Pactiv Evergreen Inc. (NASDAQ:PTVE) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good day, and welcome to the Pactiv Evergreen First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Curt Worthington, Vice President, Strategy and Investor Relations. Please go ahead.

Curt Worthington: Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our first quarter 2023 earnings call. With me on the call today, we have Michael King, President and CEO; and Jon Baksht, CFO. Please visit the Events section of our Investor Relations website at www.pactivevergreen.com and access our supplemental earnings presentation. Management’s remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I would like to remind everyone that our discussions today will include forward-looking statements, including, but not limited to, statements regarding our guidance for 2023. These forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by our forward-looking statements.

Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on Form 10-Q for the quarter ended March 31, 2023, for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today’s date, and we disclaim any obligation to update any forward-looking statements, except as required by law. Lastly, during today’s call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.

Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today’s presentation. Unless otherwise stated, all figures discussed during today’s call are for continuing operations only. With that, let me turn the call over to Pactiv Evergreen’s President and CEO, Michael King. Mike?

Michael King: Thank you, Curt, and good morning, everyone. Yesterday after the market closed, Pactiv Evergreen released strong first quarter results, including adjusted EBITDA of $189 million, exceeding our guidance and establishing solid momentum heading into the second quarter. Our performance in the quarter is a testament to the resilience of our platform, the diversity of our product portfolio and the tremendous efforts of our dedicated employees. As we will continue to outline, during sections of this presentation this morning, this is an uncertain macro environment for many sectors of the economy. However, our results underscore the inherent strength of the Pactiv Evergreen business model and reinforce our confidence in executing the next phase of our strategic journey.

Turning to the agenda on Slide 4. I will start today’s call with the highlights from the quarter along with an update on our previously announced beverage merchandising and restructuring plan. John will then discuss Q1 results in more detail, along with an update on our 2023 outlook. Finally, I will close with an update on our strategic journey. We will then move to a question-and-answer session. Moving to our first quarter highlights on Slide #6. We reported net revenues of $1.4 billion, a solid performance that reflects the many strengths of our platform and our unique ability to service our customers. While the first quarter net revenues represented a 4% decrease compared to the first quarter of 2022, excluding the impacts of divestitures, primarily Beverage Merchandising Asia in 2022, we were essentially flat to last year.

Sales volumes declined due to a focus on value over volume in the Foodservice and Food Merchandising segments and the market softening amid inflationary pressures in the Beverage and Merchandising and Food Merchandising segments. Pricing levels were slightly higher than last year as a result of the actions we took to manage price over the course of 2022. Our input costs have largely stabilized as compared to recent periods, and our pricing strategy reflects our contractual pass-through mechanisms and our competitive value proposition. First quarter adjusted EBITDA was $189 million which is ahead of our guidance. The outperformance compared to our guidance was primarily driven by favorable mix and lower SG&A. We also benefited from an extension of key business that was previously expected to occur in the second quarter.

During the quarter, we generated $25 million of free cash flow and reduced our net leverage ratio to 4.5x. As we will cover in more detail later in the presentation, we remain committed to deleveraging our balance sheet and we are focused on maximizing long-term free cash flow generation. We do not expect our Beverage Merchandising Restructuring plans to prevent us from driving solid free cash flow in 2023. And we expect our net leverage ratio to improve by year-end. Further, we expect the Beverage Merchandising Restructuring plan will put us in an even better position to generate free cash flow and accelerate our deleveraging path in 2024 and beyond. Turning to Slide 7. 2023 is an important year for Pactiv Evergreen as we execute on a number of strategic actions designed to help us focus on our core converting operations for food and beverage packaging to position us for profitable growth in the future.

First, we have already made significant progress on our Beverage Merchandising Restructuring plan, and we are confident that we will cease operations at the Canton Mill and Olmsted Falls facilities by June. We have also taken steps to support a smooth transition of our paperboard supply to avoid disruption to our customers and our remaining operations. As we outlined in March, the Beverage Merchandising Restructuring plan is expected to result in noncash and cash charges. We have since refined those estimates as follows: Non-cash charges are expected to be $320 million to $330 million, which reflects updated non-cash costs associated with accelerated depreciation of property, plant and equipment and other non-cash charges. Cash charges are expected to be $130 million to $160 million.

We have reduced the high end of the range to reflect lower-than-anticipated severance and other expenses at the impact of facilities. Finally, as we outlined previously, we have implemented a new management and operating structure for our Food Merchandising and Beverage Merchandising business as of April 1st. This is a major step towards achieving the run rate cost benefit that we highlighted in March. By combining the converting operations of our Food and Beverage Merchandising businesses, and exiting the Canton mill, we intend to leverage our collective efforts on Pactiv Evergreen’s core Food and Beverage Merchandising end markets and allow for a more profitable liquid packaging operation in the future. Not only does this align with our strategy to focus on our consistently growing higher-margin businesses, it also yields meaningful savings in annual operating costs and CapEx. We will begin reporting the financial results for the new Food and Beverage Merchandising segment with our second quarter earnings release and 10-Q.

Lastly, we have progressed the review of strategic alternatives for the Pine Bluff mill and Waynesville facility. We do not have a definitive timetable for this process, we intend to provide additional updates on the status of the review throughout the year. Turning to Slide 8. As our results indicate, we exited the first quarter on a solid trajectory and are taking the steps to improve our future EBITDA and free cash flow profile. As a result of the strong start to the year, we are now expecting our 2023 adjusted EBITDA to be in the $775 million to $800 million range. Of course, none of these accomplishments would be possible without the tremendous efforts of the great team at Pactiv Evergreen. I want to take this opportunity to thank everyone for their outstanding performance.

I will now turn it over to John to discuss our first quarter results in more detail including our segment performance before I provide an update on our strategic direction and closing remarks. John?

Jon Baksht: Thanks, Mike. Turning to Slide 9. As noted in our fourth quarter 2022 earnings call, our operating backdrop continues to be influenced by inflationary pressures that not only affect our cost structure but consumer behavior as well. While recently, we have seen a slight moderation in broader inflation measures they remain elevated relative to historical levels, and we expect interest rates, input costs and consumer spending to remain under pressure through 2023. Starting with volumes and demand, the destocking that impacted our fourth quarter volumes was largely completed during the first quarter, so we expect that particular headwind to subside for the remainder of 2023. The primary impact on consumer demand continues to be inflation.

In Foodservice, foot traffic in the quick service restaurant and full-service restaurant market segment has trended down compared to 2022 and consumers are also shifting their spend from higher-end full-service restaurants to mid- to lower-tier full-service restaurants and QSRs. In Food Merchandising, consumers have been balancing their food spending to deprioritize certain items such as bakery products. For Beverage Merchandising, oat sales were impacted by a scheduled cold mill outage while uncoated free sheet continues to face secular headwinds and consumption. With respect to pricing and mix, overall pricing levels are higher compared to the first quarter of last year as a result of our efforts to balance price versus volume throughout the course of 2022.

Relative to fourth quarter of 2022, material costs have improved slightly with more recent moderation in the current quarter. This dynamic has also benefited other aspects of our cost structure as transportation costs natural gas, energy and chemicals are all lower compared to last year. Lastly, we continue to monitor the interest rate outlook and capital markets volatility in the wake of the recent shocks to the banking sector to assess what, if any, impact that may have on the broader economy and the health of the consumer. Continuing on Slide 10. First quarter year-over-year results. Net revenues were down 4%. And Volume was down 6%, largely due to a focus on value over volume in the Foodservice and Food Merchandising segments and the market softening amid inflationary pressures in the Beverage Merchandising and Food Merchandising segments.

Price/mix was up 6% due to the contractual pass-through of higher material costs and pricing actions in all segments. Revenue for the first quarter of 2023 also included the results of divested businesses notably Beverage Merchandising Asia. Adjusting for these impacts, revenue is essentially flat. Adjusted EBITDA also benefited from year-over-year price favorability and lower transportation costs. The decrease in cash flow was impacted by lower operating cash flow due to higher incentive compensation payments and interest expense, partially offset by our strategic inventory investment in the prior year period. Moving to Slide 11 for a sequential quarter comparison. First quarter net revenues were $1.4 billion, down 3% versus the prior quarter.

Volumes were down 2% versus the fourth quarter while price and mix were down 1%, partially due to declining resin prices. Adjusted EBITDA was $189 million for the quarter, a $22 million increase from fourth quarter 2022 levels. Despite the slight decline in revenue, we benefited from lower material costs and lower employee-related costs, partially offset by higher manufacturing costs compared to the fourth quarter. First quarter free cash flow of $25 million was lower than Q4 due to lower operating cash flow caused by the timing of our annual incentive compensation payments, which occur in the first quarter. Continuing on Slide 12 and our results by segment. In our Foodservice segment, year-over-year, net revenues were down 6%. Volume was down 5%, primarily due to a continued focus on value over volume, Price/mix was down 1%.

Adjusted EBITDA down 3%. The decrease in adjusted EBITDA was due to higher manufacturing costs and lower sales volume, mostly offset by lower material costs, net of cost pass-through and lower transportation costs. Quarter-over-quarter, net revenues were down $19 million or 3%, primarily due to lower pricing driven by the contractual pass-through with lower material costs. Adjusted EBITDA was up $23 million or 26% due to lower material costs, net of cost pass-through, partially offset by higher manufacturing costs. On Slide 13, our Food Merchandising segment. Year-over-year, net revenues were up 9%. Price mix was up 15%, primarily due to pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier, and the contractual pass-through of higher material costs.

Volume was down 7%, primarily due to a focus on value over volume and the market softening amid inflationary pressures. Adjusted EBITDA was up 55%, the increase was due to a price/mix benefit, partially offset by higher manufacturing costs and lower sales volume. Quarter-over-quarter, net revenues were down slightly by $7 million or 2% and as the decline in sales volumes of 3% was partially offset by favorable pricing as pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier, offset the contractual pass-through of lower material costs. Adjusted EBITDA was up $10 million or 12% due primarily to a price/mix benefit, partially offset by higher manufacturing costs. On Slide 14, I’ll discuss the Beverage Merchandising segment.

A few important items to note here to put first quarter results in the proper context. In Q1, we performed a scheduled cold mill outage at our mill in Pine Bluff, Arkansas. These are typically done every 3 years and entail approximately 10 days of downtime for maintenance and service. At the same mill, we were impacted by Winter Storm Elliott at the start of the year, which also adversely impacted production. These events led to a meaningful degradation of EBITDA for the quarter. However, since early Q2, the mill has been back up and running with normal operations. Now for comparison to prior periods. Year-over-year, net revenues were down 8%. Price/mix was up 7%, primarily due to pricing actions taken to offset higher input costs and a contractual pass-through of higher material costs.

Volume was down 6%, primarily due to the market softening amid inflationary pressures and a decline of 9% was due to the impact from the disposition of beverage merchandising Asia. Adjusted EBITDA was down 96%. This decrease was primarily due to higher manufacturing costs and the impact from the disposition of Beverage Merchandising Asia, partially offset by favorable pricing, net of material cost pass-through. Higher manufacturing costs included $15 million related to the scheduled cold mill outage. Quarter-over-quarter, Net revenues were down $15 million or 4%, primarily due to 4% lower sales volumes, primarily due to the market softening amid inflationary pressures, price/mix was flat. Adjusted EBITDA was down $20 million or 95%, primarily due to higher manufacturing costs, partially offset by lower material costs, net of cost pass through.

Next on Slide 15. We have a summary of our balance sheet and the key components of our cash flow. We proactively reduced total debt during the quarter by repaying and repurchasing $110 million of our $1.2 billion term loan due 2026, marking a total debt reduction of $228 million since year-end 2021. Working capital increased compared to first quarter of last year, primarily due to the strategic investment in inventory over the course of 2022. Since year-end, we reduced our inventory positions in Foodservice and Food Merchandising while we built inventory in Beverage Merchandising in advance of ceasing operations in Canton in the second quarter. Additionally, we have tightened the range of estimated cash restructuring costs for Canton and Olmsted Falls, which we expect will afford us additional flexibility with respect to capital allocation.

We expect to pay out the bulk of the cash restructuring costs over the course of the second quarter through Q4 of this year. As a result of the debt repayment, our cash balance declined to $427 million and total debt declined to $4 billion, resulting in net debt of $3.6 billion and a net leverage ratio of 4.5x. We remain committed to maximizing our long-term free cash flow and reducing net leverage while maintaining our focus on driving profitable growth. We also remain committed to our dividend policy as part of our long-term capital allocation plans. Looking ahead to the rest of 2023, we anticipate ending the year with a net leverage ratio in the low 4s. We also plan to make additional debt repayments in 2023 as conditions warrant. Finally, as we progress our Beverage Merchandising Restructuring plan and strategic alternatives process for Pine Bluff and Waynesville, we’ll update our cash deployment plans accordingly.

Now please turn to Slide 17. Our company continues to execute at a high level across all our business units, and we remain well positioned to capitalize on future growth opportunities despite the near-term emphasis on the Beverage Merchandising Restructuring plan. As we have highlighted, the outlook for the U.S. economy remains uncertain as high interest rates and still elevated inflation, weigh on consumer spending, which may also negatively impact our customers’ purchasing decisions and order patterns throughout the remainder of 2023. Despite these headwinds, our first quarter results demonstrate the resilience of our Food and Beverage packaging business and the company’s ability to deliver sustainable results despite the uncertainty. As we highlighted earlier, we have increased our full year adjusted EBITDA guidance to $775 million to $800 million.

This reflects the expectation that we will build on the momentum of the first quarter to further improve productivity, throughput and customer service levels. We expect our quarterly performance in 2023 to follow a more traditional seasonality compared to 2022. Typically, our seasonality is driven by higher consumption during the summer months and into third quarter. Last year, the second quarter was our strongest quarter for adjusted EBITDA. This year, we expect a modest sequential upward trajectory from Q1 to Q2 and into the second half of the year, which will result in challenging year-over-year comps for Q2, the more favorable comps for Q3 and Q4. From a macroeconomic standpoint, our full year adjusted EBITDA guidance assumes no material deterioration in the second half of the year compared to current conditions.

Our full year guidance for capital spending remains unchanged versus our original guidance. While our expectation for total cash restructuring cost has been narrowed to $130 million to $160 million with the majority of these costs expected to occur during 2023. As a result, we are introducing new guidance for full year free cash flow, which we expect to be in excess of $200 million. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate this will help us achieve a net leverage ratio in the low 4s by year-end. I do want to provide some additional color on free cash flow and net leverage ratio timing from quarter-to-quarter. With respect to free cash flow, we expect to have negative free cash flow in Q2, followed by positive free cash flow during the second half of the year.

This is due to the timing of the cash severance payments and closure costs for Canton and Olmsted Falls, which are highly weighted in Q2. With respect to our net leverage ratio, what we are targeting to end the year in the low 4s, we expect a modest increase in Q2 as the second quarter of last year rolls off our LTM adjusted EBITDA figure in addition to the cash dynamic I just discussed. Since 2023 is expected to follow a more additional seasonal trend, we expect to see more consistent adjusted EBITDA results from quarter-to-quarter and declining net leverage through year-end. Moving to Slide 18. We have provided a bridge from our reported 2022 adjusted EBITDA to our previous and updated guidance for 2023 adjusted EBITDA. On the far left is our 2022 adjusted EBITDA of $785 million.

As we outlined in our first quarter earnings call, the adjusted EBITDA contribution in 2022 from divested businesses in our Canton mill operations on a partial year like-for-like basis was approximately $30 million. This brings our pro forma 2022 adjusted EBITDA to $755 million, which represents a like-for-like basis compared to our guidance for 2023 adjusted EBITDA. Our original guidance was for $755 million to $780 million of adjusted EBITDA for 2023, which represented 1.7% growth at the midpoint compared to 2022. With our revised guidance today, we now expect full year adjusted EBITDA in the range of $775 million to $800 million representing 4.3% growth at the midpoint compared to 2022. To put this into perspective, the Congressional Budget Office most recent estimate per U.S. real GDP growth in 2023 is only 0.3%.

I’ll now pass it back to Mike for further comments.

Michael King: Thank you, John. Please turn to Slide 20. This is an important year for Pactiv Evergreen as we build upon our foundational strengths and increase our focus on our core competencies, but it’s just as important to put 2023 into context of our strategic direction. Over the last 2 years, we expanded and strengthened our position in Foodservice and consumer packaging goods through our acquisition of Fabri-Kal, integrating great brands such as Greenware and Recycleware. We made great progress in refining our portfolio to focus on our core operations in North America by executing multiple divestitures of non-core businesses, including the sale of our Beverage Merchandising Asia business. This year, through the Beverage Merchandising Restructuring, we have taken significant steps to solidify our leadership position in large growing end markets while prioritizing our distinctive core strengths.

Through it all, we have made strides in our ESG stewardship and have set a goal of having 100% of our net revenue come from products made of recycled, recyclable or renewable materials by 2030. This past quarter, we published our first-ever task force on climate-related financial disclosures report and plan to integrate the results into our enterprise risk management program. In addition, we are actively working with our customers to develop unique products to help them meet their sustainability goals. A copy of the TCFD report may be found at investors.pactivevergreen.com under the ESG Documents section. Finally, we have dramatically reduced our net leverage profile from 7.6x at the end of 2021 to 4.5x as of 1Q 2023 through a combination of solid free cash flow, proceeds from divestitures of non-core businesses and improved EBITDA performance.

While 2023 is a transitionary year, we do expect to grow EBITDA and generate solid free cash flow despite the Beverage Merchandising Restructuring costs. We anticipate a continued reduction in our debt levels and our net leverage over the course of 2023. As John mentioned, we are targeting a net leverage ratio in the low 4s by year-end. We believe these actions will build additional momentum on our existing position as the market-leading North American food and beverage packaging company. We also expect our streamlined focus on our core converting operations to help us drive incremental revenue and EBITDA growth as well as enhance free cash flow conversion. This, in turn, would help us deliver dependable returns and reduce our net leverage to under 4x.

In summary, we believe we have a robust platform that enables profitable growth and sustained returns with the financial wherewithal to pursue organic and inorganic opportunities to add to our business. We continuously evaluate our portfolio to ensure that we have the optimal mix of products and capabilities to meet our customers’ needs and to ensure that we are deploying our capital to maximize shareholder value. We also maintain the flexibility to divest non-core businesses to help us focus on our core markets as well as delever our balance sheet. On Slide 21, I’d like to reiterate what makes Pactiv Evergreen a strong, differentiated, growing and socially responsible business. We are an industry leader in Foodservice and Food and Beverage Merchandising and our markets are largely recession resilient.

We are also focused on generating sustainable returns and the leadership team has demonstrated our willingness to optimize the portfolio in ways that put us in the best position to deliver on our commitments. We offer a broad array of products and substrates, and we have long-standing strategic partnerships with our customer base, many of which are blue chip companies. We are constantly working to innovate and develop the highest quality sustainable products. We set a goal of having 100% of our net revenues in 2030 come from products made of recycled, recyclable or renewable materials. All of this yields strong adjusted EBITDA and free cash flow generation, which we carefully managed to drive deleveraging and further growth through our disciplined capital allocation process.

in closing, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitments to our mutual success. With that, let’s open it up to questions. Operator?

Q&A Session

Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird.

Operator: The next question comes from Kieran De Brun with Mizuho.

Operator: The next question comes from Arun Viswanathan with RBC Capital Markets.

Operator: The next question comes from Anthony Pettinari with Citi.

Operator: The next question comes from Kyle White with Deutsche Bank.

Operator: [Operator Instructions] The next question comes from Cashen Keeler with Bank of America.

Operator: