Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pactiv Evergreen Inc (PTVE, Financial) announced a definitive agreement to sell its Pine Bluff paper mill and Waynesville extrusion facility to Suzano, allowing the company to focus on its core North American converting operations.
- The company is taking decisive actions to reduce operating costs by approximately $15 million through targeted headcount reductions and lower spend.
- Pactiv Evergreen Inc (PTVE) successfully repriced and upsized its senior secured term loans, reducing annualized cash interest expense by approximately $14 million.
- Despite challenging market conditions, the company remains committed to its long-term strategy and creating value for stakeholders.
- The company is leveraging its Pactiv Evergreen production system (PEPPs) to increase productivity and drive future cost savings.
Negative Points
- The second quarter results fell short of expectations due to weak consumer demand and temporary operational disruptions at the Pine Bluff paper mill.
- Adjusted EBITDA for the second quarter was $183 million, significantly below the internal forecast and the previous year's adjusted EBITDA of $217 million.
- The company experienced increased pricing pressure from customers who are more price-sensitive due to prolonged inflation.
- Net revenues for the second quarter decreased by about 6% compared to last year, driven by the closure of the Canton, North Carolina mill and lower sales volume.
- The company revised its full-year 2024 guidance downward, with adjusted EBITDA now expected to be between $800 million and $820 million, compared to the previous range of $850 million to $870 million.
Q & A Highlights
Q: Appreciate all the great color and the bridge for your full year guidance, how you get from what you had early in the year to the updated outlook. The $19 million you guys called out for volume/price-mix. Jon, it looks like based on your volume guide in the back half, it looks like it's maybe one-third volume and maybe two-thirds price cost. Is that how we should interpret that?
A: Yes. Thanks, Philip. It's a mix on the volume and price. In terms of breaking out the components that's volume, there is a component of the volume. I guess I'll give you the volume impact for the back part of the year. If you look at the general dynamic, we're looking at for Q3 and Q4, we're going to be up high-- or sorry, we're going to be up low single digits for the back part of the year. And really, both business units, we're seeing some volume pickups in both business units, we should see low single-digit volume growth. We don't really break out how much of the $19 million is volume related.
Q: So when we think about some of the pricing pressure you called out with your consumers kind of adjusting to consumer inflation and protecting your margins. Do you have a pretty good view on how that's going to be for this year based on how you're set up contractually and what you negotiated? Or is that still a very fluid situation at this point?
A: I think at this point, we have a pretty good view. And we've largely worked through a lot of the chat there on the back end of Q2 and starting the Q3. So based on a current environment, I think we have a pretty good handle.
Q: Okay. That's helpful, Mike. And then when I look at your foodservice business, volumes were relatively flat, but your EBITDA is down about, call it, 15% and price/mix was net positive off of material. So it seems like the miss was largely manufacturing costs and perhaps mix. Can you expand on that a little bit? And does that kind of linger in the back half as well? It just seems like a big number.
A: No, it's a bit of both, Phil. There is a mixed component to it. But as we talked about in the prepared remarks, higher manufacturing costs are part of it. We are facing the impacts of inflation. And there is-- that is impacting our results as the biggest components of inflation are largely going to be around labor, some utilities that we're feeling that pressure and our customers are also being very cost conscious that their consumers are being more price sensitive. So I think that's the piece that you're seeing some of that margin compression.
Q: Okay. And just one last quick one for me. The back half, you're calling call it $10 million of other cost drag and good guy from incentive comp. Does any of that have to do with curtailing your inventory just because demand is a little softer, that perhaps gets relieved as we kind of look at next year? Or give us a little more color on the back half drag on that front?
A: Yes. If you look at that $10 million, there's two big drivers. Part of it is lower absorption. So as you called out, there's going to be an increased broader cost to the lower volumes that we're seeing on the second half basis. And then that is offset by some of that incentive comp benefit.
Q: But nothing like your inventory is generally fine. It doesn't sound like you need cryptal your inventory at this point in the back half?
A: Well, we are going to bring down inventories in the back half of the year. If you look at our free cash flow, part of the free cash flow benefit, we're looking towards the back part of the year is a working capital benefit, including bringing down inventories to levels more similar to where we were at the end of last year. And if you look at the first half free cash flow levels, one is one of the reasons, if you look at the broader results, we would have liked to have seen a bit more free cash flow in the first half. But given some of the volume dynamics we touched on, we probably exited the first half of the year with a bit more inventory than we would have liked, but we expect to work that down to more normalized levels by the back part of the year.
Q: So maybe if you could-- love to get more color on some of the demand trends as you laid them out. I think especially on the Foodservice side, you alluded to some of the promotional activity kind of helping to mitigate volume declines. But more broadly, you kind of talked about expecting some-- I thought I heard low single-digit volume growth for both segments in the back half? And can you just help us kind of unpack that a little bit in terms of where the improvements have been more visible in the order pattern or what you're kind of counting on? And especially if there's any delineation in terms of product categories, especially for you guys on the food and beverage merchandising, which are a bit more distinct between the different type of customers and parts of the story you touch?
A: Yes. I don't think there's any secret to the QSR segment is clearly reacting and has started reacting at the end of Q2 to menu pricing and try to do things to promote. And so, we're here early Q3 starting to see that flattening to trending of those volumes come back. I would say we're a bit less optimistic of an inflection there just given the speed at which this is changing. Distribution, foot traffic remains strain. So while we continue to outpace foot traffic on the food away from home space, non-QSR food away-from home space, we're kind of seeing a slight improvement or flattening of that, but not what we'd call an inflection. And then on the food and beverage merchandising side, that remains to be strained. I think we're less strained in that space. But as people buy down, how they buy down and our categories specifically, we just expect that the back half and more line towards Q4, we'll see a low single-digit improvement.
Q: Okay. That's helpful. And then just on the footprint optimization, which I presumably would consider distinct from Pine Bluff and kind of wrapping up the restructuring of the Beverage Merchandising business. Still, it doesn't seem like you've heard a lot of those costs up to this point, if I'm looking at kind of the disclosures in the queue. Could you help us think about how much how far along you think you'll be before -- by the end of the year? And as we start to consider potential tailwinds from a fixed cost or overhead perspective and carrying into '25 when those benefits from a P&L perspective would become more evident.
A: Yes, sure. In terms of the footprint optimization and the program we
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
