Description

Opportunity

Berry Global (BERY) is a leading manufacturer of protective packaging solutions specializing in rigid plastic containers, flexible packaging, and non-woven fabrics catering to diverse industries like food and beverage, healthcare, consumer goods, and industrial applications. BERY boasts a global footprint with over 280 facilities across different countries, employing approximately 47,000 people. BERY business model has been described in detail by quads in a November 2020 idea.

Despite navigating choppy end-market conditions, BERY presents a compelling risk / reward opportunity in a durable sector. BERY's recent share price $65.29 combined with recent management guidance presents a 15-25% IRR upside scenario and a limited downside scenario that is backstopped by resilient Free Cash Flows.

Business Segments – 4 Main segments

Consumer Packaging International (CPI) – 32% of Sales

• Rigid plastic products within the segment include Closures and Dispensing Systems, Pharmaceutical Devices and Packaging, Bottles and Canisters, Containers, and Technical Components. 

• FY23 Performance: Revenue: $4.0 billion, 6.8% OI Margin, Volume Change: -5%.

Consumer Packaging North America (CPNA) – 24% of Sales

• Rigid plastic products within the segment include Containers and Pails, Foodservice, Closures, Bottles and Prescription Vials, and Tubes. 

• FY23 Performance: Revenue: $3.1 billion, 11.1% OI Margin, Volume Change: -3%.

Engineered Materials (EM) – 23 % of Sales

• Flexible plastic products within the segment include Stretch and Shrink Films, Converter Films, Institutional Can Liners, Food and Consumer Films, Retail Bags, and Agriculture Films. Focus on North America and Europe markets.

• FY23 Performance: Revenue: $2.9 billion, 11.5% OI Margin, Volume Change: -8%.

Health, Hygiene & Specialties (HH&S) 21% of Sales

• Product groups within the segment include non-woven and related products that service global markets in Healthcare, Hygiene, Specialties, and Tapes. 

• FY23 Performance: Revenue: $2.6 billion, 4.8% OI Margin, Volume Change: -7%.

Key Financials and KPIs – FY 2023

Reasons for Optimism:

• Solid Q4 Performance and Resilient Operations: BERY surpassed expectations with solid FCF performance in FY23, delivering $926mm FCF despite challenging demand across its markets, due to lower passthrough of resin costs and inventory de-stocking trends across the industry.

• Promising FY24 Outlook: Management's FY24 EBITDA guidance of $2.05 billion-$2.15 billion and FCF of $800-900mm. BERY expects volume improvements throughout the year, driven by easing comparisons and ongoing cost/productivity initiatives, solidifying a path towards stable performance.

• Multiple Growth Drivers: While overall volumes are projected to remain flat year-over-year, BERY identifies several key growth drivers. For example: North American foodservice, particularly BERY's polypropylene cups platform, displayed remarkable strength, highlighting potential for expansion in specific segments. 

• Focus on Operational Efficiency: BERY's commitment to cost-reduction and productivity initiatives are expected to be the biggest contributor to projected EBITDA growth.

• New Long-Term Guidance: New CEO Kevin Kwilinski's emphasis on increasing ongoing productivity and lean manufacturing efforts committed to sustain future guidance of 4-6% Adj EBITDA growth (vs. 8% 5-year CAGR) and 7-12% Adj. EPS growth (vs 12% 5-year CAGR), while achieving net debt / EBITDA leverage in the 2.5 to 3.5 range.

• Low valuation: BERY currently trades at 8.1x EV / EBITDA and has FY owner earnings yield of 12% comparing positively vs. similar trading competitors like Amcor plc ~10x EV/EBITDA and ~6% FCF yield

• HH&S Review of Strategic Alternatives: in FY23 BERY announced that it has initiated a formal process to evaluate strategic alternatives for the segment. A potential sale at accretive valuation could improve organic growth profile and accelerate deleveraging and share buybacks.

Valuation and IRR Analysis

Base Case Scenario, 15.3% IRR

The base case scenario utilizes the low end of the management guidance with 1%, 2%, 4% EBITDA Growth in FY24-26 and excess Owner Earnings / FCF after dividend going towards debt reduction. Exit multiple in line with current at 8.1x EV / EBITDA

Worse Case Scenario, 2.6% IRR

The worse case scenario utilizes 0% EBITDA Growth in FY24-26 and excess Owner Earnings / FCF after dividend going towards debt reduction. Exit multiple reduced to 7.0x EV / EBITDA

Best Case Scenario, 24.4% IRR

The base case scenario utilizes the high end of the management guidance with 2%, 4%, 6% EBITDA Growth in FY24-26 and excess Owner Earnings / FCF after dividend going towards debt reduction. Exit multiple increased to 9.0x EV / EBITDA.

Investor Fears and Conclusion

I believe the main investor concern is related to lack of consistent volume increases and the fear that FY23 declines will continue. While these concerns are realistic, BERY has demonstrated to have a very resilient business model that enabled it to maintain significant free cash flow generation ($947mm, $904mm, $876mm and $926mm respectively over the last 4 years) during the COVID pandemic and its aftermath of high inflation and extremely volatile supply chain / inventory dynamics. 

BERY’s ability to manage price adjustments and productivity improvements leading to resilient cash flows should provide back-stop to the valuation in a scenario where volumes continue to decline and the company offers no future growth.

In the new management guidance scenario, where EBITDA is re-established at a 4-6% CAGR, the current cheap valuation and opportunity for deleveraging could provide extremely attractive IRRs in the 15-25% range.

Risks

• Volume decline continues, impairing future growth potential that can’t be mitigated by productivity gains.

• Poor M&A capital allocation.

• Debt re-financing markets over future years are challenged, leading to substantial interest expense increase.

Catalyst

• Volumes stabilize and productivity gains enable consistent 4-6% EBITDA growth.

• Deleveraging below 3.5x Net Debt / EBITDA expands the potential investors universe and bridges the EV / EBITDA valuation gap with public comparables.

• Deleveraging below 3.5x enables to continue to increase allocation of FCF to repurchase shares.

• Accretive sale of HH&S segment at above current EV / EBITDA multiples.