1.4 billion and $763 million, respectively. The financial metrics above represent the combined data for Berry’s reported financials from the last 12 months as of March 30, 2019 and RPC’s reported financials from the last 12 months as of September 30, 2018. To fund this transaction, Berry has a fully committed debt financing packaging in place. We expect the Company’s net leverage, post-acquisition, to be approximately 4.8x. On April 18, 2019, the requisite majority of RPC shareholders voted to approve the RPC transaction. The transaction remains subject to, among other things, receipt of antitrust clearances and satisfaction of other customary closing conditions. The Company expects to complete the RPC acquisition early in the third quarter of calendar year 2019.

Outlook

Today we are reaffirming our fiscal year 2019 projected cash flow from operations of $1.04 billion and adjusted free cash flow of $670 million. Additionally, our fiscal 2019 capital spending and cash interest costs are unchanged and forecasted to be $350 million and $270 million, respectively. This guidance also includes the use of cash for working capital and other costs of $10 million, which is an improvement of $35 million from our prior earnings call to partially reflect the benefit of lower resin pricing. Additionally, we are reducing our cash taxes by $15 million, bringing our fiscal 2019 estimate to $150 million. The earnings reduction is primarily being driven by the slower start in our Engineered Materials and Health, Hygiene & Specialties segments along with an unfavorable impact from foreign currency exchange. These guidance assumptions all exclude the proposed acquisition of RPC.

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