Q3 2020 Pactiv Evergreen Inc Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome.
Welcome to the pact Evergreen Inc. fiscal third quarter 2020 earnings conference call.
At this time, all participants have been placed on a listen only mode and the lines will be open for your questions. Following the presentation.
I'll now turn the call over to positive evergreen.
Thank you operator before.
Before we begin please visit the events section of the company's Investor Relations website at Www Dot packed is ever green dot com and access the Companys supplemental earnings presentation.
Managements remarks today should be heard in.
Tandem with reviewing this presentation.
Before we begin our formal remarks I need to remind everyone that our discussions today will include forward looking statements.
These forward looking statements are not guarantees of future performance.
And therefore, you should not put undue reliance on them. These statements.
We 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 for a more detailed discussion of the risks that could impact our future operating results and financial condition.
Lastly.
During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to compare.
Terrible GAAP measures are available in our earnings release.
On the call today, we have John Mcgrath, Chief Executive Officer, and Michael Ragan, Chief Operating Officer, and Chief Financial Officer with that let me turn the call over to John Mcgrath John.
Good morning. This is John Mcgrath, She's youre active evergreen.
Hey, both myself and Mike Reagan, our CFO and COO will present.
We just mentioned today, we will be presenting at investor deck found on our IR website, which you can access at www dot.
Active ever Green Dot com.
Please turn now to slide three.
During this presentation, we will discuss she take away in Q3 highlights.
A brief summary affected other great.
Our Q3 financial performance for continuing operations.
And our full year.
2020 outlook.
Please turn to slide four.
There are four key takeaways from today's presentation.
First we successfully completed our IPO and debt refinancing transactions.
Second our revenue and EBITDA have recovered from.
For Q2 cold weather related losses third.
Third our strategic investment program is on track from both the Stan I'm, a better perspective, and finally, our outlook for full year adjusted EBITDA is between 615 and $630 million because.
This is our first earnings release, we are providing guidance for full year 2020.
Going forward, we will guide annually with quarterly updates please.
Please now turn to slide five.
We are encouraged by our Q3 results in light of the COVID-19 panned.
Net revenues of $1.195 billion improved substantially from Q2.
And were close to our expectations for Q3.
As expected net revenues in Q3 were down versus the same period last year.
Adjusted EBITDA.
We have $173 million also improved substantially off of Q2 Lowe's was at our expectations for Q3 and was slightly below prior year.
Net loss from continuing operations of $143 million includes $105 million.
Of noncash tax valuation allowance.
Free cash flow defined as adjusted EBITDA less capex was favorable versus both Q2 and same period last year.
Versus Q3 2019.
While adjusted EBITDA was down.
This was more than offset by lower capex.
Our strategic investment program remains on track and has provided an incremental $45 million of adjusted EBITDA through Q3 2020.
In total this program has delivered $101 million since.
Its inception.
And finally, we completed refinancing to extend average maturity to 5.3 years and lowered the average interest rate to 4.1%.
Please now turn to slide six.
Here are the bridges for revenue and adjusted EBITDA.
The net revenues in the third quarter of 2020 or $1.195 billion compared to 1.306 billion in the prior year period.
The decrease was primarily driven by lower volume largely due to the unfavorable impact from COVID-19 pandemic.
As well.
As low pricing, mainly due to lower raw material cost pass through to customers.
Adjusted EBITDA was $173 million in the third quarter of 2020 compared to $177 million in the third quarter of 2019.
The slight decline was primarily due to higher.
The faction costs, driven by planned mill outages and lower volume driven by the COVID-19 pandemic.
Partially offset by favorable sell price versus raw materials spread.
Ruble logistics costs and lower employee related costs.
Please.
Now turn to slide seven.
At this time I would like to provide a high level overview of active evergreen for those who are not familiar with our company.
We are the largest north American producer of fresh food and beverage packaging offering the broadest range of sustainable solutions based products.
One of the most strategic growth oriented customers across all segments, we participated.
In fact active evergreen is the number one packaging supplier the four of the five largest foodservice distributors three of the largest restaurant chains eight of the 10 largest supermarket chains and three of them.
Largest there are.
Our size scale and national footprint provides an unmatched value proposition for our customers and our huge competitive advantages for us.
We are two thirds of the way through our strategic investment program on a spend basis in our state of the art assets.
And helped drive sustainable earnings growth.
Material science expertise and product development capabilities continue to provide the market with on trend highly functional products that our customers want and are willing to pay for.
And our management team is focused and passionate in leading and motivated debt.
In the workforce in pursuit of profitable growth.
Please now turn to slide eight.
Our business is organized into three segments foodservice servicing customers such as Mcdonalds Osisko food.
Food and merchandising, where we provide packaging solutions to customers.
Summers like Walmart and Purdue and.
And beverage merchandise, providing packaging and equipment to our partners like they're known and Florida's natural.
In each of these segments, we hold leading share positions in most categories. Additionally, 65% of our sales come from products that are made from.
Getting cycle recyclable or renewable materials and our products are made in the USA.
We serve growing recession resilient end markets, we provide the broadest range of products, including things like food containers tops plates trays coperion beverage part.
Recent made from fiber resin and aluminum.
We also have strong deep and longstanding relationships with winning distributors restaurant chains supermarkets, and food and beverage processes. Most of our businesses on three to five year contracts and we typically have raw material pass.
Groups.
We have a network of 58 manufacturing plants and eight mega warehouses that are well invested and they're in strategic locations to service our customers and we are committed to sustainability in everything we do.
Please turn to slide nine.
Let's look at each of our segments in greater detail beginning with foodservice.
Year to date 2020, our foodservice segment had net revenues of $1.4 billion and $170 million of adjusted EBITDA.
The products, we sell in this segment allow consumers to eat.
And drink fresh food and beverages anywhere anytime.
Customers include restaurants, like Burger, King and Chick Fil, a and foodservice distributors, such as Cisco and Us foods in.
In this segment, our breadth and depth of product offering makes us a one stop shop for our customers, which.
With our national footprint improve service and create significant entry barriers, whether it's on premise dining or takeout and delivery of food and beverages, we make the products that our customers and consumers want more.
Moving to food merchandising year.
Year to date 2020.
Our food merchandising segment, and net revenue of $1 billion and $186 million of adjusted EBIT product.
Products in this segment enable fresh food to be displayed in supermarkets like whole foods, and albertsons or packaged food this slight tyson or Campbell's think.
Think about going.
Going into a supermarket and walking around the perimeter of the store.
You will find our products in the meat eggs produce bakery deli and prepared foods departments, we are well positioned to capture the consumer trends around increased fresh food consumption and we are benefiting from the recent shifts.
The more food being prepared and consumed at home.
Finally beverage merchandising year.
Year to date 2020, our beverage merchandise segment had net revenue of $1.1 billion and $112 million of adjusted EBITDA. We.
We are the number one integrated global produced.
Sir of highly decorated fresh beverage cartons and provide a one stop system from cartons fulfilling machinery.
Our vertical integration coupled with our technical support creates the lowest cost solution, an unrivaled service for our customers like silk and Tropicana.
While ensuring their production facilities operate seamlessly this.
This allows us to continue to capture growing demand for almond soy and organic milk.
Juices and liquid food products. Our cartons are typically found in the fresh milk and use cases of the supermarket as well as.
In schools hospitals and other institutional settings.
Please now turn to slide 10.
Effective evergreen environmental social and governance or not just words on a page they are guiding principles in everything we do six.
65% or three.
$3.4 billion of our 2019 revenue was from products that are made from recycled or renewable materials or that are recyclable at the end of use our goal is to be at a 100% by 20 Threerd.
Additionally, we have reduced our greenhouse gas emissions by 10% over the last.
Yes, our number one priority is to ensure a safe and accommodating work environment for our employees.
Our industry, leading safety metrics measured as a rate per 100 employees demonstrates that we are two to three times better than our peer group in all categories.
From a government standpoint.
The majority of our board of directors, including our chairman our independent.
Additionally, we have implemented lead development programs to ensure we develop our high performing talent for future assignments I will now turn it over to Mike for a detailed financial review.
Thanks, John.
Moving to slide 12.
Looking at our third quarter 2020 financial performance net revenue for the quarter was $1.195 billion.
This is 1.306 billion in the same period last year, a decline of 8%.
As far as expected with the decline.
Mind, you to the impact of the Cobot, 19, pandemic and lower pricing, mainly due to lower raw material costs passed through to customers.
Key impacts were in our foodservice and beverage merchandising segment.
Both mostly due to the effects of COVID-19.
I will talk to each segment on the.
Slide.
Adjusted EBITDA for the quarter was $173 million versus $177 million in the same period last year a decline of 2%.
Adjusted EBITDA was below prior year due to higher manufacturing costs, driven by the timing of planned mill out.
Ages, lower volume driven by the impacts of the COVID-19 pandemic and lower pricing.
Partially offset by favorable raw material costs net of lower cost pass through to customers.
Favorable logistics costs and lower employee related costs.
Free cash flow.
Defined as adjusted EBITDA less Capex was favorable to the same period last year.
Whilst adjusted EBITDA was down this was more than offset by lower capex.
We have previously talked about our mill outages.
In late September and early October we successfully completed.
A toll mill outage Canton, North Carolina Mill.
During the outage, we did have a five course, a one day delay in style and will increase operating costs by $5 million in Q4 2020, as we implement of workarounds for the fire affected part of the mill.
Tragically.
Two contractors lost their lives in the file outcomes.
Our condolences to the families of these contract wins.
We've also combined our Pine Bluff, Arkansas October outage would be already scheduled January outage shifting costs of $7 million to $8 million from 2020 2021.
Moving to slide 13.
In Q3, our foodservice segment saw net revenues down 13% versus same period last year.
Due to the impact of COVID-19 on volumes and lower pricing due to pass through of lower raw material costs to customers.
Adjusted EBITDA for the.
Segment was down 9% versus same period last year due to lower sales volume due to the impact of COVID-19, and higher manufacturing costs, partially offset by lower raw material costs and lower logistics cost.
Adjusted EBITDA margin in this segment improved from 16% in third quarter.
Got a 20, 19% to 17% this quarter.
In Q3, our food merchandising segment revenues were up 1% versus same period last year due to favorable pricing, partially offset by lower cost passed through to customers unfavorable foreign currency impact and lower volume.
Adjusted EBITDA for the segment was up 29% versus same period last year due to favorable material costs net of lower costs passed through to customers, partially offset by lower sales volume.
Adjusted EBITDA margin in this segment improved from 16% in third quarter 2019 to 20.
As in this quarter.
In Q3, our beverage merchandising segment revenues were down 10%.
In the same period last year due to lower sales volume and lower pricing Juicy the impact of the COVID-19 pandemic.
Adjusted EBITDA for the segment was down 47% versus same period last.
Okay, due to lower pricing and lower sales volume due to the impact of the COVID-19 pandemic and increased manufacturing cost due to planned mill outages in the current year quarter.
These items were partially offset by lower raw material costs, driven by wood supply as markets have returned to historical normalized levels from price.
Maybe a weather related increases.
And lower employee related expenses.
Adjusted EBITDA margin in this segment declined from 11% in third quarter, 2019% to 7% this quarter, mostly due to outage timing.
Moving to slide 14.
John earlier touched.
Net loss from continuing operations for the quarter at a loss of $143 million.
There are numerous significant and or unusual items in the period that are not necessarily representative of underlying operational performance and so we'll briefly walk through this reconciliation of net income to adjusted.
On it.
And free cash flow.
The third quarter 2020.
Our loss from continuing operations was $143 million.
We had income tax expense of $43 million, which includes a 105 million dollar noncash tax valuation allowance.
The deferred interest deductions.
The increase in the valuation allowance reflects the reassessment of the Recoverability of our deferred interest deductions following the distribution of GPC in September 2020.
Depreciation and amortization was $73 million.
Net interest expense was $87 million.
Foreign exchange losses on cash for $42 million.
This was mostly due to currency movements on our large us dollar cash deposits.
Until shortly before the IPO the holding company was domiciled in New Zealand and therefore, New Zealand dollars.
As was the base currency.
The holding company's Thomas Hall is now the United States.
Goodwill impairment charges was $6 million these relate to and payment of the remaining Cxi South America business.
Loss on sale of business and non current assets $1 million.
Non cash pension income $18 million.
Operational process engineering related consultancy costs $3 million.
Related party management fee $44 million following.
Following the IPO, we are no longer chat charge the related party management fee.
Restructuring.
Asset impairment and other related charges $40 million. This includes a noncash impairment charge of $11 million related to the remaining see OSI South America business, bringing the total noncash charges relating to classifying the business as held for sale to $17 million for the quarter.
Strategic review and transaction related costs $24 million.
These costs represent costs incurred for strategic reviews of our businesses as well as costs related to our IPO that cannot be offset against the proceeds of the IPO.
Unrealized gain on derivatives of $1 million and other.
$1 million, providing for an adjusted EBITDA of $173 million.
Capital expenditures for $69 million, providing to free cash flow of $104 million.
Further details on each of these items provided in our form 10-Q.
Moving to slide 15.
[music].
COVID-19 continues to have an impact on our business, most notably in our foodservice and beverage merchandising segments.
Each segment is experiencing revenue and associated manufacturing absorption impacts and increased costs related to employee pay support and safety.
Due to the impact of the pandemic in Q3, our foodservice segment, so revenue reduction of $54 million and adjusted EBITDA reduction of $26 million versus same period last year.
Well so year to date the segment has seen revenue reduction of $179 million and.
And adjusted EBITDA of $88 million.
In Q3, our food merchandising segment saw revenue reduction of $5 million and know adjusted EBITDA impact both the same period last year.
Well see year to date the segment has seen revenue reduction of $70 million and adjusted EBITDA of $6 million.
In Q3, our beverage merchandising segment, so revenue reduction of $40 million and adjusted EBITDA reduction of $21 million versus same period last year.
While so year to date the segment has seen revenue reduction of $88 million and adjusted EBITDA of $52 million.
We continue to focus on the safety of our employees and the markets and products that will thrive during and post coated 90.
Moving to slide 16.
Our strategic investment program is a full year 661 million dollar program that commenced in 2018 and focuses.
On growth Capex for capacity expansion and the launch of sustainable products.
Productivity Capex, most notably our automation integrated supply chain factory, EFTA intelligence, and other cost savings initiatives and onetime equipment reliability and facilities improvements.
We continue to invest in.
Our strategic investment program, having spent $450 million of the $661 million to date, and we will continue to invest through 2020 and 2021.
We expect to see two to two and a half year annualized benefits from the program, having to date realized $101 million of annualized.
Adjusted EBITDA benefit today.
To be clear, we look at the annualized adjusted EBITDA benefit from a two year payback project as half of the investment.
Moving to slide 17.
This is a conceptual picture about future adjusted EBITDA growth potential.
Our strategic investment program is records.
Its entered into five buckets on the slide three.
Third quarter 2020, we have invested $450 million in growth and productivity capex and have realized $101 million of annualized benefit today.
In Q4, 2020, and full year 2021, we expect to invest a further $211 million.
In growth and productivity Capex, so we have or expect to invest a total of $661 million in growth and productivity capex in our full year strategic investment program from which we expect two to two and a half year paybacks overall.
We believe that we have a well defined path to substantial EBITDA growth.
Growth and margin expansion in.
In addition, there is a potential for bolt on M&A.
Moving to slide 19 so.
Full year 2020, we expect full year revenues between $4.71 billion and $4.755 billion we.
We expect adjusted EBITDA between 600 fit.
15 million and $630 million.
We expect capital expenditures related to our continuing operations for the full year to be between 240 and $290 million I'll now pass it back to John for closing comments.
Thanks, Mike. This concludes our prepared remarks, and we will now open.
Open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you may.
The press star two if you'd like to remove your question from the queue for.
For participants using speaker.
Equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.
The earnings.
John in foodservice is it possible to say how demand trend.
It over the three months of the quarter and maybe into October November and have you seen or do you anticipate any kind of customer destocking in for Q.
In preparation of maybe further walk downs or restrictions in the U.S. and can you just remind us how much visibility you have into the demand pipeline there how far ahead are.
Renters place orders.
Yes. So thanks. Thanks for the question Anthony So ill, let mainly we don't have large outlook or visibility into demand are our customers order very frequently either weekly or several times a week. So we get to see demand in real time, I'd say right now through the first half.
Q4 demand.
Yes, all segments for that matter look very similar to the demand that we would have seen any segment in Q3.
And for Foodservice in particular I think that was your first question. Anthony we would have seen that demand in foodservice pretty consistent throughout the three months of Q3.
Okay. That's helpful. And then if I look at decremental margins on on volume declines it looked like it was about 30% in Threeq, you and maybe in a similar range for the year. When we think about incremental margins next year as you get a volume recovery, presumably I mean is that 30% sort of an accurate number to use.
And.
Could that increase as cost savings flow through.
Your upside there any kind of sense you can give us on incremental margins going forward are in 21.
Yes, I think I think the cobot recovery is number one number two across each segment, we're introducing new products. So I think we'll we'll we'll see a benefit there.
We've talked about the.
Increase from that we're going to get from the integration of evergreen, So thats, taking evergreen products and using the border. The paper for things that we can convert and sell on foodservice suffered merchandising side.
There is the continued.
The path of our strategic investment program, you would've seen $101 million through.
Through the program's inception with 45 million coming in the first three quarters.
I would expect fully expect that to continue and that.
We will continue to realize benefits there so I think besides just the.
Hoguet volume recovery there are other.
EBIT improvement levers.
Okay. That's helpful I'll turn it over.
Thanks Anthony.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.
Hi, This is actually Tom David onto Ghansham, how are you this morning.
Hi, Scott.
So could you start by touching on how you see price cost evolving in Fourq and then into 2021, just in context of higher sequential resin prices lately.
So if you look historically at all of our businesses.
We have a large majority.
One of our sales.
Sales of our revenue on some kind of contractual pass through.
Meaning that raw materials go up we increase our price those contracted customers raw materials go down we passed the raw materials through for our non contracted business. We go out with general market price increases. So for instance here in early Q.
Q4, we would've went out with a market price increase to cover not only the raw material component, but also the.
The freight and other incremental cost components that we would that we would see.
So I would expect the raw materials are always going to move they're going to move up they're going to move down we have a history of recovering.
Also.
We hedge.
The lag, which is a difference between the time the raw material goes up and the time, we can actually pass through we hedge that period in many of the commodities that we use to make our products, although not a perfect hedge.
It does give us some cover some installation if you will between the time raw material moves and the time we.
We actually move up price and recover.
That's helpful. And then just following up on that could you just remind us of the portion of your business that's contracts versus non contract and then separately within beverage Mart or beverage merchandising can you provide some more color on the expected margin progression over the coming quarters, just in context of the planned outages.
Yes.
So in foodservice and food merchandising roughly 75% to 80% of all of that business is on some kind of contract with with pass through in beverage merchandising a half of the beverage merchandising business would be cartons, the beverage cartons and around.
80% of that business is on pass through.
The second part of that business as board and paper sales.
And about 40% of our board and paper sales on some kind of contractual pass through and finally, the last piece of the business, which is represents around 20%, which is the paper segment. That's priced at market. So there is no country.
Fuel pass through.
That's helpful. Thanks.
Okay.
Thank you. Our next question comes from the line of George Staphos with Bank of America. Please proceed with your question.
Hi, everyone. Good morning, I, just wanted to piggy back on the earlier question.
I don't think you talk to what we should expect on the progression of beverage merchandising margins and then the related question I had.
There's a fairly wide EBITDA range for the fourth quarter.
Despite the fact that you have.
And pushed out I think you said seven $8 million of spending from beverage merchandising mill outages into 21.
Despite the fact that you said that business is more or less steady at the rates that you saw in the third quarter. So what is causing the relatively wide range on EBITDA and again, if you can talk.
The beverage merchandising EBITDA progressions out would be helpful and I had a follow on.
Sure Mike you want to take that one.
Yes, sorry in terms of the wide range.
And you know the beverage merchandising margins I think you know.
The best way to think about it says, yes, there's no sort of seven.
<unk> million dollars pushed out into Q1 EPS.
Around the at the mill outage Pine Bluff.
The second piece, though is from the file we had is that the firing canton during the outage yeah yeah.
Yeah, I guess more or less enough.
Set you know.
In Q4, because we've got workarounds as we restore that kind of the plant. So yes, those yeah. Those two things through Q4, essentially offset each other.
And so you know what what we were expecting to see.
In in sort of the the mill.
Cost is net net in Q4 to be yeah.
Flat from the outage lists the you know the cost of the you know the fire impacts having said that you know way ramping up at all.
The you know the outage in canton and that's been a little slow in them.
Yeah, we expected, but yeah.
So there is some lag there.
And then the other piece and beverage merchandising is that you know a paper markets a bit depressed and and you know paper volumes are a bit depressed. So net net net were expecting.
Yeah beverage merchandising to be a little bit down on what what we've you know or you know sort of talked about in the past George and you know offset in the other parts of the other segments.
Okay.
So I guess then.
If you know more or less.
Sounds like sequentially beverage merchandising is flat and EBITDA because whatever pick up you would have gotten from the fire you're now losing as you're ramping up. This this next outage and there are there offsets as well as you mentioned Mike.
Where then does the swing factor.
Show up in terms of the you know again not trying to be too.
Yeah Fine point on this but the 170 to 185.
Is it your volumes in foodservice is it volumes in beverage Merck excuse me in food merchandising terms, so where's that variation coming or are you just trying to be conservative.
Because hey, who the heck knows we're still in the middle of pandemic I'm, just trying to get a sense of what's in there I mean, it's in line with our forecast, but I'm just trying to get a sense of what's in your model and your thoughts.
Yeah, I think look in foodservice you know we have seen a little bit ahead of it.
Where we saw in the last.
Little wall, just still little and saying within and in in a food merchandising. So we're expecting that to continue for those funds to be a little bit ahead, those two segments.
And you know and it's all you know it's it's just Ah you know small pieces that were slightly ahead.
And then and then.
As I said, you know beverage merchandising is a bit.
It's a bit down and so net net net yeah Whit.
We're expecting to be more or less where we said we'd be you know.
When we discussed this out through the IPO process.
And then my last question I'll turn it over to Mike.
If you did around 20 million of benefit if I did my math correctly on EPS IP in the third quarter. So if you're at 45.
Five or 46 ish million in a year to date.
Versus where you were at the six month period.
20 million or so can you correct or were from that now.
And where did the S&P benefits come from in terms of the various buckets. Thank you guys.
AH Yes, you you know your numbers your numbers are more or less correct George.
The the benefits coming across more or less old old pieces, there so as as I go through the.
Different pieces, the business growth way and new product isn't materially innovations way continuing.
To to launch new products are starting up new lines in terms of the capacity expansions and so we're seeing benefits that automation continues apace.
Digital transformation is only a small.
You know increment year to date, but we ask that we did see a small benefit there and then the integrated supply chain.
Program is really really ramping up and.
We're really starting to see the benefits of that so.
That's a big piece of it.
Thank you very much.
Okay.
Thank you. Our next question comes from the line of Mark Wilde with Bank of Montreal. Please proceed with your question.
Good morning, John Good morning, Mike.
Mark Mark well, Yeah, two questions first just in in food merchandise and you had a really good quarter from a margin per se.
Active it sounded like some of that.
Price cost I Wonder if you could just help us think about where you expect that margin to be going forward and whether there is some you know give back in terms of price cost.
You want me to take that Joe, Yes, but doesn't think that I'll.
All in.
Yeah, sorry in enough food merchandising business so.
You know there was ER in now we sell a lot of products.
Consumer products and there was a change to the methodology in terms of.
Of how.
How we we price those you know this time last year.
With us he pays so essentially we are you know we moved it we went to an all in price as opposed to a you know a direct cost plus logistics.
Right. So net net net those those.
Things a favorable there the second the second thing is were selling a lot more.
At a higher margin products.
And and particularly around protein.
That's that's really favorable for us and.
So we are seeing benefits from margin improved.
Treatment. This so moving forward.
Walter.
We we will continue to see benefits out of protein.
Year on year, the the CP.
Difference will fit.
That finishes at the end of October So you won't see.
No such benefit there back, but we should still see stronger EBITDA margins in total because it adds an olin comparison, you know where we.
We're a lot stronger across the board in that in that particular segment.
Okay second question I had was just around beverage merchandising and if you could just.
Just talk a little bit about the.
Both pricing and and volume in that business and whether this covert a resurgence is having any impact on the portion of that business. It goes like into school milk programs.
Yeah, Greg Great question, Mark So let me, let me look at it by the pieces.
It is a beverage merchandise we sell to your point cartons overall are doing well our business in Asia is very robust and our sales of cartons to the processors for plant based milk substitutes juices and liquid food products are up are up nicely.
That is however to your point being offset by by school milk.
The school, so I would say school milk as a category for US is probably down 30, 35% and that's very reflective of.
The the school closures.
Also on the liquid packaging board side the second.
Out of that business liquid packaging Board and Cup stock. So liquid packaging board is down because of the folks from sell liquid packaging board to or also in the business of making school lunch cards.
So that's that's in line with with what we're seeing obviously and then on the cup stock pieces of the business.
You know, we would see a similar offset or similar downturn in our foodservice paper Cup business reflective of people not commuting in the morning people not stopping getting that morning couple of coffee. So we're seeing we're seeing the downside there on the paper side, we're just seeing across both coated groundwood and uncoated freesheet, we're seeing.
And really significant volume impairment and the price is getting a lot more competitive as obviously competitors by for what's left store or the smaller amount of demand that's out there for those those products again on the offset.
We are working.
And on ways to take that paper and make other products out of it and we're we're gaining some success there. Okay last one for me I just wondered Mike just general area in a broad sense with a strategic investment program can you talk a little bit about how you think about how much of that it can really be.
Stained overtime in the form of improved EBITDA.
And how much of that might you know ultimately just be the price of staying competitive because your competitors are doing a lot of the same things trying to improve their supply chain take out costs.
Well I think you know.
No we would.
I think the two different things really I think we you know we have the ads in terms of the cost takeouts, the new products those sorts of things and I feel I really do think you know for the most part this is additive.
Competition, Yeah will always be there and so.
You know does some of it is the offset elsewhere that you know.
The people who are doing things I guess, so I don't I'm not aware of anyone doing something as large as what were doing but.
Oh, there's always gonna be competition in our markets.
Yes.
I would add you know again, if you look at the components of the program to Mikes point were adding a significant amount of capacity in those machine centers that are constrained or they're getting constrained due to due to demand. So that we believe you know we're adding capacity we have the demand and so I believe that stays I think the new ERP.
Introductions certainly there's a lot of these are new to the market I got to believe those for them for the most part stay automation gets it gets people out of the plants. So you know, we're not going to get people back in the plant so that benefit that we get and automation will stay on our integrated supply chain were the two biggest components or transportation.
Management system, and a warehouse management system, we're doing better procuring freight with this tool that theres no doubt about it just like freight rates being up and from a rousing standpoint. The last three months, we've seen about a 16% productivity bump in our throughput Cuprum man hour worked in our in our warehouses. So yeah.
Profit people can certainly improve systems, but I'm looking at the but we're not planning on getting any of that any of that benefit.
Up anytime soon and then the factory House and intelligence is we're just in the infancy of that we're ramping up we're putting these tools in more of our facilities, but the ability.
Unless you understand how our production is moving in real time, and the ability to make corrections I mean, we've already seen in the plants at this been installed in for a while we've seen a in our North Carolina facility Morsel, North Carolina, which is 7% productivity increased directly attributed to the factory EPS intelligence. So you know, although there might be some slip.
Lepage I think these are all programs that are going to continue to give us a significant competitive advantage going forward all right. That's helpful. John I'll turn it over.
Thank you. Our next question comes from the line of Robert Roger.
Roger Spitz with Bank of America. Please proceed with your question.
Thank you good morning.
The first can you give us pro forma September thirtyth cash that's pro forma for the October refinancing and or what was cash yesterday. Please.
I love the pro forma.
Net debt I can tell you like and now our 10-Q gives you a bit.
More information on this but you know out our gross debt.
Is about.
Well point.
Zero 7 billion and we're also going to pay down a little bit more you know in October in in sorry in November.
So it will be about.
That $4 billion.
Gross profit.
At Thirtyth of September we were about 3.4 billion of net debt.
And and you know cash yesterday was I don't know half of half a billion dollars.
Around that area so.
I believe.
That answers.
Question.
Okay. My other question is on cash.
Can you provide Q1 20 in Q2 20, each sales need the dot each.
And if this isn't the prospectus I apologize I, just don't see it there, but the breakdown obviously, the one H totals.
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Or did you say 21, I'm I'm, sorry, 20, Q I'm, sorry, hurt Q1, 20, <unk> to 20 sales in EBITDA.
As opposed to the one aged 20 sales and EBITDA. We've got the one H I was just one.
And that you can provide the breakdown of.
Q1, and Q2 for sales and EBITDA. Please.
Yeah, and then net revenues for Q1 were 1.212 billion.
Q2 was 1.107.
And then and then for adjusted EBITDA was 140.
During the six for Q1 and 127 for Q2.
Thank you, ladies and gentlemen, as a reminder, if you'd like to during the question queue. Please press star one on your telephone keypad are.
Our next question comes from the line of Sam Mcgovern with Credit Suisse. Please proceed with your question.
Hey, guys just following up on.
Ladies and Rogers questions I was hoping gives the latest availability under the revolver.
And just give us a sense in terms of what you're thinking about with regard to debt pay down how much of it focused on revolver draw versus you know the five underneath side due 2023.
Hi, Sam.
The revolver is undrawn, we've only got we only had lcs under that so you know the.
The revolver is $250 million, it's undrawn at this point.
The second question.
Can I just ask you ask you to repeat your second.
Second question. Please.
Right. Yeah, you you mentioned that you continue to pay down or expect to pay down in November and then.
And you know, giving going forward to the extent you're paying down how do you think about pay down.
On the term loan versus the five it needs a due 2023.
Well I guess, we never really.
Commented on future payments. The you know we are paying down $70 million.
On on the five in a night you know that.
No. This is already out there so ever on already knows about that.
No you know in terms of what we'll pay down next we'll do it based on you know what.
You know what the math tells us what's the best thing to pay down.
You know, we obviously, we've we've stated to everyone that out that you know you're paying down debt is it you know is is our number one capital allocation priority. So we'll continue to do that.
But I kinda give any sort of guideline.
Law and so on.
Timing or anything like that.
Okay, great. Thanks, so much.
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Thank you. Our next question comes from the line of John Babcock with Bank of America. Please proceed with your question.
Hi. This is Chuck went on for George Staphos I just want to ask.
Very quickly it seems like it was a relatively large range and implied capex guidance for the fourth quarter. I was just wondering if you might be able to talk about the different puts and takes and what's driving that.
Yes look it's what that is John is that.
Yeah, we've got a bunch of large projects and.
It all really.
Really comes down to when the the invoicing is done and you know and when it's paid and when it's due and all those sorts of things. So we're continuing to just spend pace, but but.
The you know when the actual cash goes out the door is a little difficult to judge right now so.
Yes, if it's not in if it's not in Q4 it will be in Q.
Q4, 2020 will be in Q1 2021 so.
You know, it's not like we are holding back on capex or anything like that we do expect and we talked about spending you know somebody to turnaround sales.
On an $80 million this year.
Mmm are on pace to do that in terms of what you know what with bolting into the ground. It's just about the you know the timing of when the cash goes out the door.
Okay. My might you be able to provide some color on the big projects that you have going on.
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Sure Vince well, it's mostly.
You know days, there's some capacity.
You know most of its around the strategic investment program isn't capacity pieces. There then you know in in and like the business growth and new product a material innovation.
Yes, we are continuing to add oh or add capacity there automation program we.
We continue to add.
You know add automation throughout our sites and then also in the mills, we continue to invest there.
And and you know those ocean best.
Since you know will continue.
You know despite the you know the that the delay in the in the mill outage in Q1 2021.
Okay. Thank you that's all you never.
Mm Hmm.
Thank you ladies and gentlemen, this concludes our question.
And answer session I'll turn the floor back to Mr. Mcgrath for any final comments.
Thank you for participating in this our first earnings call.
I do want to leave you just with one thought for the quarter. You know I think we did really well from a recovery.
Re standpoint versus our lows in Q2.
We are on track with our estimates.
For Q3.
Full year EPS.
And our EPS IP is deliberate and you would have seen $45 million through Q3.
We're in a very fluid environment right now.
But I think we are well positioned.
Second.
With our access to markets and our product and material portfolio.
To perform in whatever event might happen going forward I keep telling people people have to eat and drink and food and beverage has to be packaged and were one of the largest Pat.
Coverage as a fresh food and beverage in North America. So you know again I think we're we're we're hedged to some extent by the products and materials, we make our products out of 14 different materials. Unlike many of our competitors. So cold. It is an impact no doubt were going to get through co, but in our business is going to be stronger.
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Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.