Pactiv Evergreen Inc. (NASDAQ:PTVE) Q1 2024 Earnings Call Transcript

Pactiv Evergreen Inc. (NASDAQ:PTVE) Q1 2024 Earnings Call Transcript May 3, 2024

Pactiv Evergreen Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Pactiv Evergreen First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Curt Worthington, Vice-President of Strategy Investor Relations. You may begin.

Curt Worthington: Thank you, operator, and good morning, everyone. Welcome to our first quarter 2024 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. Managements remarks today should be heard in tandem with reviewing this presentation. Before we begin, our formal remarks, I want to remind everyone that our discussions today will include forward looking statements, including those regarding our guidance for 2024. 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, 2023 and our quarterly report on Form 10-Q for the quarter ended March 31, 2024 for more formal detailed discussion of these remarks. 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: Thanks, Curt. Good morning, everyone. Thank you for joining us today. Let me begin by commending our team on their efforts and contributions during the first quarter of 2024. The team’s dedication to our continuous improvement culture, a commitment to delivering for our customers, positions Pactiv Evergreen to adapt to dynamic market conditions and create value for all stakeholders. Turning to slide 4. I’ll start by highlighting the progress we made against our strategic priorities during the first quarter. Then I’ll discuss some internal and external dynamics we have been observing and actions we are taking to position the business for long-term success. Jon will then provide updates on our key financial metrics and discuss our outlook for 2024.

At the end of the call, we’ll open it up for Q&A. Turning to slide 5. I will start with a few key themes that underpin our performance during the first quarter and also provide some context and our progress against our strategic priorities. First, despite the first quarter presenting us with an irregular business environment, our team delivered solid results. Adjusting EBITDA for Q1 of 2024 was $168 million, which was at the high end of our guidance provided during our fourth quarter earnings call. Our results largely reflect a lower pricing environment, which was partially driven by lower raw material cost and the cumulative effect of sustained price inflation on consumer spending resulting in lower volumes. We also saw higher employee-related costs, partially offset by lower manufacturing and transportation costs.

Volumes decreased 3% in the quarter compared to the prior year, primarily due to a focus on vary over volume in the food and beverage merchandising segment. Volumes also reflected the market softening amid inflationary pressures. During the fourth quarter earnings call, we highlighted weather-related reductions in restaurant foot traffic and the residual impact on our customer supply chains. We were able to mostly offset this dynamic as well as the impact it had on our results. Second, we find ourselves navigating a landscape that remains dynamic. While there are signs the economy is still bland, and overall inflation has moderated compared to the last two years, we hear from our customers that the financial health of the average consumer in the United States is still strained.

Since early 2020, consumer prices have increased 21%, while food prices have increased 26%. At the same time, reports indicate that the total household savings have been depleted to below pre-pandemic levels. The net effect is a cautious consumer who is still adjusting to a potentially lasting step change in the cost of living. Third, I want to underscore that we are executing on a multiyear playbook of cost management initiatives. As I mentioned earlier, the broader market environment remains dynamic. We believe our disciplined approach and focus on managing our costs will help us navigate the current market conditions. Free manufacturing cost reductions to the logistics process improvements, our teams are focused on identifying inefficiencies and eliminating unnecessary expenses.

We expect sequential improvements into the second half of the year, providing an additional layer of earnings momentum in 2024. While we expect the effects from the recent inflationary uptick to persist through the second quarter, before seeing signs of improvement during the second half of the year, our focus remains on building volume momentum. We are leveraging our longstanding partnerships with blue chip customers, in addition to our innovative product portfolio to gain share across our end markets. On that front, we’ve entered new agreements with new existing customers across our business, including QSRs, distributors, and CPG customers, and expect those to ramp up during the second half of 2024, demonstrating our ability to execute and win.

We continue to invest in robust data analytics that enables us to better allocate resources to the markets that maximize our profitability. We are then able to leverage this capability to make informed choices that ultimately guide our portfolio and underpin our value over volume approach. We are also prioritizing our customer service levels, which have remained strong. The actions we are taking today are consistent with our transformational journey, and we believe they position us for long-term sustained growth. Fourth, we are reiterating our full year outlook. While Jon will provide greater detail around our specific assumptions, I want to provide some context. We are well positioned and expect to see an improvement in volumes during the second half, partly due to seasonality, but also due to our pipeline of customer wins, which are expected to ramp as we progress through the rest of the year.

In addition, we have lined the site to a number of cost-saving actions through the second half of 2024 that we expect to help us generate year-over-year adjusted EBITDA growth. Given the actions that we have taken previously, our company is better equipped to adjust to market signals than in past years. We are able to scale quickly to evolve in market conditions while simultaneously capturing cost savings opportunities. Regarding the recent rise in inflation data, which is a bit of a divergence from the previous multiyear improvement trend, we do not currently anticipate a meaningful change in the market dynamics during the second quarter. With the recent uptick in inflation and the resulting effect on both the consumer and our customers persist beyond the second quarter, we would expect our full year guidance to come in at the lower end of our guidance range.

Turning to slide 6, I will address other key drivers influencing our performance through 2024. Year-to-date restaurant food traffic is down compared to last year. Reflecting weakened consumer health and continued trading down to lower-cost food options, and to a lesser extent, the severe weather experienced in January. We continue to leverage our unique value proposition with our customers, which we believe has allowed our food service business to outpace its end markets and has supportive strategic value over volume decisions within our food and beverage merchandising segment. Over the last few months, the pace of inflation has accelerated, which has made the current environment less conducive to a volume improvement. Many of our customers that were able to grow earnings over the past several years by trading volumes for pricing are leaning more heavily on their own cost structures to offset heightened price sensitivity by consumers.

We have reached a point where, after several years of persistent inflation, consumers are less able to absorb further food price increases. While commodity input costs have trended down over the past two years, recent macroeconomic developments suggest that raw material costs may trend a bit upwards. For example, the price of oil has recently increased, which has introduced more volatility in resin prices compared to last year. That said, we ultimately passed the resin costs on to our customers and do not expect recent volatility to have a material impact on results in the near future. We are also taking actions to mitigate the impact of higher oil prices and our transportation costs. We continue to monitor and navigate the dynamic nature of our business.

We are confident in the actions we have taken over the last several quarters to position us to deliver against our long-term strategy as evidenced by our Q1 results. With that, I would now like to turn the call over to Jon. Jon?

Jon Baksht : Thank you, Mike. I’ll start with our first quarter highlights on slide 8. Before I cover the results in detail, I’ll provide some context for our performance in the quarter. As we outlined in March, we expected our Q1 results to be impacted by lower volumes and the continued adjustment of consumers to higher for longer inflation. We also outlined the actions we’re taking to build earnings momentum for the remainder of 2024 including volume growth and cost improvements. Based on that backdrop Q1 was generally as expected. We reported net revenues of $1.3 billion for the quarter which represents a decrease of about 13% compared to last year. The decrease was largely due to the closure of our Canton North Carolina mill operations during the second quarter of 2023.

Lower pricing due to the pass-through of lower material costs and lower sales volume. Lower sales volume generally reflected a focus on value over volume in the food and beverage merchandising segment and market softness amid inflationary pressures. Excluding the impact of the Canton mill closure our revenue is down approximately $95 million or 7%. Overall, volumes were down 3% in the quarter. Food service volumes are slightly negative year-over-year but outpaced industry foot traffic trends, which were down more than 3% during the quarter. Food and beverage merchandising volumes decreased mainly due to strategic value over buying decisions as we continued to optimize the portfolio. Underlying industry demand and food and beverage merchandising was roughly flat outside of those actions.

Price mix was down 4%, which was mostly a function of lower contractual pass-throughs driven by lower raw material costs compared to the prior year period. Adjusted EBITDA was $168 million at the high end of our guidance range provided in March, but an 11% decrease compared to the prior year. The decrease in adjusted EBITDA reflects lower pricing, relative material costs pass-through, reduced sales volume, and higher employee-related costs, partially offset by favorable manufacturing and transportation costs. Our adjusted EBITDA margin was 13.4% compared to 13.2% in the prior year period. Our year-over-year adjusted EBITDA comparison also reflects the one-time impact from the extension of key business of approximately $8 million in Q1 of last year.

This had a positive impact on prior year adjusted EBITDA margins. During the first quarter, free cash was negative $74 million, which is impacted by seasonal factors, including typical inventory build ahead of the summer season in Q2 and Q3. By comparison, during Q1 of last year, we experienced a working capital benefit as we were in the process of working down our strategic inventory build from 2022. Entering this year, our inventory is closer to normalized levels. As a result, I would characterize the inventory build in Q1 as more typical for our company. We remain committed to be leveraging our balance sheet and are focused on maximizing long term free cash flow generation. From a quarter-over-quarter perspective, revenues decline 2% due to a lower sales line, the decrease is generally driven by seasonal trends in the food service segment.

Adjusted EBITDA was 19% lower, mostly due to higher manufacturing and material costs and lower sales volume primarily due to seasonal trends in the food service segment. Continuing to slide 9, we will look at results by segment beginning with food service. Net revenues were down 3%, year-over-year, mainly due to lower pricing reflecting the pass-through of lower material costs and unfavorable product mix. Volumes are down marginally. Food service is still contending with challenging consumer dynamics, but we believe our business is more resilient than the broader industry, with our segment volumes outpacing industry foot traffic data. Price mix was down 2%, reflecting lower than expected demand from some of our higher margin transactional relationships, as well as a higher weighting to lower margin product categories.

Price is down slightly due to the lower contractual pass-throughs. As Mike previewed during his prepared remarks, we have started to see increased price sensitivity from some of our food service customers. While we were largely able to offset this dynamic during the quarter, we anticipate this headwind will persist through the balance of the year. Adjusted EBITDA decreased to 15% compared to last year to $90 million, and adjusted EBITDA margins decreased by just over 200 basis points. The margin variance reflects unfavorable product mix, higher manufacturing costs, and lower pricing, net of cost pass-through. On a quarter-over-quarter basis, our results were impacted mainly by lower volumes, which are attributable to seasonal trends. Similar to our year-over-year comparisons, our volumes on a quarter-over-quarter basis outperformed broader industry foot traffic trends, which is consistent with our strategy to align with customers winning in their respective end markets.

Net revenues were down 5% sequentially, mostly due to seasonal volume dynamics. Adjusted EBITDA declined 20%, driven by lower sales volume and higher manufacturing costs. Turning to slide 10. Food and beverage merchandising experienced a continuation of the themes from the fourth quarter as retail food at home prices are still elevated compared to historical levels, despite moderating more noticeably than food away from home prices. The end result is that consumers are curbing their spending and weighing their budgets towards staples like protein and eggs. Our produce packaging benefited from easier comps as heavy rains and flooding in California last year delayed the harvest into the later part of 2023. Our beverage carton business also benefited from non-dairy drinks that utilize our packaging formats.

On a year-over-year basis, net revenues were down 22%. Volumes are down, mostly due to the Canton North Carolina mill closure in May, 2023 largely due to the pass-through of lower material costs and lower sales volume. Excluding the Canton impact, volumes were down 4%, mainly due to a focus on value over volume and lower demand for discretionary food products like bakery items. Adjusted EBITDA decreased 1% compared to the last year, primarily due to lower sales volume, unfavorable product mix, lower pricing, net of material costs pass-through, partially offset by lower manufacturing costs. Adjusted EBITDA margins increased by just over 300 basis points due to progress in our beverage merchandise restructuring. The first quarter of 2023 also included the one-time impact from the extension of key business of approximately $8 million in Q1 of last year mentioned previously.

On a sequential basis, net revenues were up 1% due to a marginal improvement in sales volume, while pricing and mix were consistent over the prior period. Adjusted EBITDA declined 12% both due to higher manufacturing and raw material costs, partially offset by lower transportation costs. Turning to slide 11, we have a summary of our balance sheet and key components of our cash flow. The slide I’ve taken our leverage during the quarter was expected as a result of an increase in net debt and lower LTM-adjusted EBITDA. However, we still anticipate ending 2024 with the net leverage ratio in the high 3s. In terms of free cash flow, we experienced a $74 million outflow, which partially reflects lower profitability compared to last year, as well as a seasonal inventory bill heading into the summer months.

On Wednesday, we further amended the credit agreement to increase the capacity on our revolving credit facility from $250 million to $1.1 billion, materially enhancing our available liquidity and extending the maturity date to May 1, 2029. We also amended the applicable interest rate and other pricing terms, including by replacing the facility fee with a lower fee on unutilized capacity. There were no other material changes to the terms of the credit agreement. As it relates to our capital allocation priorities, our approach remains aligned with our long-term strategy and underlying consumer trends. We are committed to delivering profitable growth, which in turn will allow us to meet our goals to delever the balance sheet and preserve liquidity.

Our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth, and we believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing returns to stakeholders. Turning to slide 12, as Mike mentioned, we are reiterating our financial guidance for fiscal 2024, including our adjusted EBITDA range of $850 million to $870 million. We expect near-term challenges, such as lower consumer demand, to persist into the second quarter. That said, we are also optimistic about the actions we are taking to mitigate costs, drive operational improvement, and increase volumes during the second half of the year. As Mike noted earlier, our Q2 results may be unfavorably impacted by the recent rise in the consumer price index and overall food prices in March, which may tamper the magnitude of a volume inflection outside of typical seasonal factors during Q2.

Against that backdrop, we believe the actions we have taken to build volume momentum in the second half of the year, in addition to cost reduction initiatives we have implemented, the position was to achieve adjusted EBITDA within our full year guidance range. To put a finer point on the second half inflection we are guiding to, we expect an improvement in adjusted EBITDA for the second half of the year of more than 30% compared to the first half. Approximately half of that improvement is related to our Pine Bluff mill which just completed a planned outage in April. The remaining sequential adjusted EBITDA growth volume accounts for the majority of the expected improvement while the remainder is attributable to cost savings and favorable price mix.

For further context on the volume growth component, we expect most of that to be driven by seasonality and general market improvement, with the remainder resulting from our strategy of aligning with core customers that are outperforming their end markets. In addition, our full year guidance is based on modest improvement in industry volumes predicated on continued moderation and inflation throughout the year, coupled with expanded volumes with several new and existing customers. If inflation pressures persist and impact the consumer, our full year results will trend towards the lower end of our guidance range. Our full year guidance for capital spending and free cash flow remains unchanged versus our original guidance, and we still expect net leverage to be in the high threes by yearend.

With respect to the beverage merchandising restructuring, we have narrowed our guidance to approximately $160 million of cash restructuring charges and approximately $330 million of noncash restructuring charges. As of Q1, we have recorded substantially all of the expected restructuring costs for that initiative. With respect to our footprint optimization plan, the expected restructuring charges remain at $50 million to $65 million, and total noncash restructuring charges remain at $20 million to $40 million. These costs are expected to occur in 2024 and 2025. We’ll provide further updates on the footprint optimization as it is implemented. To wrap up, our first quarter tracked closely to our expectations, driven mainly by the actions we undertook to position our business for second-half momentum and long-term growth.

While we expect relative weakness in the near term, we are confident in our plans for the rest of the year. Within both segments of our business, we expect to deliver margin expansion in the second half of the year, credit improvements in the trajectory of volume and mix. Our team remains focused on executing our strategy and positioning our business to build momentum and achieve our full year guidance. With that, I’ll turn the call back over to Mike.

Michael King : Thanks, Jon. Before we open up the line to Q&A, I want to reiterate that we believe we have a robust platform that enables profitable growth and sustainable returns long term. We’re industry leader in food service and food and beverage merchandising and remain focused on generating sustainable returns. Our management teams demonstrate our willingness to optimize the portfolio we deliver on our commitments. We continue to leverage our longstanding strategic partnerships with our customer base, many of which are blue chip companies and are constantly working to innovate and develop the highest quality sustainable products. We expect that the actions we are taking today will yield solid adjusted EBITDA and free cash flow generation, which we carefully manage to drive deleveraging and further growth through our discipline 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 commitment to our mutual success. That concludes our prepared remarks. Wit that, let’s open up the line to questions. Operator?

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Q&A Session

Operator: [Operator Instructions] And our first question will be coming from Anthony Pettinari of Citi.

Bryan Burgmeier: Good morning, this is Bryan Burgmeier on for Anthony. Thank you for taking the question. Maybe just to start, just a question on kind of the revised outlook, I totally understand that ongoing inflation is a concern. Can you just maybe help us kind of understand the magnitude? Is it greater on the top line in the form of consumer spending and volumes? Is it going to be greater on the bottom line for rising costs? And can you help us frame maybe which segment is seeing the greater impact right now?

Michael King: Yes, I’ll take the front end of that. So we reiterated our guidance. We didn’t revise our guidance, so I just want to make sure we get that out there.

Bryan Burgmeier: Got it, yes, definitely.

Michael King: Yes, and then, Jon, if you want to follow up with.

Jon Baksht : Yes, sure, I’ll reiterate a few comments that I made in the prepared remarks here just to give you a sense of where the improvement is coming from. So the second half improvement, we’re expecting 30% growth from the first half to the second half from an EBITDA perspective. So 50% or approximately 50% is coming from Pine Bluff. So I mentioned we had a planned outage in April, which is now behind us. We also had some weather-related down time on that mill in the first quarter. So there’ll be a meaningful improvement from just the operations of Pine Bluff. The remainder, the majority is driven by volume. Some of that is seasonality, going into the back part of the year. Part of that is general market improvements as some of the current market environments were expecting some easing there.

And as we mentioned, growing with some key customers. And so we’ve had some customer wins that will ramp up with some volume going into the second half of the year. The remainder is cost savings. And some favorable price mix it were affecting.

Bryan Burgmeier: Got it. Thank you. Thanks for the detail. And then maybe just on those new business wins that you flagged, you’ve been talking about kind of winning alongside your strategic customers for a while now. Maybe which end market is maybe winning the most? It sounds like it’s in QSR. And then is there any sort of trends? Are people asking for more paper, more plastic? Is it about cups or trays? Just any detail on kind of where those business wins are. Thanks, I’ll turn it over.

Michael King: Yes, good question. So I wouldn’t say it’s in any one segment. I’d say we’re kind of seeing our partnership across all of our end markets yield success. So as we’ve partnered, both on the beverage and food merchandising side, as well as the food service side, we’re seeing new volume and share gains in just about every one of our channels. I would tell you, we are not seeing any substrate, any major substrate shift or anything at the moment. It’s really pretty mixed across both fiber-based and poly, so hope that covers it.

Operator: And our next question will be coming from Ghansham Panjabi with Baird.

Ghansham Panjabi: Hey, guys, good morning. Michael, just kind of going back to your comments, and just trying to reconcile them. So at least from our vantage point, last year was the year of recession, if you sold into the CPG channels. And it’s logical to assume that sort of morphs into the food service channel as well. Is it your assumption that, I mean, are you assuming that things get tougher in terms of food service as the year goes on, or are you actually seeing that? I’m just trying to disaggregate your comments.

Michael King: Yes, so if you take Q1 as an indicator, the broader food service in markets, I think, if you look at foot traffic. We look at foot traffic as one of our indicators down close to 4%. And if you look at our performance, we were substantially less a low single-digit, one and a half-ish type down on the units for food service end markets. And if you think about, kind of the early days of Q2 here and, our key customer earnings reports on the food service side, it’s no secret that they’re beat up right now and that there needs to be a change. And so back half, volume recovery for us and kind of what we’re anticipating is kind of that low single-digit recovery, so promotional activity, we’ve seen inventories, get healthy here over Q1 with our customers.

And we probably expect that the joint kind of recovery would be, the value they’re trying to create the supply chain, our customers are creating the supply chain, creates the ability for them to promote, and we’ll see that come through largely in that low to single-digit recovery with the end customer.

Ghansham Panjabi: Thanks for that. And then your comments on the customers less able to push pricing and focusing on the cost structures. Maybe you can expand on that, and then just the corollaries to that would be, if your food service customer starts stressing the value portion of their menus, which seems to be the case, just judging by the comments they’ve made this week, how does that impact you, if at all?

Michael King: Yes, it definitely has an impact. We reported in Q4 that we started to see the customer approach start to shift. They certainly are looking for ways to create value, and they’ve turned on their vendor bases, and so we’re not insulated from that. And so as we, partner with our customers, we’re looking for ways to help them, A, to create value within their own portfolios, and then B, there’s certainly continue to be pressure on the entire cost structure. So I would say that has certainly ramped up here in Q1, and we don’t expect that to slow down in Q2. So, yes, I think you get that right. I don’t anticipate a shift in their inventory approaches or anything that would make the supply chain more fragile, but I do expect that, they’re going to our customers, and certainly we are looking to leverage our inventory help to grow sales and promote the customers for traffic especially in food service.

Operator: And our next question will be coming from Philip Ng of Jefferies.

Philip Ng: Hey, guys. Mike, I guess, piggybacking on Ghansham’s question, where perhaps you’re seeing your customers under more stress, is that largely a food service comment? Because a lot of the packaging companies that have more food and beverage consumer staple exposures are talking about, hey, the destock happened in fourth quarter. Things are kind of bottoming out in 1Q and perhaps getting a little better in 2Q. Just kind of help us contextualize perhaps where things are a little more choppier and how we think about the back half, I guess, perhaps.