Berry Global Group Inc. was pretty stoked about its recent acquisition of AEP Industries Inc., but the deal for the flexible packaging films maker is turning out to be even better than expected.
Evansville, Ind.-based Berry said on a quarterly conference call to discuss earnings that the deal is now expected to bring annual cost savings of $70 million, up from an earlier estimate of $50 million.
Berry CEO Tom Salmon said the deal "has exceeded expectations."
"We remain excited about the future prospects of the plastic flexible packaging market," he said.
"Berry has a disciplined and systematic approach of integrating acquired businesses that has been developed and proven," the CEO said, about the more than 40 acquisitions the company has completed over the years. "AEP employees that became part of Berry have done a tremendous job of executing on the integration while providing high quality and service to our customers," Salmon said.
"The results to date have validated our expectations," he said. "Our projected cost synergies are ahead of our initial guidance, and we believe this will be one of the best acquisitions in Berry's history," he said.
Berry is saving money through more purchasing power, a reduction in "redundancy" selling, general and administrative costs and implementation of what the company calls "operational best practices."
Berry said the deals to acquire AEP and Avintiv Inc., a nonwovens manufacturer, have served to diversify the company.
"We have strategically diversified our portfolio from food, which now represents only 20 percent of our annual revenues compared with approximately 40 percent at IPO, to higher growth end markets like health care and hygiene, which now represents more than 40 percent of our annual revenue," Salmon told stock analysts.
Salmon, during the call, said the company is not de-emphasizing food as he called it a great business that provides dependable and consistent free cash flow.
As the company has made acquisitions over time, the overall percentage of sales that the food business represents shrinks.
Berry reported a profit of $72 million, or 54 cents per diluted share, on quarterly record sales of $1.806 billion for the second fiscal quarter ended April 1.
This compares with a profit of $59 million, or 47 cents per diluted share, on sales of $1.614 billion for the second fiscal quarter in 2016.
The company's recent change of name from Berry Plastics to Berry Global "could set the stage for future acquisition-related growth," said Christopher Manuel, a senior analyst with Wells Fargo Securities LLC, in a research note.
"We believe M&A remains a key focus of the company despite near term prioritization of debt repayment (and internal investments) and anticipate BERY could utilize M&A to capitalize on the substantial fragmentation of the plastics packaging market (both domestic and internationally)," he said in the note.
"In terms of scope, we anticipate that smaller bolt-on deals are more likely (funded through cash flow) in the near-term; that said, we believe BERY has earned credibility executing large scale transactions since becoming a public company," Manuel wrote.