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Berry Plastic’s, Inc. (NYSE:BERY)

F4Q2012 Earnings Conference Call

November 27, 2012 10:00 AM ET

Executives

Jonathan Rich - Chairman and Chief Executive Officer

James Kratochvil - Chief Financial Officer

Mark Miles - Treasurer

Dustin Stilwell - Head of Investor Relations

Analysts

George Staphos - Bank of America

Albert Kabili - Credit Suisse

Anthony Pettinari – Citi

Scott Gaffner - Barclays

Matt Wooten - Robert W. Baird

Jose Davila [ph] - Goldman Sachs

Alex Chi [ph] - Goldman Sachs

Chris Manuel - Wells Fargo

Mark Wilde - Deutsche Bank

Edlain Rodriguez - Lazard Capital Markets

Operator

Good day ladies and gentlemen, welcome to the Berry Plastic’s Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. Now I’ll turn the conference over to Dustin Stilwell, Head of Investor Relations. Please begin.

Dustin Stilwell

Good morning and welcome to Berry Plastics Earnings Conference Call. Joining me from the Company today I have Jon Rich, our Chairman and CEO; Jim Kratochvil, our CFO and Mark Miles, our Treasurer.

During this call, we will be discussing some non-GAAP financial measures including operating EBITDA and adjusted EBITDA. The most directly comparable GAAP financial measures in the reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our public filings. An archived audio replay of this conference will also be available on the company’s website. During this conference call we may make forward looking statements within the meaning of Federal Securities Laws. Forward-looking statements include statements concerning the company’s plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information.

Actual results in future periods may differ materially from forward-looking statements made today because of a number of risks and uncertainties. Including various economic and competitive factors, the company’s ability to pass through raw material price increases to its customers, its ability to service debt, the availability and cost of plastic resin, the impact of changing environmental laws, changes in the level of the Company’s capital investment, the results in integration of the acquired business, our reliance on unpatented know-how and trade secrets and the risks set forth in the Risk Factors cautionary statement regarding forward-looking statements and other sections of our reports filed or furnished with the Securities Exchange Commission. We should not place undue reliance on our forward-looking statements. We undertake no obligation to update any forward-looking statements to reflect changes and underlying assumptions of factors new information, future events, or other changes. Additional and important information about the Company’s business is set forth in the Company’s various filings with the SEC and the information discussed today should be considered alongside the information contained in those filings.

I would now like to turn it over to Jon Rich.

Jonathan Rich

Thank you Dustin and good morning everyone. Thank you for joining us and welcome to the Berry Plastics fourth quarter 2012 earnings call and our first conference call since filing our IPO on October 4, 2012. Throughout this call we will refer to the fourth fiscal quarter as September 2012 quarter. During today’s call, I’ll provide an overview of our performance for the September 2012 quarter. After an update surrounding our key strategies and provide the insight into Berry’s outlook going forward. Jim will then report on our financial results, capital structure and key balance sheet items. After our prepared remarks, Jim and I will open the call to answer your questions.

Let me begin by welcoming new investors and coverage analysts of Berry Plastics to our conference call today. We are always interested in hearing from our investors. I encourage you to reach out to Dustin Stilwell and our investor relations group if you have any questions or comments about Berry.

The successful completion of our public offering and the initiation of trading of our shares on the New York Stock Exchange on October 4 was a historic milestone for our company. Included in our investor base today are approximately 375 company employees, many of whom purchased shares in the IPO and who collectively own approximately 14% of the company. The broad based participation of employees in our equity is a long standing part of our history and culture of Berry. Let us tide our interest closely to that of our investors. I am very pleased to report that quarterly operating EBITDA was $212 million for the September 2012 ending period. The total fiscal year of 2012 adjusted EBITDA was $803 million, both of these are records for any quarter or year in the Company’s history. Operating EBITDA increased 13% versus the same period in 2011 on sales that were 2% lower. Adjusted net income per share for the September 2012 quarter was $0.34 compared to a net loss per share of $0.04 for the same period in 2011. Operating EBITDA margin is defined by operating EBITDA per net sales was strong for the quarter at 18%, up 3% from the prior year quarter. Improved product mix, aggressive productivity initiatives and lower costs for raw materials coupled with higher prices in certain of our product segments led to the improvement.

The reduced year-over-year sales were attributable to the pass through of lower raw material cost versus last year, intentional withdrawal from chronically low margin business and weaker demand as a result of ongoing sluggish economic activity. Adjusted pre-cash flow defined as cash from operations, net additions to property plant and equipment for the September 2012 quarter was $159 million. This result exceeded our expectations and allowed us to reduce our post-IPO debt leverage to 4.9 times adjusted EBITDA, one quarter sooner than originally planned. We remained committed to the path of driving our leverage lower.

Before I turn it over to Jim who will provide greater detail on our financial periodic changes I want to take a couple of minutes to give you my perspective on the packaging industry. How Berry participates in that segment and the impact of the current economic environment on the industry and Berry. Global served industry market for packaging today including glass, metal, paper and plastic substrates is more than $600 billion in turnover equally distributed geographically between Europe, Asia and the Americas. The average demand for packaging volumes typically grows at GDP rates in individual countries and here in the U.S. we believe that growth rates for aggregate packaging volumes correlates most closely to the non-durable goods component of the U.S. GDP. Because our products are used in consumer staples, market segments such as food, personal care and healthcare. Demand tends to be less cyclical and more predictable in many other industries. This has certainly been through since the economic recession of 2009 and the recovery of the past two years.

Within the packaging segment, plastic packaging has in our opinion will continue to be the fastest growing substrate. Plastic packaging has over the past several years generally growing at 2 to 3 times the rate of glass, metal or paper packaging. We believe the reasons for plastic’s success in gaining share in the industry is grounded and the fact that there is a greater ability to enhance the consumer’s experience in the form and function of the packaging by reducing the total cost of the product to our customers. Plastic packaging also uses significantly less energy throughout the lifecycle of our products and the expansion of post-consumer recycling is reducing the environmental impact of our packages and providing a re-usable raw material string. For all of these reasons we believe plastics will be the winning substrate for packaging and because of this Berry’s focus is almost exclusively on plastics.

Today, Berry is already one of the largest global players in the plastics space. Berry is uniquely positioned with our extensive portfolio of products, technologies and assets in both rigid and flexible plastics. One of the most exciting future areas for Berry will be the development of new packaging products that are at the interface of rigid and flexible technologies. Innovative packaging utilizing these technologies will offer the weight savings and barrier properties of flexible plastics while retaining the form and function that comes from rigid substrate. While we are pleased with our performance, the economic environment that we have faced in 2012 has presented challenges to our challenges to our industry and Berry has not been immune to those factors.

While the overall GDP for the U.S. has grown quarterly in the 1.5% to 2% range, the non-durable goods component of GDP has only grown at about half of that rate. This situation is somewhat unusual from a historical perspective that has been principally caused by weak demand for packaged food products especially grocery. As a result of higher commodity prices for grains caused by quantitative easing in the summer drought. Food prices have risen substantially in the past year and half which led to a nearly 3% overall decline in demand for packaged food products. In contrast, we have seen demand with the other segments that we serve such as personal care, healthcare and restaurants grow in line or above the average U.S. GDP rates.

Fiscal year-to-date volumes per Berry has been approximately 6% lower than the same period in 2011. The primary reason for this was due to our decision to withdraw from certain chronically low margin segments of our flexible plastic offerings in 2011. The benefits of this strategic decision are evident in the 18% year-over-year increase in our operating EBITDA with only a 4% increase in revenue. These actions were completed by December 2011 and going forward in calendar 2013 our year-over-year volume comparison should reflect normal business activity. Not of the strategic decisions, our volume this year has grown approximately 1 to 2%. Looking forward into next year we are assuming that the U.S. GDP will grow by roughly 2%. We also believe that the non-durable goods portions will return to more normal historical relationships that overall GDP and could provide some list especially in the latter half of 2013. Based on the plastic substrate share increases highlight previously, new product launches by Berry and other internal actions we anticipate that Berry volumes should grow above the U.S. non-durable GDP rates. Furthermore, due to operating leverage in the business and continued mixed shifts toward higher margin products, we anticipate operating EBITDA will grow faster than the increase in volume.

Raw material cost for our principal inputs polyethylene and polypropylene have in general been lower to date in 2012 versus the same period in 2011. We believe this trend is linked to the global weakness in demand for resins. Lower oil prices and the effect of more production from low cost natural gas inputs starting to impact especially ethylene related derivatives. Long term we believe that the trend of investment in gas related raw material would be positive to Berry and our industry. While our crystal ball to resin prices has never as clear as we would like. The demand remains consistent with the recent past quarters, we would anticipate resin prices to trend flat to slightly down in the coming quarters.

Now, I’ll turn the call over to Jim who will provide more specific details on Berry’s financial results. Jim?

James Kratochvil

Thank you Jon and good morning to everyone. I would like to comment first on our consolidated results from the September 2012 quarter and then discuss the segment results for the quarter. Please make note that throughout my commentary when I reference our rigid business know that this consist of our rigid open top and rigid close top segments. Our comments surrounding our flexible business will include our engineered material and flexible packaging segments. As Jon will discuss momentarily our primary focus is reducing the Company’s debt. The proceeds from the IPO went to retire the Company’s 11% senior subordinated notes. If you take into account this debt retirement at the end of September 2012 quarter, our net debt was $3.958 million compared to $4.585 billion at the end of September 2011 quarter. The year-over-year leverage reduction of 1.2 times to 4.9 times currently was assisted by the continued focus on margin expansion and generation of free cash and is the continuance of our strategy to reduce overall debt and reside in a 2 to 4 times leverage range.

Looking at adjusted free cash flow defined as cash from operations plus additions to property plan and equipment. In the September 2012 quarter we have positive adjusted free cash flow of $159 million compared to $91 million in the September 2011 quarter. For the fiscal year 2012, our adjusted free cash flow was $279 million compared to a $172 million for the fiscal 2011. As announced in our press release, September 2012 quarter sales declined 2%, net sales for the quarter was $1.204 billion compared to $1.229 billion for the September 2011 quarter. The sales decline was primarily attributable to the intentional withdrawal from chronically low margin business and lower selling prices due to the pass through of lower rising cost partially offset by sales from acquired businesses. However, despite modestly softer volumes throughout the quarter our operating EBITDA performance continued to be strong specifically adjusted net income per share for the September 2012 quarter was $0.34 compared to net loss per share of $0.04 in the same period in 2011. Operating EBITDA was $212 million for the September 2012 quarter reflecting an increase of $24 million or up 13% from the $188 million in the same period in 2011. Berry’s overall operating EBITDA margin improved from a low of 11% in the June 2012 quarter to 18% in the September 2012 quarter. Again, this improvement reflects better sales mix, better alignment between cost of raw materials, and our selling prices to customers, cost reductions, and significant operational improvements. In addition, working capital decreased $69 million sequentially versus the June 2012 quarter. This improvement is a result of continued focus on managing the working capital cycles in lower resin costs. Fiscal 2012 additions to property plant and equipment increased to $230 million, which was in line with our projection and an increase of $70 million compared to fiscal 2011. Our additions to property plant and equipment are forecasted to be approximately $230 million to $250 million for fiscal 2013 with much of the increase funding new growth initiatives and product launches.

Turning to our business segments. In the Rigid business, net sales increased by 1% resulting from the sales related to the Rexam acquisition partially offset by reduced price adjusted volume and lower selling prices as a result of lower raw material cost during the quarter. Operating EBITDA increased 12% overall. The increase resulted from improved manufacturing performance in relationship of net selling price to raw material cost. Operating EBITDA margin for the Rigid business increased to 21% in the September 2012 quarter compared to 19% in the same period in 2011. In the Flexible business, net sales decreased by 6% resulting from the intentional withdrawal from the chronically low margin business, lower selling prices as a result of lower raw material cost and a modest decline in the base net price adjusted organic sales. Operating EBITDA increased 16% overall. This increase resulted from improved manufacturing performance, the relationship of net selling price to raw material cost and earnings from acquired businesses partially offset by modest negative net price adjusted organic sales volumes, and increased SG&A costs. Operating EBITDA margin for the Flexible business increased to 13% in the September 2012 quarter compared to 11% in the same period in 2011.

Our balance sheet continues to strengthen. Berry maintains more than ample liquidity which is enhanced by businesses that generate substantial free cash flow. At the end of the September 2012 quarter, the company had net cash on hand of $87 million and unused borrowing capacity of $426 million providing a significant amount of liquidity totaling $513 million. As a reminder, the company has no material financial maintenance covenant associated with our debt facilities. Also, our annual principle amortization on our debt is approximately $35 million per year.

This concludes my financial review of the September 2012 quarter and at this time I would like to turn it back to Jon.

Jonathan Rich

Thank you, Jim. As we move forward there are a few key strategic objectives that we will focus on. The first is to continue our actions to reduce the overall debt leverage of Berry. Over the past two years we have made significant progress towards this goal. Even with the expectations of modest economic growth, you will generate substantial positive free cash that combined with increases in our adjusted EBITDA should reduce our leverage at a rate of about one half term per year. Ultimately, our goal is to reduce leverage to around 3 times and maintain leverage in the range of 2 to 4 depending on the attractiveness of our opportunities to put capital to work.

The second goal is to accelerate our rate of innovative organic growth. Berry has a strong pipeline of new products and portfolio of intellectual property. We are particularly excited about new packaging concepts that are at the interface of rigid and flexible technologies. As we work closely with our customers to create new products, we strive to improve the form and function that our packaging offers to consumers to enhance the brand image and messaging that our customers convey with our packages on retail shelves and to create designs that reduce the overall cost of packaging. Two exciting product areas that we are working on are the plastic barrier packages and packages for thermal management. In the most recent quarter, we made progress towards commercialization of these products that were consistent with our plans and we will describe these in more detail as we reach successful commercialization with our customers.

The third goal is to continue to identify value adding acquisitions that can be accretive to shareholder value. We typically look for both on acquisitions that have innovative technology and where a combination with Berry generates substantial synergies. A good example of this kind of acquisition is Prime Label & Screen Incorporated, which we closed on in October. Prime is a highly innovative leader in specialty re-sealable labels, including a patented rigid lens closure system. The Prime Label operations and product offering was approximately $11 million in annual sales be integrated into Berry’s Flexible packaging segment. While the Prime Label acquisition was a small transaction, the acquisition is in direct alignment with Berry’s strategic plan, allowing us to enhance our existing product offering while providing us with opportunities to develop innovative products to further meet our customers’ needs. Prime Label’s expertise in narrow web technology coupled with Berry’s expertise in high volume wide web technology will allow us to expand Prime Label’s closures to consumer product applications beyond their current core personal care business.

Our fourth strategic goal is to begin to take the steps to grow our business internationally where population demographics and GDP growth rates are attractive. Today, more than 90% of our sales are in North America, but we do have 14 plants overseas that are located in Latin America, Asia and Europe. Our initial focus will be to grow with our existing customers in Latin America and Asia, introducing technology based value-added products where we can achieve at or above Berry’s current total operating EBITDA margin average.

We will continue to update you quarterly and at our investor events on our progress in all of these areas.

Now, I would like to share some comments about our view of the current December ending quarter, which is seasonally our weakest quarter. We believe that overall economic activity will continue to remain sluggish but modestly positive in the near term as it has been for the past 3 quarters. Berry has been investing heavily in new product launches which will likely have a slightly negative near-term impact but will generate future new revenues. Also, 9 Berry facilities were impacted temporarily as a result of Hurricane Sandy, and the associated cost will have a modest impact in the December quarter. Facing these headwinds in the December quarter, we still anticipate that our operating EBITDA will improve versus the prior year as long as volumes continue on their current trend. If volumes weaken, Berry is prepared to take the necessary steps to variablize our costs.

Finally, in October, in conjunction with our IPO, David Heller joined our Board of Directors where he will serve as Chairman of the Audit Committee. David is the former global co-head of the securities divisions at Goldman Sachs. His extensive background in the financial sector will provide beneficial as we move the company forward, we are pleased to have him join our Board. These are indeed exciting times here at Berry. Our results this quarter are consistent with our belief that we are winning in the marketplace. We are confident in our strategies to enhance the value of our company, and we look forward to a long and mutually beneficial relationship with our investment community.

As we move ahead, we will execute on the strategies I discussed and continue our traditional focus on reducing our costs, enhancing our productivity and generating cash.

I thank you for your continued interest in Berry Plastics and now we are ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from George Staphos of Bank of America, your line is open.

George Staphos - Bank of America

Thanks, good morning, everybody. Three questions. First of, Jon, would it be possible to talk about the December quarter on a year-on-year basis, your expectations relative to what we observed in the third quarter. Should we expect EBITDA growth trends and dollar terms that are comparable with what we saw in the fiscal fourth quarter, or could it be lower because of the headwinds that you mentioned? That’s number one. Number two, I know you gave some general commentary on your new products and you stated that you are in the process of commercializing them. But given that you spoke a fair amount about these on the roadshow would be helpful to hear a bit more in terms of what you are seeing in terms of commercializing these new products? And then thirdly, could you remind us, do you have any debt that is coming up that is callable, what are the opportunities perhaps to improve upon your cost of borrowing in the months ahead? Thank you.

Jonathan Rich

Okay, I will take the first two kinds and then I will turn the third question over to Jim. With regards to the first question, I think clearly the number one challenge in the packaging industry remains just the overall economic activity. It has been as I have commented, a sluggish recovery. We don’t really see any change in that factor going on in the December ending quarter with regards to volumes. We have a couple of slight headwinds, so I would say that on a year-over-year basis we expect our EBITDA to be above last year’s level on a percentage improvement basis perhaps slightly lower than we achieved in the September ending quarter. So, still an improvement.

George Staphos - Bank of America

Okay, thank you.

Jonathan Rich

With regards to new products, we talked about the products that we are focusing on for barrier packaging and thermal management, nothing has changed in terms of our plans or progress with regards to what we discussed in conjunction with the IPO. We remain extremely excited about these products, all of the developments were going exactly as planned. We are in the midst of customer approvals. Those approval processes are on track as we discussed before and we are taking the appropriate steps to make the right investments to get ready to serve those customers. I just don’t want to get ahead of my customers in terms of their customer approval processes, I am not going to talk about specific customers but, in general everything remains exactly on track as we had discussed in September and October.

George Staphos - Bank of America

Jon, just if I can inject here, copy is that in the test market anywhere and when would we expect to hear some results back on that?

Jonathan Rich

I think we will be able to discuss that in the next conference call.

George Staphos - Bank of America

Okay. And on debt?

Jonathan Rich

Debt, I will turn it over to Jim and he can comment on that.

James Kratochvil

Yes, thanks Jon.

George Staphos - Bank of America

Hi, Jim.

James Kratochvil

How are you doing, George? We do have tranches of our debt that are callable, okay. And there are opportunities for us as we go forward. We haven’t called any debt, we haven’t made any formal decisions to do so, but there will be opportunities going forward to that. For example, our 10.25 in 16 are callable, that would be an example. There are some that are out there. And we will be looking at opportunities to optimize our capital structure going forward. We have a great capital structure right now, I think as you know.

George Staphos - Bank of America

When is that next opportunity?

James Kratochvil

We could do something now if we wanted to.

George Staphos - Bank of America

Okay, thanks very much.

Operator

Thank you. Our next question is from Al Kabili of Credit Suisse, your line is open.

Albert Kabili - Credit Suisse

Hi, thanks, good morning. Just wanted to talk a little bit about the headwinds you indicated on Hurricane Sandy and the new product introductions. Is there any color as to magnitude of the headwinds in this fiscal first quarter and you expect that that will be fully abated in the second quarter?

Jonathan Rich

I would describe both as modest impacts. Hurricane Sandy affected 9 of our facilities, also impacted a number of our customers on the East Coast. The good news is we didn’t miss any shipments or have any issues in serving our customers. All of our plants were back up and running as normal. There will be a small modest cost which will be completely booked in the December quarter. With regards to our R&D expenses, look, we view those as great investments, they are directed towards the exciting new product opportunities and we think that’s the right thing to do. Those will be recurring but the revenues should start in the back half of next year.

Albert Kabili - Credit Suisse

Okay, got it. So, Sandy obviously is kind of the temporary in the quarter and then on the new products R&D ramped up a little bit, but that will start to be, I guess accretive in the back half of the year, if I caught that right, John?

Jonathan Rich

September-ending quarter next year.

Albert Kabili - Credit Suisse

Okay. And then if you could talk a little bit on the competitive environment, what you are seeing right now, the contracts that are coming up for renewal, how are you feeling about that? How do you perceive your market share trending on these renewals?

Jonathan Rich

Overall, demand has continued to be sluggish for the factors that I described in the text. I think from a competitive standpoint, we try to focus on what Berry does best and that’s to create innovative, differentiated packaging that allows us to distinguish ourselves with our customers. The progress we are making there continues to be very good. That weighs against a sluggish economic environment where overall demand continues to be sort of modest. But in the face of that, we believe that we are doing a very good job. The exact determination of market shares is clouded somewhat by – we are just at the end of the period of the strategic decisions that we took to withdraw from certain chronically low-margin businesses and transparency of that will be become more clear in 2013. We should be completely through that by the end of the December quarter.

Albert Kabili - Credit Suisse

Okay. All right. I appreciate that, Jon. And then final question is for Jim, on the working capital contribution and bigger than we expected, and I was just wondering if that’s sustainable. As we look to the coming quarter, does some of this working capital contribution that you got in this fiscal fourth quarter reverse out in 1Q on timing or are you able to kind of hold working capital at current levels going forward? Thanks.

Jonathan Rich

On the working capital, which was about $59 million decrease from the June quarter, about a third of that is relative to decrease in days outstanding. So, in other words, we worked hard at the company through being able to improve on the acquisitions, working capital that we have made, we take it to a more granular level, we put, we worked on our receivable days. There are a lot of things we have done. That’s a permanent reduction of about a third. The rest of it was driven by lower raw materials, specifically resin, and that’s subject to the resin cycle. So, to the extent resin is flat. We don’t have to give that back to the extent that resin increases, then it will be a use of working capital to have to deal with an increasing or inflationary environment with resin.

Albert Kabili - Credit Suisse

Okay. Terrific. Thank you very much. Good luck in the upcoming quarter.

Jonathan Rich

Thank you.

Operator

Thank you. Our next question is from Scott Gaffner of Barclays. Your line is open.

Scott Gaffner - Barclays

Good morning. Just following up on the last question on the competitive landscape. In the release, you did mention some market share gains. Can you talk about where those gains are coming forth, it’s by segment or by product?

Jonathan Rich

Lot of the gains have occurred in product mix where we have differentiated new offerings. I would say that probably gaining at the interface of rigid and flexible technologies. The other thing, of course, is our flexible business is stabilized now. We are essentially through the year-over-year voluntary decisions that we took and so, we are starting to see our flexible business have positive comps on a year-over-year basis, and that should continue in the coming quarters.

Scott Gaffner - Barclays

Okay. And then, in the outlook, you did mention growing internationally. And just wondered, is that taking on an increased importance here, are your customers pulling you more than they would have over the past year, is that or should we see some gains on that in 2013?

Jonathan Rich

Actions that we are taking in the order in which I discussed. So, growing internationally is important to the company because it fits with where the population demographics and GDP growth rates are higher. We certainly have the ability to grow with our existing customers, but Berry has been, and we will continue to be very focused on growing internationally where we have differentiated product offerings where we can hold or enhance our current company average operating margins. And so, I think we are still few quarters out. We frankly have more – we will be very selective to make sure that we can do in a way that adds to shareholder value.

Scott Gaffner - Barclays

Okay. And then just lastly on the exit of the low margin businesses, I think you mentioned you would be done with that by the end of December. So, should we still expect some impact in the December quarter, and should it be less than the impact that you felt in the September quarter?

Jonathan Rich

Yes, that’s exactly right. Some modest impact in the current quarter, and then next year, it should be just market comps.

Scott Gaffner - Barclays

Okay. Thanks. Good luck in the quarter.

Jonathan Rich

Thanks very much.

Operator

Thank you. Our next question is from Thomas Duffey of Robert W. Baird. Your line is open.

Matt Wooten - Robert W. Baird

Good morning. It’s actually Matt Wooten sitting in for Thomas today. Thank you. Your commentary has been a little bit cautious on the near-term outlook. I am just wondering if this is specific to order patterns or customer commentary in October and November. Have you seen any shifts there especially on inventory for their year-end?

Jonathan Rich

First of all, the December-ending quarter is always seasonally the weakest quarter for us. So, in terms of trying to draw a comparison, you have to take into account that we see demand weakening in the current quarter as it always does. So, I don’t think there is anything abnormal about that. I think the entire year has been sort of sluggish from a demand standpoint. And so, I wouldn’t say that we are seeing anything dramatically different than sort of last three quarters. But I wouldn’t describe that as being a particularly robust environment. So, I would say we remain cautious only because the full year has been sort of a weak demand environment. We are not seeing anything unusual in the fourth quarter other than the normal sort of weakness in seasonal trends, which is partially driven by our rigid business.

Matt Wooten - Robert W. Baird

Understood. And then, as we look out to fiscal year 2013, how should we think about the different components of EBITDA growth? I think if I recall correctly that on a calendar year basis, you are forecasting about $50 million in year-over-year improvement?

Jonathan Rich

It will grow at 2% next year, and we think Berry will grow slightly above that for the reasons I discussed. Largely driven by product mix and innovation, I mean, again on a year-over-year basis, our flexible business should look more like normal.

Matt Wooten - Robert W. Baird

Okay. Thank you.

Operator

Thank you. Our next question is from Jose Davila [ph] of Goldman Sachs. Your line is open.

Jose Davila [ph] - Goldman Sachs

Thank you. Good morning. Just a couple of quick things. One is, I was wondering if you could talk about the thermoforming drink cup business, trends there, is it still continuing to provide the type of growth you have seen in the past, is it selling down? I just wanted a little color there, because I know that’s been a big positive over the years.

Jonathan Rich

Yes, I think on thermoform drink cups, we have had a very strong year in thermoform drink cups. It was again, I think consistent with our past performance, clearly one of the strongest businesses we have and one of the strongest grower. So, nothing unusual there. I would say that the early part of the year, remembering back is a very mild winner. I think our customers got off to a fast start in the year because the winter was mild and people were out to restaurants perhaps than they would be historically. Now, that drove volumes in the early part of the year. Seasonally, the fourth quarter is always the weakest for fast food restaurants. And so, I think you have seen that with some of our customers who have reported, and I think our business trends there, but overall, it’s been an extremely strong year for thermoform drink cups again.

Jose Davila [ph] - Goldman Sachs

Okay. And then, the only other thing was in terms of the relationship between your selling prices and your raw material costs, I mean, how would you describe the quarter you just finished in terms of that relationship? I mean, is it a normal sort of back to balance or was there some bit of a boost there as there was maybe a lag along some of the lower costs? So, just trying to, as we think about modeling going forward, just trying to understand sort of where things stood in the most recent quarter?

James Kratochvil

Jose, you know, resin prices fell, and they were (inaudible) which is typical. We did receive some benefit from that, but it’s not just the relationship between selling prices and materials that affects that category. It’s also our continued focus on reducing the amount of usage of material and recovering scrap and other things that continues to benefit us there. But I would say overall, we did have some benefits from that.

Jonathan Rich

And I would just remind you that Berry scale is a big competitive advantage is this area and certainly we have been able to leverage Berry’s scale through our management.

Jose Davila [ph] - Goldman Sachs

All right. Thank you.

Operator

Thank you. Our next question is from Alex Chi [ph] of Goldman Sachs. Your line is open.

Alex Chi [ph] - Goldman Sachs

Thanks, good morning guys. As you think about the volume front in the grocery channel, based on the conversations you are currently having with your customer base, when are you thinking that we may see the organic volume front and the grocery channel start to turn positive?

Jonathan Rich

Again, I think it’s always difficult to forecast that exactly. What we have seen is that the rate of increases at grocery has started to moderate some. Demand has been weak this year as I discussed. I am still anticipating that in the early part of the year, they will still look kind of like in the environment that we are in now, but I would – my personal view is that things will improve in the back half of 2013, should return to a more normal relationship with GDP. So, I am anticipating some improvement in the back half of next year.

Alex Chi [ph] - Goldman Sachs

That’s helpful, Jon. And then a question for Jim, just thinking about the cash flow outlook for ’13, can you just talk to the important cash items that we should be thinking about in ’13, specifically what the cash interest number will be, cash taxes, what your expectation is for working capital?

James Kratochvil

Let me start with that and I will have Mark finish it. Basically I think that on the CapEx side of the business, I think we said between $230 million and $250 million which is important. And that will depend on how much we invested in relations and how quickly that comes in terms of the need. In terms of working capital, that will be highly dependent on what happens with resin pricing going forward. We are not expecting to have because we are continuing to focus on working capital as a source of cash for us. We don’t expect to have a significant usage of cash flow working capital other than what you would expect with supporting increased sales and increased growth. On the interest and on the taxes, I will turn it over to Mark.

Mark Miles

Yes, on the interest, it’s in the $250 million range annually for cash interest, and on taxes, for fiscal 2013, it should be minimal. Our first significant payment under the tax receivable agreement will be in the first quarter of fiscal 2014, early in that quarter.

Alex Chi [ph] - Goldman Sachs

Okay, thanks so much, Mark.

Operator

Thank you. Our next question is from Chris Manuel of Wells Fargo. Your line is open.

Chris Manuel - Wells Fargo

Good morning gentlemen. Just a couple of questions for you. First, if we could start with a little bit of color on the acquisition you just did, I think you said it was $11 million of revenue. Do you have any purchase price, approximately what you paid EBITDA, gains, synergies, things like that, typical metrics that you guys provide?

Jonathan Rich

I would say that it’s a very small transaction, and it’s a purchase priceless sort of de minimus to Berry in its entirety. The key was this was a very attractive piece of technology, which we thought would have a lot of synergies in terms of applying those technologies to Berry’s existing asset infrastructure. So, we think it will be a great growth opportunity, especially tied, again it ties to this approach that we are taking at the interface of rigid and flexible technology. So, this was a small technology bolt-on. Again, there will be some normal synergies, but it was really driven by the –

James Kratochvil

It doesn’t move the needle at all.

Chris Manuel - Wells Fargo

Okay. Second question I had was when we think about free cash flow for 2013, and as you work through the elements that some of the – almost in the previous question and some of the stuff he does discussed earlier with respect to what peace is permanent and what peace would be one year improvement. I think he said two thirds will be permanent with resin, if it stays at the present level. So, present stated level and we did 79 in fiscal 2012. What would be the puts and takes as we think about 2013, you still have a few acquisitions that will roll through. I think still pack and then this most recent one that help you little bit of volume growth. Can you be about that that same range for 2013?

James Kratochvil

Well, first of all, this is Jim, what I would tell you is that it was not—I would say one third is permanent and other working capital and two thirds are subject to the cycle with resin.

Jonathan Rich

Okay, so just to clarify that, but I would say other than the major components that we talked about, there really isn’t a lot, other than of course EBITDA growth which is the other important factor and there really isn’t lot of other things that would move the needle. If there is an acquisition that comes up during that time certainly would have an affect as well, but there really isn’t anything other than the things we talked about.

Chris Manuel - Wells Fargo

Okay, that is helpful and then the last question I had was, as we were thinking about you have announced a few some structuring activity I think closing some plants or reopening a plant as well. Can you give us a sense of where you are in that process? Do you have most of the actions that you intend to take underway or there more things that you are contemplating looking at, how do you look at that?

James Kratochvil

Yeah, I think on the restructuring we are through the majority of that based on current volume, I think as Jon said to the extent volumes deteriorate, Berry is prepared, as it always has been to take actions if necessary. We are still going to have a little tail just on the cost side. You know perhaps on the cost related to those actions, but it is decreasing on a quarterly basis going forward.

Chris Manuel - Wells Fargo

Okay. Thank you.

Operator

Thank you and next question is from Mark Wilde of Deutsche Bank, your line is open.

Mark Wilde - Deutsche Bank

Good morning. I wonder Jon if it is possible to give just a little bit more color on the underlying volumes in the four segments.

Jonathan Rich

No I think demand, I think if you look at Berry’s total year to data, I think I told you that net and voluntary decisions, our overall demand has been about 1 to 2% for the total year. I think year-to-date a little bit stronger in rigid and in flexible going forward it may flip just because the year-over-year compound flexible should improve as we go forward. I still anticipate that demand will increase with GDP rates although food packaging has already discussed, maybe slightly stronger than that because we are getting a little bit of recovery from a particularly weak 2012. Overall, we may be slightly better demand in GDP rates.

Mark Wilde - Deutsche Bank

Okay, and just specifically look at that rigid open top where it looks like you were down about just on a topline basis about 10 and 10.5% year on year, it that all just resonant?

Jonathan Rich

On the revenue side, the vast majority of that is just pass throughs on revenue. Rigid, our open top business are drink, about the Thermoforming drink cup business has been great as I described already, offset by some weakness in the container side, particularly in dairy and grocery, so those two have balanced. Also, we did have one piece of business in Rigid Open Top in 2011 where the customer that we voluntarily withdrew from because the reinvestment in that business didn’t make any sense, we are working our way through that. That should also be done by the end of this year.

Mark Wilde - Deutsche Bank

Okay. And then Jon, can you just remind us, how much exposure do you have to the housing market, just through things like tapes and other products? And what you are seeing in terms of kind of housing related demand right now?

Jonathan Rich

Part of our Engineered Materials business, primarily in the tape segments, but we serve both housing and automotive and we are a nice recovery there. Our tapes business is getting better. The other thing is while we didn’t like Hurricane Sandy, the tapes business got helped some by that, and so I would say we don’t have a huge exposure to the durable side, automotive or housing, but what we have is getting better and our tapes business is getting nicely better.

James Kratochvil

Yes, we have invested our way in to higher operating margins there. That’s actually a pretty good business.

Mark Wilde - Deutsche Bank

Okay. And then, Jim, just a couple of questions for you. Can you give us a sense of the underlying tax rate kind of excluding adjustments here in the fourth quarter and what we should expect going forward?

James Kratochvil

Yes, use 40% that will be a good number.

Mark Wilde - Deutsche Bank

Because, it looks like it was lower in the latest quarter.

James Kratochvil

This is impacted by some unusual items that are not recurring.

Mark Wilde - Deutsche Bank

Okay, alright. Thanks helpful. And then finally, any thoughts on switching your fiscal year to a calendar year basis, just make kind of the comparisons with your peers a little easier?

James Kratochvil

Yes, we have gone back and forth on that subject here numerous times because there is a cost involved with doing it, mechanically there is a cost doing it. We haven’t come to a decision on what we want to do there at this point. So, we have considered and we will consider again.

Jonathan Rich

Yes, we will continue to look at that.

Mark Wilde - Deutsche Bank

Okay, sounds good. Good luck in the coming quarter.

Operator

Thank you. Our next question is from Anthony Pettinari of Citi, your line is open.

Anthony Pettinari – Citi

Hi, good morning.

Jonathan Rich

Good morning.

Anthony Pettinari – Citi

When you talked about the 2% sales decline in the quarter, you referenced the intentional withdrawal from lower margin businesses, as well as some lower raw material prices. As you look forward to the December quarter it sounds like the actions to cut lower margin volumes are kind of ramping down, but there is still some impact there and resin prices have been kind of muted. As you look forward to the December quarter, would you expect sales to be down in the same kind of neighborhood as they were in the September quarter or how should we think about that?

Jonathan Rich

The big factor is pass through on resin prices. Resin, as Jim described already, dropped in the first half of the year, it’s become sort of flat in the current period, so there may be less pass through that. But I would expect something similar.

Anthony Pettinari – Citi

Okay. And then just one last question, I think you had proceeds from asset sales of about 30 million in the year, as we look forward to 2013 do you expect any significant asset sales for the year?

James Kratochvil

We don’t see anything that’s significant out there. We have got some idle facilities that we will maybe sell, but there won’t be a lot of, there shouldn’t be a lot of sales.

Jonathan Rich

We are constantly looking at our portfolio but we don’t have anything new to discuss.

Anthony Pettinari – Citi

Okay. Thanks, I will turn it over.

Operator

Thank you. Our final question is from Edlain Rodriguez of Lazard Capital Markets. Your line is open.

Edlain Rodriguez - Lazard Capital Markets

Thank you guys. Jon, one quick question on the steps you have taken to grow the business internationally. Can you talk about what you are doing there, and let’s say, two years from now, how big do you expect this to be compared to where it is right now?

Jonathan Rich

We are taking steps internally to prepare Berry to be in a position to grow the business internationally. As you know, we have largely been a domestic customer. There are certain organizational steps you need to take to be able to manage and grow international businesses. We are doing that. We have targeted Latin America and Southeast Asia as the two regions to focus on. We have assets there already. So, it’s not like we don’t have a presence there. And we are going to focus on our current customer base, because many of our customers are global multinational. And we are going to enter those markets with products where we have some differentiation from a technology standpoint, so that we can enter those markets with operating margins that are at or above Berry’s current average. I would anticipate that within the two-year period we discussed, we should be generating revenues consistent with our plans, but I don’t have a number to give you.

Edlain Rodriguez - Lazard Capital Markets

Okay. That’s fine. Thank you.

Operator

Thank you. This is the Q&A portion of today’s conference. I would like to turn the call over to management for any closing remarks.

Jonathan Rich

Again, I would like to thank everybody for participating in the call today. Again, remind you that we always want to hear from investors, so that if you have any follow-up questions or comments, I encourage you to reach out to Dustin Stilwell, and we look forward to talking with you at the next conference call. Also want to wish everybody a great holiday season here as we come to the end of the year. We look forward to seeing you on the next call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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