The Blacker the Berry, the Sweeter the Juice

COMPANY DESCRIPTION
Berry Plastics (BERY) is a leading provider of plastic consumer packaging and engineered materials
(USD2.6bn market cap). The company was acquired by financial sponsors Apollo and Graham Partners in
2006 and taken public in 2012. Both PEs still own c.30% of the equity. It operates 3 different segments:

Rigid packaging (54% of sales): BERYs core strength, with the company holding dominant market
positions in many of its two product lines (open & close top). Examples: plastic cups, prescription
bottles, closures etc.
Engineered materials (30% of sales): This segment is exposed to the fast and growing oil and gas
infrastructure market where BERY supplies pipeline corrosion protection solutions. However,
consumer oriented products in the segment (trash bags, liners) face strong competition from market
leaders in those categories.
Flexible packaging (16% of sales): Provides packages such as printer bags, pouches of food and
beverage, and medical and personal care.

INVESTMENT CASE
We have bought a significant amount of shares due to the following reasons:
FCF generation: Currently trades at 10.2% 14E FCF yield, and we expect it could generate FCF >35% of
its market cap in the next 3 years. This recurrent FCF generation capacity is achieved thanks to low
working capital requirements, controlled maintenance capex and margin improvement.
FCF ESTIMATES
(USDm )
EBIT
(+) D&A
(+/-) Adjustments
EBITDA adjusted
(+/-) Changes in NWC
(-) Capex
(-) Interest expense
(-) Taxes
FCF for debt reduction
Management guidance
Accum ulated FCF
% market cap

2011
42
344
270
656
(155)
(327)
47
221

2012
325
355
91
771
35
(200)
(328)
(2)
276

2013
386
341
48
775
(42)
(221)
(244)
(28)
240

2014E
453
342
794
(3)
(230)
(220)
(78)
263
270
263
10.2%

2015E
499
348
847
(8)
(224)
(203)
(99)
314

2016E
539
355
894
(9)
(229)
(183)
(118)
355

576
22.4%

932
36.2%

Focus on deleveraging: After several years where the main focus has been on acquiring additional
capacity through M&A, significantly increasing the companys leverage, managements main priority is
debt reduction, which will consequently allow value to flow to equity holders. Leverage has decreased from
7.3x in 2010 to 4.8x in Sep 2013. Management has set a leverage reduction target of turn per year. We
note that historically, deleveraging has led to a valuation multiple expansion in the packaging group.
Debt maturities under control: BERY has a flexible, covenant-light capital structure with minimal near
term debt maturities as it is expecting to close the refinancing of its USD1.2bn term loan, maturing in 2015,
in the next couple of weeks. This transaction would push any significant maturities to 2018 and beyond. In
addition, the company is considering alternatives for its 2018 Second Priority Notes which become callable
in May. Liquidity currently stands at USD670m.
MATURITIES SCHEDULE
(USDm )
Capital Leases
Group Term Loan
Term Loan
Second Priority Notes
Incremental term loan
Second Priority Notes
Total gross debt

Interest
(L +7%)
(L +2%)
9.50%
([L or 1%] +2.5%)
9.75%

Maturity
2014
2015
2018
2020
2021

Am ount
106
18
1,125
500
1,397
800
3,946

Com m ents

In talks to refinance at (L +2.75/3%)

Potential to renegotiate terms
Potential to renegotiate terms

Margin improvement: As the market leader in the plastic packaging industry, BERY benefits from
significantly higher margins than its peers. We expect the current restructuring plan (to be completed in
2014) to have a positive effect on margins in the coming years fuelled by cost cutting in SG&A, better
product mix and contract revisions allowing to pass through resin price increases to customers. The
company is also targeting an improvement in the flexible packaging segment, increasing EBITDA margin
from c.10% to 14-15%.
MARGINS ESTIMATES
(USDm )
Gross Margin
EBITDA Margin
EBIT margin
Net margin

2011
15.0%
14.4%
0.9%
-7.6%

2012
16.2%
16.2%
6.8%
0.1%

2013
17.5%
16.7%
8.3%
1.8%

2014E
18.5%
17.0%
9.7%
5.1%

2015E
19.2%
17.8%
10.5%
6.4%

2016E
19.7%
18.4%
11.1%
7.5%

EPS upside: We believe there is room for substantial EPS accretion in 2014 driven by a reduction in
interest expense (due to strong deleveraging and refinancing opportunities) and the aforementioned
margin expansion. Comps dont look demanding and could trigger shares momentum in earnings reporting
season.
Low risk client portfolio: Over 76% of the companys sales are generated in stable, consumer oriented
end markets (food/beverage 39%, healthcare 15%). BERY enjoys longstanding relationships with a
diverse mix of leading multi-national, regional and local customers (McDonalds, Subway, Kraft, P&G etc.).
Over 13K customers: top customer represents only 2% of sales with top 10 customers representing 18%
of sales. In addition, BERY holds a #1 or #2 position in markets representing c.75% of sales.
Additional revenue opportunities: The company has identified opportunities to increase revenue growth,
which is expected to grow at ~GDP growth rate. It is focused on growing internationally (the US currently
represents 96% of sales) leveraging on the global footprint of existing clients. In addition, BERYs powerful
R&D effort produces unique product innovations, its latest development, Versalite, in trial phase, has
received positive feedback from clients. Lastly, potential M&A opportunities could contribute to top line
growth, although management has stated deleveraging is a priority.
Management team: BERY has an experienced management team, with an in depth knowledge of the
industry and a proven track record in consolidating acquisitions and creating significant synergies in the
past years. Furthermore, management holds a significant stake in the company (c.15%) which incentivises
the creation of value for shareholders as interests are aligned.
Brokers positive bias: Limited operating history as a public company (IPO in October 2012) and poor
results due to restructuring have led the shares underperformance. We deem brokers positive bias on the
shares should support momentum.
Current valuation screens badly: At 38x trailing P/E and 8.3x trailing EV/EBITDA the shares look
overvalued. However, considering forward multiples based on our conservative assumptions, the equity
story is more appealing. Valuing BERY at a 7% FCF yield (peer group average), we believe the shares
offer an attractive upside potential and an adequate risk/reward profile considering the catalysts ahead.
VALUATION
(USDm )
Free Cash Flow
Current FCF yield (%)
Target FCF yield (%)
Equity Value
NOSH (m)
Target Price (USD)
Share price (USD)
Upside potential (%)

2014E
263
10.2%
7.0%
3,755
115
32.53
22.32
45.7%

2015E
314
12.2%
7.0%
4,479
115
38.81
22.32
73.9%

2016E
355
13.8%
7.0%
5,077
115
43.99
22.32
97.1%

CONCLUSION
All in all, we believe that the combination of a non-cyclical market leader in the packaging industry, a highly
levered company with stable FCF generation and a best-in-class management team should provide strong
returns for the companys shareholders in the coming years.

Source: Financial accounts & presentations, broker reports, Bloomberg and Peninsula Capital estimates. Share price data based on
$22.32 purchase price.

DISCLAIMER: This document has been distributed for informational purposes only. Neither the
information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets
mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not
intended to provide personal investment advice, and it does not take into account the specific investment
objectives, financial situation or particular needs of any person or entity that may receive this
document. Persons reading this document should seek professional financial advice regarding the
appropriateness of investing in any securities or assets discussed in this document. The authors opinions
are subject to change without notice. Forecasts, estimates, and certain information contained herein are
based upon proprietary research, and the information used in such process was obtained from publicly
available sources. Information contained herein has been obtained from sources believed to be reliable,
but such reliability is not guaranteed. The investment fund Peninsula Capital, FIL may have a position in
the securities or assets discussed in this article. Peninsula Capital FIL may re-evaluate its holdings in such
positions and sell or cover certain positions without notice. No part of this document may be reproduced in
any form, or referred to in any other publication, without express written permission of Peninsula Capital,
FIL. Past performance is no guarantee of future results.