Berry Plastics debt grew in Q1 on Avintiv buy, but company has begun deleveraging

By Paul Deckelman

New York, Feb. 10 – Berry Plastics Group, Inc. saw its debt-load balloon upward during its recently concluded fiscal 2016 first quarter as a result of last fall’s $2.45 billion purchase of Avintiv Inc.

But the Evansville, Ind.-based maker of plastic consumer product packaging, hygiene and health care products and engineered materials has already begun chopping away at its more than $6 billion debt load and says that its top priority at this point is using free cash flow to deleverage.

“Our top priority is debt reduction and the deleveraging of our balance sheet,” the company’s chairman and chief executive officer, Jonathan D. Rich, declared on Berry’s Wednesday conference call after the release of its results for the fiscal first quarter ended Jan. 2.

Avintiv purchase boosts debt

Rich noted that traditionally the company’s target ratio of net-debt as a multiple of trailing 12-month adjusted EBITDA has been a range of 3 to 4 times. The acquisition of Avintiv from private equity funds managed by the Blackstone Group, which closed last Oct. 1, added some $2.5 billion of new debt to Berry’s balance sheet – $400 million of new junk bonds and $2.1 billion of new term loan debt.

The company priced the new 6% second-priority senior secured notes due 2022 at par in a quick-to-market transaction on Sept. 16 via its Berry Plastics Escrow Corp. subsidiary, after downsizing the planned issue from an originally announced $600 million.

Concurrently, its Berry Plastics Corp. LLC subsidiary entered into the new first-lien term loan due 2022, which bears interest at 300 basis points over Libor, with a 1% Libor floor. It priced at 99.5, with a 101 soft call for six months, after being upsized from $1.9 billion originally.

Those transactions brought total debt up to $6.15 billion at the end of the fiscal first quarter from $3.69 billion at the end of fiscal 2015 on Sept. 26, just before the Avinitiv sale closed. They also swelled the leverage ratio to 5.2 times last-12-months adjusted EBITDA pro forma for the transaction – but Rich added that “I am pleased to report that in just six months, we have reduced this ratio by three-tenths of a turn, to a quarter-end level of 4.9 times.”

Berry’s chief financial officer, Mark W. Miles, said that “in alignment with our strategy to reduce debt, the company made a voluntary term loan principal payment of $50 million in the December quarter [i.e., the 2016 fiscal first quarter]. Additionally, last week, we made another voluntary term loan principal payment of $100 million.

Rich said that “our plan for fiscal 2016 is to achieve a half-turn or more reduction in leverage through free cash flow and earnings growth. We have a track record of generating substantial free cash flow, and expect to do so again this year.”

Miles said that interest expense for the first quarter was $75 million, compared to the prior-year expense of $53 million, with the $22 million increase primarily as a result of borrowings associated with the Avinitiv acquisition.

He said that the company projects cash interest expense for the whole of fiscal year 2016, which ends in late September, at about $270 million, “which assumes we continue to utilize our free cash flow to reduce our debt throughout the year.”

Cash flow expected to grow

Adjusted free cash flow – which Berry defines as cash from operations less net spending on property, plant equipment and payments made under the company’s tax-receivable agreement – was $45 million in the latest quarter, versus $36 million in the year-earlier period.

He pointed out that the adjusted free cash flow figure included $30 million of non-recurring cash uses associated with the Avintiv acquisition. Excluding those items, adjusted free cash flow for the quarter was $75 million – a gain of some 108% over the year-ago quarter.

Berry generated $191 million of cash flow from operations in the latest quarter, nearly double the $100 million a year earlier, even in spite of the $30 million of non-recurring cash uses during the quarter associated with the Avintiv acquisition.

On a trailing 12-months basis, adjusted free cash flow for that period was $445 million, or $3.65 per diluted share, for a better than 12% free-cash-flow yield, Miles said.

Rich said that for all of the current fiscal year, the company is guiding adjusted free cash flow at $475 million, or about $3.80 per diluted share, for a yield of nearly 13%.

During the question-and-answer portion of the conference call following the formal presentations by Miles and Rich, an analyst asked about the company’s view on further acquisitions.

Rich replied that as he has said “we stated our priorities during the call” – reducing the debt to EBITDA ratio, driving organic growth, expanding internationally, and continuing to be disciplined while executing value-creative acquisitions “that have historically brought us success.”

But he reiterated that “we continue to remain focused on our top priority of deleveraging our balance sheet,” although he allowed that “within our other strategic goals, one is to continue to look at value-accretive acquisitions. I would say that our emphasis is in that order.”

Rich continued that he was “not specifically ruling out any actions, but we are going to execute on the priorities, as I've stated.”

As of the end of the fiscal first quarter, the company’s more than $6.1 billion of debt included $4.23 billion of term loans – up from $2.39 billion in September, due to the issuance of the new term loan tranche for the Avintiv acquisition.

Besides the $400 million of new bonds connected to that transaction, the company also had outstanding previously issued junk bond debt of $500 million of 5½% second priority senior secured notes due 2022 and $700 million of 5 1/8% second-priority senior secured notes due 2023, as well as $194 million of capital leases and other obligations.

Cash at the quarter-end stood at $282 million, up from $228 million at the end of fiscal 2015.

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