Berry Plastics' CEO Discusses F1Q2013 Results - Earnings Call Transcript

|
 |  About: Berry Plastics Group, Inc. (BERY)
by: SA Transcripts

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Berry Plastic's Earnings Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce our host for today Mr. Dustin Stilwell, Head of Investor Relations. Sir please go ahead.

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 and a 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 result 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 or factors, new information, future events, or other changes. Additional 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.

Jon Rich

Well, thank you Dustin and Good morning, everyone. Thank you for joining us and welcome to the Berry Plastics first quarter 2013 earnings call. Throughout this call we will refer to the first fiscal quarter as the December 2012 quarter. Our agenda for this morning is to review the company's financial performance for the December 2012 quarter and provide some preliminary thoughts on fiscal 2013. In a moment Jim will report on our financial results, capital structure and key balance sheet items, after which I will close with comments on our key strategies and provide insight into Berry's outlook going forward. We will then open the call to answer any questions you may have.

As noted in our press release despite the continuation of challenges related to the overall economy Berry achieved an operating EBITDA record for any December quarter. As we have commented on prior calls our December quarter is historically our slowest period given the seasonality inherent in our drink cup business and related products.

Our December quarter was modestly impacted by challenges related to hurricane Sandy and increases in our expenditures on research, development and commercialization of several innovative packaging concepts which I'll describe later in today's call. The benefits of which will be recognized in future quarters.

In spite of the softness in certain segments of our served markets Berry continues to outperform year-over-year numbers. The year-over-year improvements for the December quarter were achieved primarily through them, through manufacturing improvements, aggressive cost reduction actions taken in the current quarter, as well as throughout 2012, sourcing savings and pricing actions taken to capture the value of our products. We anticipate that working capital reduction programs and close management of capital spending will continue to contribute to the reduction of the company's overall leverage as it did in 2012. Going forward we will continue to place a strong focus on free cash flow.

Berry achieved sales of $1.72 billion and operating EBITDA of $173 million for the December 2012 ending quarter. I am pleased to report that we generated $44 million in adjusted free cash flow during the December 2012 quarter. Our operating EBITDA increased 5% versus the same year period on sales that were 6% lower and physical volumes that were essentially flat compared with the prior year period.

Adjusted net income per share for the December 2012 quarter was $0.08 compared to an adjusted net loss per share of $0.05 for the same prior year period. Operating EBITDA margin as defined by operating EBITDA divided by net sales was strong for the quarter at 16% up 2% from the prior year quarter. The reduced year-over-year sales were primarily attributable to the pass-through of lower raw material costs versus the prior year.

While we are pleased with our performance the economic environment the packaging sector faced in calendar 2012, as well as in our December quarter remains subdued. AS we forecasted during our September quarter conference call and as witnessed in the current quarter Berry felt the effects of sustained weakness of nondurable goods primarily caused by weak demand for packaged food products at grocery personal care goods and certain other product markets. Consumer demand for packaged food goods in the U.S. was down on average about 1% in the December ending quarter compared to the same period in 2011.

Overall demand for packaged food goods began to decline in the middle of 2011 and while the rate of decline slowed consumers remain cautious. The primary driver of the lower demand has been the significant increase in overall food prices which occurred over the same time period. Conversely demand within other segments that we serve continues to grow in line with U.S. GDP rates. Overall, we believe our volumes in the recently completed quarter were in line with or better than the market and net of the strategic decisions we took to withdraw from certain low margin business, we had a slight gain in market share.

We maintain our view that plastic packaging will continue to outperform and gain share against metal glass and paper substrates. The strategic decisions that exit certain chronically unprofitable business early in fiscal 2011 were realized throughout calendar 2012 and are evident in the 5% year-over-year increase in operating EBITDA on relatively flat volumes during the December 2012 quarter versus prior year. These actions were mostly completed by December 2011 and going forward in calendar 2013 our year-over-year volume comparison should reflect normal business activity. Net of these strategic decisions our volume this year has grown approximately 1% to 2%.

Turning now to raw materials, plastic resin is Berry's primary feedstock and comprises approximately 50% of our cost of goods sold. Over the past several years Berry has taken actions to more effectively manage raw material volatilities through shorter contractual resin price change pass-throughs, quick responses to resin price moves, and reduced usage of raw materials through light weighting and scrap reduction.

Resin escalators, de-escalators and contract provisions that allow change in our selling price is based on resin price fluctuations. Let me point out that approximately 70% of our resin cost increases are passed through to our customers within 60 days and 95% is passed through within 90 days. Our selling price arrangements related to resin costs are comprised of 25% market-based pricing, 35% monthly pass-through, 10% bimonthly and 25% quarterly.

Raw material costs for our principal inputs polyethylene and polypropylene fell in the first half of calendar 2012 and in general we're more stable in the second half of the year. As we enter 2013 we're seeing significant increases in resin prices especially for polypropylene, which we believe is primarily a result of short-term supply outages. If you member calendar 2011 and 2012, which started similar to this year resin prices spiked up in the first two months before dropping later during those years. It remains to be seen if current demand levels will support these increases through the latter half of 2013.

Due to the shortened escalators highlighted previously another steps being implemented. The recent resin volatility will have only a modest negative impact on our fiscal second quarter, while future resin prices are always unpredictable, Berry has and will continue to work to shorten the lag time in recovering higher risen prices as they occur.

On the acquisition front, we continue to be very pleased with the positive contributions of both our recent additions of STOPAQ and Prime Label & Screen. These acquisitions provide highly innovative and complementary technologies to our existing product suite.

Acquisitions such as these broaden our existing product lines and leverage our unique expertise to provide solutions at the interface of rigid and flexible plastic.

And now I'll turn the call over to Jim, who'll provide more specific details on Berry's financial results, Jim?

Jim Kratochvil

Thank you, Jon and Good morning, everyone. I'd like to comment first on our consolidated results from the December 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 consists of both our Rigid Open Top and Rigid Closed Top segments.

My comments surrounding our Flexible business will include our Engineered Materials and Flexible Packaging segments.

As we mentioned during our last conference call one of our primary focus is reducing the company's leverage. During the quarter we used proceeds from the IPO and to pay off our 11% Senior Subordinated Notes. Upon retirement of these notes at the end of December 2012 quarter, our net debt was $3.943 billion compared to $4.384 billion at the end of this September 2012 quarter.

Our current 4.59 times leverage is a result of continued focus on margin expansion and generation of free cash flow as well as our principle strategy to reduce overall leverage so that it ultimately resides in a 2 or 4 times range.

In line with this strategy earlier this week, Berry announced that we intend to obtain $1 billion in commitments of incremental first lean senior secured term loans to redeem our second priority Senior Secured Floating Rate Notes due in 2014, our first priority Senior Secured Floating Rate Notes due in 2015 and our 10.25 Senior Subordinated Notes due in 2016. This refinancing is currently underway and is going extremely well. As a result, this morning we announced our intention to increase the pursued commitment to $1.4 billion and also redeem our 8.25 quarter first priority senior secured notes due in 2015.

I'd also like to point out and we are very pleased to report that Berry's Corporate family rating received an upgrade from Moody's by one notch. Refinancing, at the day we'll improve our free cash flow dynamics of our business as we replaced more expensive debt with lower cost debt and extend our maturity profile. We look forward to ramping up the syndication just after this call.

Looking at adjusted free cash flow defined as cash from operations less net additions to property plant and equipment in the December 2012 quarter, we had positive adjusted free cash flow of $44 million.

Going forward we will continue to focus intently on maximizing free cash flow by closely managing the use of working capital, alongside investing for future growth. Our investments in property, plant and equipment are forecasted to be approximately $230 million for fiscal 2013 with much of the increased funding, new growth initiatives, international expansion and new product lunches.

Net sales for the quarter were $1.72 billion compared to $1.137 billion for the December 2011 quarter. The 6% sales decline was primarily attributable to lower selling prices due to the pass-through of lower resin cost versus prior year and as Jon mentioned earlier, after factoring in the company's decision to strategically exit certain chronically unprofitable business, our volumes have grown 1% to 2%.

Despite the fact that volumes remained flat for the quarter throughout most of the packaging markets, our operating EBITDA and earnings performance continued to be strong. Specifically adjusted net income per share for December 2012 quarter was $0.08 compared to an adjusted net loss per share of $0.05 in the same period in 2011.

Operating EBITDA was a $173 million for the December 2012 quarter reflecting an increase of $9 million or 5% from the $164 million in the same period in 2011.

Berry's overall operating EBITDA margin improved from 14% in the December 2011 quarter to 16% in the December 2012 quarter. Again, this increase reflects manufacturing improvements, aggressive cost reduction actions taken throughout 2012, sourcing savings and pricing actions taken to capture the value of our products.

Turning to our business segments in the Rigid business net sales decreased by 10% primarily resulting from lower selling prices as a result of lower raw material costs and a modest reduction in physical volumes during the December 2012 quarter.

Operating EBITDA decreased 2% overall. The decrease resulted from the relationship of net selling price to raw material costs due to the pass-through timing of raw materials along with a modest increase in SG&A due to additional research, development and commercialization spending in the December 2012 quarter.

Operating EBITDA margin for the Rigid business increased to 19% in the December 2012 quarter compared to 18% in the same period in 2011, primarily related to the decrease in raw material costs year-over-year and investments in innovation during the December 2012 quarter.

In the Flexible business net sales decreased by 1% resulting from lower selling prices as a result of lower raw material costs partially offset by a modest improvement in physical volumes. Operating EBITDA increased 21% overall. This increase primarily resulted from improved manufacturing performance, acquisition volume and the relationship of net selling price to raw material costs partially offset by increased SG&A costs due to additional research, development and commercialization spending.

Operating EBITDA margin for the flexible business increased to 13% in the December 2012 quarter compared to 10% in the same period in 2011.

Turning to our balance sheet Berry maintains more than ample liquidity, which is enhanced by businesses that generate substantial free cash flow. At the end of the December 2012 quarter the company had cash on hand of $32 million in unused borrowing capacity of $413 million, providing a significant amount of liquidity totaling $445 million.

As a reminder the company has no material financial maintenance covenants associated with our debt facility. Also our annual principle obligation on our debt is approximately $37 million per year.

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

Jon Rich

Well, thank you, Jim. As we move forward we will remain focused on and continue to pursue initiatives in support of our key strategic objectives. These include continuing to reduce our debt leverage, innovating exciting new products for our customers, growing our business internationally, and identifying and executing on value adding acquisitions.

As mentioned by Jim, we continue to reduce overall leverage through generation of substantial free cash flow, increasing our earnings, working capital management, and effective oversight of our capital expenditures. Our goal is to reduce our leverage one half ton per year targeting as previously mentioned the two to four times leverage range.

Over the last two years Berry has invested significantly in creating innovative and differentiated new products for our customers. We built a new marketing and design center, as well as an expanded R&D facility at our Evansville headquarters. We have a state-of-the-art rapid prototyping capability that allows us to turn new packaging concepts that we develop with our customers into models within 24 hours. We've increased our investments in R&D and marketing and recently expanded our corporate innovation team in order to accelerate breakthrough technologies.

Many of the new packaging concepts that we are developing are at the interface of traditional rigid and Flexible designs. Berry's strength in both areas uniquely positions us to take advantage of this new emerging field within the plastics packaging space. One new product category that we are particularly excited about are packages for applications that require thermal management. Things that have to be kept hot or cold.

For example, coffee cups, soup bowls, ice cream containers and so forth. Berry's exciting new solution to this problem incorporates a new material concept together with new plastics packaging manufacturing technologies, to create packages that will keep hot food and drinks hot and cold things cold.

In our vision of the future the days of not being able to hold on to a hot cup of coffee, or requiring a sleeve overwrap just to grip the cup will soon be a thing of the past. Berry will offer our new thermal management packages under the trade name VERSALITE. VERSALITE packages will have outstanding insulating properties can be printed with high definition graphics that convey our customers, brands and messages, will be produced with low carbon footprints and energy requirements, will be recyclable in communities where polypropylene recycling facilities exists and will be cost competitive with other premium packages that serve the insulated packaging segment today.

In the last quarter, we've continued to test VERSALITE with consumer focused groups who consistently rate VERSALITE, a superior solution for hot and cold applications. Our validation work with customer development partners remains on track. We announced last quarter the opening of our manufacturing plant in Madisonville, Kentucky, that will be dedicated to the VERSALITE product launch. Production equipment is being installed in the first half of 2013 with startup anticipated during our September ending quarter. By year-end, we will have significant capacity to produce VERSALITE hot and cold cups with a full line of the most common sizes. We anticipate the first commercial sales in the last part of the year.

The second innovation that we are excited about is the all plastic barrier package that will be an alternative to traditional glass and metal containers or plastic containers with metal or foil lids for food products that have extended shelf life. The all plastic solution offers lighter weights, lower cost, resealability and microwave cooking all while maintaining the barrier properties required for shelf stability.

Berry will offer containers for these applications under the trade name Barricade, while our revolutionary lid technology will be marketed under the trade name NUSEAL. We expect the first product in this family to be commercial in the first half of 2013. Berry has already filed for more than 20 patents on the VERSALITE, NUSEAL and Barricade product platforms.

While we are excited about our breakthrough new product platforms the spirit of innovation runs throughout all of our businesses. Our current pipeline is robust. We've had significant product line wins with our personal care products, sealant and barrier films, laminate tubes and with our Ruffies branded trash bags.

We continue to work closely with our customers to create standout new packaging that will attract consumers, enhanced the brand image of our customers and prove the form function and ease of use of the package, reduces the overall cost and it's compatible with our commitment to the environment and the communities where we work and sell our products. Many of our new packages will be coming to retail stores across the country in 2013.

As mentioned in our previous earnings calls, we'll also continue to focus, the focus of growing with our existing customers, to introduce technology based value-add products in overseas geographic regions that will have faster economic growth. Berry well proceed with a disciplined approach and we'll pursue growth opportunities that will be at or above our current operating margin average. Along with this strategy, I'm pleased to announce the Jeff Thompson, who previously served as our Chief Legal Officer, has been named Executive Vice President of our International Business Development Group.

Now, I'd like to share some comments about our view of the coming March quarter, which is seasonally our second week this quarter and our outlook for fiscal 2013. We believe that overall economic activity will improve this year. But for the first calendar quarter, will be only slightly stronger than what we've witnessed over the previous four quarters.

Specifically, the January market increases in polyethylene of $0.05 and polypropylene of $0.15, as I described earlier will generate a modest headwind in the March 2013 quarter, although we've already taken actions to pass these price increases through to our customers.

In addition last year's March 2012 ending quarter was very strong for Berry and was positively impacted by falling resin prices that occurred at the end of 2011. Taking these factors into account for our March 2013 quarter and assuming that volumes improve inline with GDP forecast, we still anticipate a modest improvement in our operating EBITDA versus the prior year. Our operating EBITDA projections remain on track for fiscal 2013. To the extent that volume does not recover or deteriorates further Berry is prepared to take the necessary cost actions to maintain appropriate profitability growth for the year.

I'm pleased to announce that in January, Rick Rickertsen joined our Board of Directors. Rick is a managing partner of Pine Creek Partners based in Washington D.C. Rick brings a wealth of knowledge gained from 25 years of experience in the financial and private equity sectors. His insight will prove beneficial as we move the Company forward and we are very pleased to have him join our Board.

And finally, with one full quarter as a public company under our belt, Berry remains focused on our key strategies discussed today and we'll continue to relay our progress to you in upcoming quarters. Despite challenges, our results are consistent with our belief that we continue to gain share in the marketplace. This is enhanced by our focus on operational improvements and proactive pursuit of cost avoidance and cost reduction programs.

We fully expect that our strategies of continuing to pursue high return on investment projects, reducing overall debt, broadening our product portfolio and growing in emerging markets will enhance shareholder value and drive the Company's results throughout 2013.

As always, I'm confident that the people at Berry will continue to achieve our goals as they always have. I thank you for your continued interest in Berry Plastics and now we're ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of [Ghanshyam Punjabi].

Hey guys, Good morning.

Jon Rich

Good morning, Ghanshyam.

Unidentified Analyst

Hey, can you just touch on the volume trajectory intra quarter across your major product lines during the calendar year fourth quarter and also if you could break that out by the major end markets like food, personal care, etcetera? Thanks.

Jon Rich

I think so as Jim described, you know rigid volumes in the December ending calendar quarter were slightly down, flexible volumes very slightly up and for the total company we think we were essentially flat on volume versus the prior year period.

Unidentified Analyst

Was there any deviation during the quarter?

Jon Rich

No.

Unidentified Analyst

Okay and if you parse that out by you know food, personal care, etcetera?

Jon Rich

Yeah, so if you look at food and personal care again as I described, food we think food packaged goods in the quarter were down about 1%, we think Berry looked very similar to that. One important trend that's happening at Berry on volume is that throughout calendar 2012 we continue to work through the strategic decision that we had taken to withdraw from certain chronically unprofitable businesses. That led to constant increases in our year-over-year comparisons on volume and we expect that this year will look more normal compared to the marketplace.

Unidentified Analyst

Okay and then just another question if I could, on VERSALITE, Jon how do you think the volatility in polypropylene just based on what we've see in the last, you know so far this year and probably into February as well, how does that affect your customer's adoption rates for the product if at all?

Jon Rich

Again our customers are and the consumers that we market test with, all are extremely excited about the portfolio of performance properties balanced with the cost competitiveness of it and it's a tremendous value added product and we don't anticipate that the current moves in polypropylene will have any impact on that.

Unidentified Analyst

Okay, great. Thanks so much.

Operator

Thank you and our next question comes from the line George Staphos.

George Staphos - Banc of America-Merrill Lynch

Hi everyone, Good morning.

Jon Rich

Good morning, George.

George Staphos - Banc of America-Merrill Lynch

Jon, I wanted to come back to the volume question. So the uphold slightly inflexible, down slightly in rigid, was that your view of underlying volume or was that your view of volume including the impact of volume you've walked away from.

Jon Rich

Yeah, we were flat on a total basis.

George Staphos - Banc of America-Merrill Lynch

Okay.

Jon Rich

That's including all the cost right, so we think net of those comps we were slightly up and had a slight gain in market share.

George Staphos - Banc of America-Merrill Lynch

Okay, that's great. Do you think the, I know you wrapping up the program, in terms of having walked away from business and re-priced. Are we more or less done with that as we sit here today, so first calendar quarter, second fiscal quarter, we shouldn't be talking about that any more, or is this something that really doesn't get wrapped up until the end of this quarter?

Jon Rich

I think we're through with that and so the comp should reflect normal market activity.

George Staphos - Banc of America-Merrill Lynch

Okay, next question I saw some commentary that you're investing in Evansville, around the all Berry Plastic package could you, is that the correct source of information, can you comment as to what is behind that? And then the related question for both of the all Berry plastic package Barricade, and VERSALITE. Timing vise should we expect that you are commercially selling product that is showing up in your P&L by the fiscal fourth quarter this year or fiscal first quarter of '14, I guess it's to be the first quarter?

Jon Rich

Yeah, I actually I think we should have the first product sales in that family in the fiscal third quarter. We're just lining out the-

Jim Kratochvil

[No].

Jon Rich

First piece of equipment as we speak and those are in the normal start up phase. But I would also remind you George, that the barricade NUSEAL line is going to be more customer specific than the common SKUs that occur on VERSALITE, so the each incremental addition of a new product, will be really attractive to us, but not of the scale likely of the VERSALITE one. But by the first sale should conclude in the third fiscal quarter.

George Staphos - Banc of America-Merrill Lynch

Okay, that's great. And the I think it was a $30 million investment in Evansville can you comment on that?

Jon Rich

Yeah, part of that was the equipment to produce the specific product and again I don't want to get a head of my customers, so I'm going to let them speak first. Part of it was some infrastructure changes, we needed in Evansville in order to bring in more raw materials, feedstocks and we are very pleased that the city and county here supported that within expansion of our rail access.

George Staphos - Banc of America-Merrill Lynch

Okay. Last question, and I'll turn over, just so that we're all on the same page, you cited an expectation of modest improvement and your adjusted EBITDA this quarter versus the last quarter, for around our analysis the last year what figure you had given for adjusted EBITDA for that comment?

Jon Rich

I'll let Mark comment on that.

Mark Miles

Yeah, let me look George, I think it's $196 million, George.

Jon Rich

$196 million is the number I remember.

George Staphos - Banc of America-Merrill Lynch

That's what I got too, thanks.

Mark Miles

Yeah, you're welcome.

Operator

Thank you and our next question comes from the line of Alex (inaudible).

Unidentified Analyst

Thanks, Good morning.

Jon Rich

Good morning, Alex.

Jon Rich

So the commentary around the new product certainly comes across this it's a quiet exciting. Jon, would you be able to just talk about the size of that market especially VERSALITE and how you see it developing and the size of the profit pool and how much of the profit pool Berry could capture over time?

Jon Rich

Again I think it's one thing to remember, we're obviously focused on hot and cold cups and containers but let me just talk about hot cups for a moment. That market in the U.S. and around the world is larger than the traditional cold cup market that Berry has played in with its thermoform drink cups.

We estimate that approximately 10 billion one-time use coffee cups are used by the tier 1 and tier 2 retailers in North America. We think that market on the global basis could more like $30 billion to $35 billion. One think we really like about it is that the hot cups tend to be more standardized SKUs than cold cups. So that I think will make it easier for us to penetrate.

We think we are going to be very competitive in terms of the offerings that we have and again so then the question just is how much of that current market space can we penetrate and I think I'll leave that to the future discussions is our customers work through their qualification. I can just tell you that, consumers and customers we are working with remain extremely excited about that product.

Unidentified Analyst

Thanks, Jon. And then you guys mentioned that Sandy had an impact on the results in the December quarter and also you had some incremental costs tied to the new product development. Is there a way for you to be able to quantify what the Sandy impact was and then the new product development costs? Should we see those flow through the P&L through the balance of fiscal '13 until you actually begin to sell the new products? How is that going to flow through the P&L?

Jon Rich

I'll let Jim comment on that.

Jim Kratochvil

Yeah, first of all on hurricane Sandy. We had nine plants that were effected in the system and we estimate that the cost of that was somewhere between $3 million and $4 million, because we had - number of plants were down for a period of time.

In terms of the R&D costs, we saw in the quarter we just completed about $5 million associated with its R&D costs and additional costs that we have to bring some of the products to commercialization that we have been talking about. So, and those costs are continuing in our system, they are not going away they're continuing within our system and they will help us rollout these products.

Unidentified Analyst

Thanks very much, Jim. Thanks, Jon.

Operator

Thank you and our next question comes from the line of Scott Gaffner. Mr. Gaffner, your line is open please check your mute button.

Scott Gaffner - Barclays

Good morning.

Jon Rich

Hi, Scott.

Jim Kratochvil

Good morning, Scott.

Scott Gaffner - Barclays

How are you? I could have used the VERSALITE cup this morning. The paper cup I think, Jon I think I got up to 3 or 4 seconds this morning on the paper cup?

Jon Rich

We can't wait for you to be able to go to a retail store near you and purchase one.

Scott Gaffner - Barclays

Absolutely, we talked about the investments in new capacity. I think, you mentioned always rightsizing capacity for demand I think there were some closures in the quarter as well. Can you just sort of talk about the overall net capacity adjustment throughout the quarter?

Jon Rich

I think we took some of those steps prior the year. I don't think we made any significant steps in the fourth quarter and in general I would tell you as I said before we have completed the strategic actions that we intended to take and we think that our portfolio is balanced and we look forward to the growth here in 2013.

Scott Gaffner - Barclays

Okay, and then just going to your comments on volumes. You said you would like to see the volumes improve in line with GDP growth. Is - and volumes were flat in the fourth quarter or your fiscal first quarter GDP was up about 2.5%. So is that commentary based off of lower food inflation allowing underlying consumption to get up to a level that's in line with GDP or just what do you think it is that gets us sort of back in line with GDP growth versus where we were in the fiscal first quarter?

Jon Rich

I think a couple of factors; first of all you know many prognosticators have sort of estimated the first quarter at 2%, that's kind of what we think. I mean we're just going along with the common wisdom. I think the fourth quarter of U.S. GDP figures came out just a couple days ago and again reflected sort of a weakness in nondurable goods even though the whole GDP report was skewed by number of factors like government spending.

The one we focus on is nondurable goods. Historically nondurable goods and GDP fall right on top of each other, 2012 was unusual and that nondurable goods were weak, that's consistent with what we saw in other surveys of packaged food goods. When that's happened historically it typically doesn't last very long and so it's our anticipation as jobs continue to recover, the economy continues to recover at albeit at a modest rate that that will lead to increases in nondurable goods relative to GDP. We think that should provide favorability. Particularly I feel good about that for the whole calendar year 2013; we will like to see how the first quarter develops.

Scott Gaffner - Barclays

Thank you. Good luck in the quarter.

Jon Rich

Thanks.

Operator

Thank you and our next question comes from the line of Joe Stivaletti.

Jon Rich

Joe.

Joe Stivaletti - Goldman Sachs

Good morning, guys, just a couple little things. On the - as you talk about acquisitions in your leverage and what not I just was wondering if you would consider any kind of are you considering acquisitions that would be of a large scale and if so what would your comfort level be in terms of moving your leverage up temporarily, to what level would you be comfortable doing that I mean you have made so much progress in bringing that leverage down during the past couple of years. Just was trying to understand how you think about that.

Jon Rich

I'll let Jim comment, because he will never let me raise the leverage.

Jim Kratochvil

Joe, I will just say that, you know our focus has been on deleveraging and we have been able - within the confines of that we've been able to make some acquisitions that have hoped us to achieve that goal of deleveraging. So we are very cautious about at this point of making an acquisition that would significantly increase our leverage that's not our number one priority at this point. We want to get to the range of two to four times. Okay, that's basically where we were headed. That's not to say we won't make acquisitions or look at acquisitions, but I don't think in the near term our focus is on any major type of acquisition that will significantly increase our leverage.

Joe Stivaletti - Goldman Sachs

Okay and then just quickly on your refinancing. I was just curious if you could shed some light on your decision to move heavily from fixed rate bonds or long-term bonds I should say into bank bonds as opposed to issuing new bonds. I just was, just you know curious about how you thought about that and made that decision?

Jon Rich

Mark will comment on that.

Mark Miles

Hey Joe. You know we're, it's more market base Joe. We're happy with our bank investor as well as our bond investors and so we're open to both markets and we will evaluate each refinancing opportunity with what we view the most favorable market for Berry is at that time. We are happy with both markets and continue to look at both. This one just fit better for the bank financing.

Joe Stivaletti - Goldman Sachs

Okay. Thanks a lot.

Operator

Thank you, and our next question comes from the line of Chris Manuel.

Chris Manuel - Wells Fargo

Good morning, gentlemen a couple questions for you. First when you speak, you spoke a little bit about moving internationally and your pulling in someone to head efforts there more formally. Can you talk about the pace of how that could play out or do you anticipate that being kind of the follow-up more acquisition related or can you do that you know smaller in greenfield with select customers. Can you just tell us maybe a little bit about how you would anticipate that happening, you know what portion of the portfolio might be international if we looked forward five years, 10 years etcetera?

Jon Rich

First of all there is a number of reasons why Berry has tremendous opportunities to grow geographically. First of all the large portion of our customer base is the global multinational package goods companies. What we're going to do is focus on Latin America and Asia, Southeast Asia, and China.

We are going to work with our existing customer base to bring technology based value added products into those regions that can hold Berry's net average operating margins or higher. So we are not interested in just becoming the fourth piece of commoditized capacity in the region. We're going to focus on differentiated value added packaging and I think you've already heard today some of the exciting concepts we have there. And acquisitions we're really more focused internally on the organic side, you know I think down the road we'll have to see if acquisitions makes sense but right now we focused on our differentiated technologies.

Chris Manuel - Wells Fargo

That's helpful. Two last questions first is when we look at the different businesses. If I heard you correctly you are most of the way or finished at this point with walking away from less profitable business and you are getting pricing where you want it. As we look at, as an example the flexible packaging margins that are still one-ish, two-ish very low single-digits hasn't necessarily, it has shown a little bit of improvement but not a lot of improvement. Can you maybe talk to us a little bit about what the destination might be there? Is this business longer term only going to be a low single-digit business or can it begin to approach kind of corporate average levels or some of your other pieces?

Jon Rich

First of all I just wanted to make sure, look our Flexible Packaging business this year was a double digit operating margin business it was 10 plus and has moved dramatically. The thing we're most excited there's two things we're excited about with Flexible Packaging, one is if you walk through any grocery store in America you'll see that consumer preferences and trends on the shelf are shifting towards Flexible Packaging, so it's going be a faster growing segment.

And the thing we're most excited about is this interface of rigid and flexible technology. So down the road as you walk down a grocery store shop you're going to see packaging that looks completely different than what you see today because that interface of rigid and flexible will allow you to have form function, lower cost combining the best of both technologies.

As we move down those two paths, I'm very confident that our flexible packaging business should start to approach our goal as 15% margins and I don't see any reason why we shouldn't be able to get there over some period of time.

Chris Manuel - Wells Fargo

Okay. I think I was referring primarily to the EBIT margin so but.

Jon Rich

Ah, the EBIT margin, yeah that's okay.

Chris Manuel - Wells Fargo

But referring an EBITDA it still shows 400-500 basis points to get to the 15 -

Jon Rich

I think we should be able to raise the EBITDA margins for 400-500 basis points in the coming years, right.

Chris Manuel - Wells Fargo

Yeah, that's helpful. That still gets me around where I'm looking for, okay. The last question I had with respect to resin, can you remind us of what the help was potentially in your 2Q last year and what you might anticipate the looking at both increases in polyethylene and then the increase [as such] for polypropylene what the headwind might be this year just so we get a sense of what the year over year differential is, can you maybe help us with that?

Jon Rich

-comment on that?

Jim Kratochvil

We had about the tailwind we had last year coming into the year was from lower resin prices and the fourth calendar quarter of '11 was in the neighborhood of $8 million to $9 million-ish we benefited in 2012 in the first quarter. And as we look forward to the quarter we're in today there's a headwind based on where resin prices have gone up to already probably in the neighborhood of $5 million.

Okay, so we had tailwind last year and we have a little bit of headwind, I would remind you also that if you look at the last couple of years we had resin prices that shot up rapidly in the quarter that we're in and then they declined fairly quickly in the back half of the year. So we don't know what's going to happen this year but without underlying demand, it's likely that we'll see similar cycles so.

Chris Manuel - Wells Fargo

Okay. Thank you, gentlemen.

Operator

Thank you, and our next question comes from the line of Mark Wilde.

Mark Wilde - Deutsche Bank Securities

Good morning, Jon.

Jon Rich

Good morning, Mark.

Mark Wilde - Deutsche Bank Securities

Just following on Chris' question about the offshore growth it sounds like with the announcement this morning of moving your General Counsel in-charge of offshore initiatives, I just other things that we've heard over the last kind of three or four months from you that the focus on the international growth for Berry is increasing is that correct? And could you talk about where you might see kind of targets over the next 3 to 5 years for international presence?

Jon Rich

You know look again I think I want to reiterate the strategic objectives of Berry because they're in the prioritized order. Number one continuing to focus on deleveraging, number two these very exciting new product offerings that we're rolling out, number three is international and number four is bolt-on value adding acquisitions.

So that is the prioritization with inside the company I think we see like everybody more attractive growth rates in certain parts of the world. The other thing is we already have tremendous relationships with our customer basis who are already in those regions. Frankly, we have been the governor that has controlled the rate at which we can grow overseas because we have been and remain very focus on doing it only where we can remain at or above our net average operating margin for the entire company.

That's going to require us to focus on value-added differentiated packaging and I think we've got a number of great opportunities there I'm not going to comment on that we have obviously an internal target I think as we start to grow there that will become more transparent.

Mark Wilde - Deutsche Bank Securities

That's fine. I applaud the margin and capital discipline, because it seems like, we've seen a lot of companies go both South into Asia and end with some pretty low margins.

The other question I had this morning is -

Jon Rich

Let me just make a comment on that, because look, in my - I've had a lot of international experience in my business career and that has helped me to focus on the fact that there are great opportunities overseas, but if you start with too low of a margin recovering that is extremely difficult. So I can assure you that that Berry is not going to take those steps.

Mark Wilde - Deutsche Bank Securities

Okay. And the other question I had is just - capital for some of the new business initiatives, have you, can you give us the amount of capital that you're putting into to say the VERSALITE and the Barricade this year and whether that's moved in the last three to six months.

Jon Rich

All of its increasing but I am not going to give a specific number for competitive reasons.

Mark Wilde - Deutsche Bank Securities

Okay, but -

Jon Rich

It's in the forecasted $230 million for the fiscal year.

Mark Wilde - Deutsche Bank Securities

Okay. All right, very good. Good luck in the second quarter and the balance of the year.

Jon Rich

Thanks very, much.

Operator

Thank you. And our next question comes from the line of Anthony Pettinari.

Anthony Pettinari - Citi

Good morning. You discussed your view that you might be gaining some share absent your strategic decisions to exit businesses. And my question is, when you look at the Rigid, Flexible and Engineered businesses, where are you gaining the share and are the share gains, I mean are these primarily coming from existing plastic space, competitors or to what extent are they driven by substitution from, glass metal, paper.

Jon Rich

So I think that's a very good question. The thing you have to remember about Berry is both our scale and the breadth of the served industry markets that we play in. So we detail that out and have a very clear understanding of where we think we're winning, it falls in some cases in all of those categories.

We have some exciting wins in the Flexible side, we have some wins in some market segments in the Rigid side. We continue to be very very pleased with thermoform drink cups, great markets. We're doing a great job in certain segments there, but and there is still shifting from alternative material. So I'd say we're winning against competitors and our space and we're continuing to see shift towards plastic as the trend has been for years, but it's a complex dynamic.

Anthony Pettinari - Citi

Okay. And when you think about alternative materials. Maybe looking a little bit more, long-term over the next two to three years. Where do you see the most opportunity to take share from, is it glass, metal, paper and what are the categories where do you think there is the most opportunity from maybe a longer term perspective?

Jon Rich

I think I spoke already about barricade and NUSEAL, these barrier technologies that is targeting opportunities to switch glass, metal, and spiral wound, cardboard into plastic there is tremendous opportunities performed function improvement cost savings and then customer brand enhancement. So we think of three of those areas are good targets for our new product technologies.

Anthony Pettinari - Citi

Okay and then maybe just final question on the financial side. On working capital management as we look to 2013 can you provide any color on how we should think about how much working capital could be a source of cash in the year and how we should think about your working capital build as we move through the year if the seasonality is impacted by any of the initiatives on working capital you're taking.

Jon Rich

It's a little bit of a complex question because it's the internal projects that we have that we're working under to lower working capital and provide a source, and then we also have what happens with the resin market in particular. Because as resin prices have gone up that's going to put some pressure, in the short-term on our working capital, which would be returned to us to the extent that it comes back. So we're not, net-net we're not expecting to have a major source of cash from working capital today based on what we see.

Anthony Pettinari - Citi

Thank you, I'll turn it over.

Operator

Thank you and our final question comes from the line of Bill Hoffmann.

Bill Hoffmann - RBC Capital Markets

Hi, yeah good morning, Jon I wonder if you'd just talk a little bit more about (Inaudible) if you're of investing plant equivalent here in Madisonville, Kentucky, could you just give us some concept that how much new business you have contractually set up and I'm not talking about exact numbers but does it a qualify for 75% operating rates, to that kind of plant with future growth like how do you look at that?

Jon Rich

You know, again I think I commented already Bill, and it's good to hear from you, we commented already on the scale of the market size right. So we're working with both tier-1 and tier-2 retail customer, I'm not going to get ahead of them in terms of their customer qualification processes. I would describe that the initial volumes that were capital equipment that were putting in is big for us compared to other product lines that we're in but still very, very small compared to the served industry market.

So I think if this thing really catches on it'll provide an exciting opportunity for us to continue to invest and expand our production capacity and I'm not particularly concerned about selling out the current tranches that we're investing.

Bill Hoffmann - RBC Capital Markets

Okay, and sorry just do - you have - if you have contracts at this point or is that's a new-.

Jon Rich

We're working customers but I'm not going to comment on it beyond that.

Bill Hoffmann - RBC Capital Markets

Okay. Thank you. That's it.

Jon Rich

Again, I would like to wrap up today by thanking everybody for joining us on the call today. We thank you for your continued interest in Berry Plastics and we look forward to talking with you again at the end of our second fiscal quarter. Thanks, everybody.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!