Berry Global

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Berry Global is a global manufacturer and marketer of a broad range of rigid, flexible, and non-woven products serving various end markets, with a particular focus on packaging solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Berry Global Inc. (“Berry” or “the Company”) operates a global manufacturing, marketing, and distribution business primarily focused on packaging. The company’s offerings include a wide range of rigid, flexible, and non-woven products catering to various sectors. Their revenue is divided into four main reportable segments:

Consumer Packaging International (CPI): This segment consists of engineered and converted products and is primarily related to food, beverage, pharmaceutical, and other general consumer end-use products.
Consumer Packaging North America: This segment is a manufacturer of rigid products that primarily serve the North American market. Product groups within this segment include containers for food and beverages, bottles, closures, and health and beauty products, and flexible films.
Health, Hygiene, and Specialties: This is a manufacturer of engineered materials and specialized products that serve global markets within the Healthcare, Hygiene, and Specialties sectors. In 2022, Health, Hygiene, and Specialties accounted for 22% of our consolidated net sales.
Engineered Materials: This segment produces a diversified product range for North American and European markets that include tapes, films, and specialty coatings.

The company serves a vast and diverse customer base with long and well established partnerships. Major competitors include large players such as Amcor, Sealed Air, and Graphic Packaging in the packaging industry, and multiple other competitors in the various sectors that the company operates.

The company’s products are essential components in the supply chain, creating a stable revenue stream, though there are certain cyclical factors at play. However, the company’s customers are diversified across various end-markets.

Moat Analysis

Moat Rating: 2 / 5

Berry Global’s moat is relatively narrow, stemming mostly from some cost advantages, customer lock-in, and the intangible asset of size. While it demonstrates a degree of competitive advantage, it isn’t considered a “wide moat” due to significant risks and vulnerabilities.

Cost Advantages (2/5):

Berry benefits from its scale, particularly in areas of supply chain management, raw material procurement and production efficiencies. They produce large amount of varied products for which they have negotiated favorable contracts, and utilize their vast manufacturing facilities to lower cost production and transportation. They also reduce waste, optimize their packaging processes, and reduce their energy footprint.

However, these advantages are not entirely sustainable or difficult to replicate. For a commodity like plastic, scale advantages can only go so far, and a lot of different competitors have large scale facilities too. Also, a lot of these cost advantages come from having presence in low cost countries which competitors can replicate, and some also stem from improving operational efficiency which other players can imitate.
 Moreover, their product line is relatively commoditized and does not allow them for substantial price premiums.

Customer Lock-In (2/5):

Some of Berry Global’s packaging products, especially those customized for a specific customer or for a specific machine, can lead to some level of customer lock-in due to high switching costs associated with changing vendors/suppliers. They also have long term contracts and partnerships with some of their clients, creating another aspect of customer lock in. However, many buyers of their products have many suppliers from which they can chose, and most companies are not locked into one specific vendor. This weakens the switching costs that Berry might have. Therefore, its customer lock in is not as strong as some other companies.
Intangible Asset (2/5): Berry Global has an established presence with many well recognized brands and some of their patents create a degree of differentiation in their products. However, their products and brands are not as powerful or as differentiated as say a Coca Cola or a Nike.
Lack of Network Effects:

Berry does not benefit from network effects as it is a producer of products, and doesn’t benefit from their products being used by more and more people. Also, their products are based on physical goods and not information or connectivity.

Risks and Resilience

Risks:

Raw Material Costs: The company is exposed to fluctuations in raw material prices, particularly resins and polymers. Increasing costs of these materials directly impact margins and profitability. Berry’s profitability and operations are highly sensitive to raw material prices and their availability.
Intense Competition: They operate in a highly competitive market with numerous players, resulting in pricing pressures, and reduced profitability. A lot of times they have to match prices of their competitors which decreases profitability.
Acquisition Integration: Berry has aggressively grown by acquisitions. Failure to integrate new acquisitions effectively may lead to loss of efficiency and create operational disruptions. This also makes the analysis of the company much more difficult as they have so many different segments that must be studied.
Cyclicality: Demand for some of the Company’s products can be cyclical and linked to economic conditions. Reduced industrial activity can lead to reduced revenues and increased capital expenditure.
Debt and Leverage: The company has used high debt levels to finance most of its acquisitions, and this high debt burden creates added risk and could reduce overall performance or shareholder returns.

Resilience:

Diversification: Berry’s diversified portfolio of product lines across industries and geographies makes the business more resilient than if they were completely concentrated in one sector.
Integrated Supply Chain: Their vertically integrated model allows them to be more resilient to supply disruptions, although they are still very exposed to raw material prices as a whole.
Long-term Customer Relationships: Their long term relationships with large players also increases their resilience in downturn periods.
Ability to Reduce Costs: Their size gives them advantages in lowering costs through economies of scale and efficiency improvements, which helps them stay profitable in case of downturns.

Financial Analysis

Here is an in-depth analysis of Berry Global’s financials based on the provided information:

Income Statement Analysis

Revenue Trends: The company’s net sales have grown over the years, however, a lot of this growth has come from acquisitions rather than organic growth. The revenue growth has also slowed recently, particularly in the international consumer packaging segment, which saw a decline of 7.6% in 2023 versus 2022.
Cost of Goods Sold: As mentioned before, the company is highly sensitive to input material costs. They have recently taken a lot of price increases in order to pass this through to customers, but that has not fully recovered the full costs. Inflation has been a key driver of their increased costs.
Operating Income: Operating income has been affected by lower sales volume and higher input prices in recent times, and their operating income has declined substantially as a result, going from 1.78 billion to $878 million in 2023 year versus 2022. In all the divisions, operating profits decreased substantially, except for health and hygiene.
Net Income: The net income was $189 in 2022, and dropped to a net loss of $466 million in 2023. Higher interest rates and lower revenues caused a substantial downturn in profitability.

Balance Sheet Analysis

Debt: Debt levels have been high historically, and the company uses a mix of long and short term borrowing to finance its business. A substantial portion of the debt matures in a few years, therefore presenting risks.
Assets: Goodwill and intangible assets make a big portion of the company’s assets, showing they spent a lot on mergers.
Working Capital: Working capital is negative, meaning that current liabilities are greater than current assets, something that creates a red flag on a company’s financial health.

Cash Flows

Operating Cash Flows: The company’s cash flows are being negatively impacted from reduced profitability.
Financing Cash Flows: They used a significant amount of cash to fund their acquisitions. They continue to have large interest payments in debt.

Key Takeaways from Earnings Calls and News

Economic Slowdown: They are highly affected by economic downturns as consumers buy less of their products, causing lower sales volume and higher fixed costs.
Focus on Profitability: They are focusing on reducing their debt burden. They also expect to increase operating efficiency and margins.
Integration Challenges: Recent earnings calls have highlighted the challenges of integrating different acquisitions into a cohesive global business. They have to standardize their systems, processes, and supply chains.
Cost Inflation: The company is facing high inflation which negatively impacts profits, and they are trying to mitigate it by raising prices and cutting expenses.
Shift in Customer Preferences: Consumer preferences are shifting and many of their brands have become commoditized. They need to keep spending on R&D to find new and innovative products.

The company has a volatile track record and the risks are not to be overlooked. In general, it is a highly leveraged company operating in a cyclical and very competitive industry. Given this, it’s important for investors to exercise caution when evaluating this business.

Understandability:

Understandability: 2 / 5

Berry Global is a somewhat complex business to understand due to the many industries, products, and geographies that they serve.

Complexity of Operations: They operate a lot of segments and are involved in diverse industries, which makes understanding the economics of each operation difficult to analyze.
Accounting Complexity: The company’s financials are difficult to understand because of the many acquisitions, restructurings, write downs and adjustments, and the accounting changes they make. The effect of amortization of intangibles, and goodwill impairment on reported profits makes it hard to analyze underlying profitability.
Global Presence: The company operates in multiple regions and the performance of the business in those markets has to be considered independently. FX risk is a problem that can further complicate analysis.
M&A History: Their history of acquisitions and divestitures makes it very difficult to compare company performance with previous years and also estimate future performance due to these adjustments to reported financials.
Non-Consumer Facing Products: Their products are mainly B2B, and therefore it is much more difficult for most investors to conceptualize and experience their product lines and customer feedback.

Balance Sheet Health:

Balance Sheet Health: 2 / 5

Berry’s balance sheet is relatively unhealthy due to high debt levels and negative working capital.

High Debt-to-Equity Ratio: The company has a substantial debt burden, which makes its earnings very susceptible to increases in interest rates, economic downturns and puts its solvency at risk.
Negative Working Capital: Current liabilities are greater than current assets which can pose liquidity challenges in the short term.
Significant Goodwill and Intangibles: A lot of the company’s assets are based on goodwill and intangibles, which can be written down in the future.
Low Cash Position: They have a low cash position as compared to their high debt balance which makes them very sensitive to liquidity problems and rising interest rates.
Financial Flexibility: Their high debt also reduces their financial flexibility when it comes to investments and acquisitions. The risk of not paying debt on time or refinancing debt is also a major concern.
Leverage: Due to their large debt burden, they are highly leveraged. Leverage magnifies the company’s financial results but also increases risk during bad times.