Q2 2021 Pactiv Evergreen Inc Earnings Call
[music].
For your financial Officer.
Before we begin please visit the events section of the company's Investor Relations website, that's www dot pack of evergreen Dot com.
Access the company's 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 may include forward looking statements. These forward looking statements are not guarantee of future performance and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties debt.
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 in financial condition.
Lastly, during today's call, we would discuss non-GAAP financial measures, which we believe can be useful in evaluating on performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with gap and reconciliation 2 comparable GAAP measures are available in our earnings release with that let me turn the key.
All over to Michael game, Mike.
Thank you to all good morning, everyone and welcome.
Yesterday aftermarket clothes effective evergreen released its second quarter of 2021 results that were broadly in line with the guidance, we are providing in the last quarter.
We saw a noticeable improvement on our volumes across our business segments, especially in food service as consumers recover from the COVID-19 pandemic we.
We expect this trend to continue on to the second half of 2021.
On the cost side, we saw a similar dynamic is across the industry with inflation and raw material and logistics putting pressure on margins.
As input prices for resin and pay per rose substantially.
Cause you know these input costs are linked to indexes and the lag in pricing recovery impacted cute too.
Assuming the rate of increases and inputs flow.
For a turnaround we would expect it to recover raw material costs on the second half and Q2, we began to make progress on turning around our beverage merchandising business.
While we are pleased with the progress there's still more to be done.
As part of that plan, we are pleased to announce a new addition to our team.
Siren raki will be joining us as the president of our beverage merchandising unit effective August 16th he brings a wealth of knowledge and experience on the paper industry, including a successful turnaround history, and we look forward to having him join our team.
I'm very proud of our teams as they remained focused on maximizing our businesses to service our customers and meet our stakeholders expectations.
Please know turn to slide number for.
During this presentation, we will discuss key business takeaways and.
Second quarter 2021 highlights will provide a business update.
We'll go through our second quarter financial performance.
And discuss our full year 2021 outlook, we will conclude with questions and answers.
Please know turn to slide 6 our second quarter results, so material improvement to the top line when compared to the peak impact of the pandemic and 2 <unk> 2020, and foodservice the segment most acutely impacted by COVID-19, and the second quarter of 2020, we saw a healthy recovery volumes up 33 per cent year over year.
Here.
And within 1% of the second quarter 2019 levels.
And food merchandising, we saw volumes improved by 4%.
And they were within 1% of the second quarter of 2019 levels. The beverage merchandising segment. So volume improvement of 13 per cent with volumes now reaching above what we saw on the second quarter of 2019 by 3 per cent.
As we had indicated on the last earnings call. Despite the volume improvement EBITDA margins were pressured in the quarter.
[noise] impacts of inflation and higher material on logistics costs we.
We increased prices and Q2 to offset some of these cost increases.
We will continue to monitor inflation carefully take further price actions as appropriate.
We anticipate margin recovery through the remainder of 2021 in behalf.
We are encouraged by the healthy recovery and continued improvement volumes and are taken the appropriate steps to navigate the labor shortages continued escalations and raw material costs and a possible uncertainty due to the delta variant around COVID-19.
In the past few weeks, we've also made some important announcements.
We have provided our first update and plan of action from our beverage merchandising operational review with the decision to exit Dakota Groundwood pay per business by the end of 2021.
It was a difficult decision, but necessary to help us focus more on our core competency.
We also announced the execution of an agreement that will reduce our gross pension liabilities by $950 million. We funded this transaction using existing plan assets will believe these actions are in the best long term interest of the company.
Please now turn your attention to slide 7.
Now, let's move to Q.
Q2.2021 highlights.
Net revenue of 1.352 billion was up 22% from Q2 of 2020 as we saw a strong volume recovery from the prior year when we experienced the biggest negative impact from COVID-19.
Net income from continuing operations was $8 million in earnings per share from continuing operations was 5 cents per share.
Adjusted EBITDA was $130 million for the quarter up 2% from Q2 of 2020 due to strong volume recovery and better pricing the.
The quarter was impacted by $11 billion for winter storm here.
Free cash flow defined as adjusted EBITDA less capex was $59 million.
Finally, our strategic investment program is on track and delivered $14 million of additional annualized adjusted EBITDA benefit in the second quarter.
Like a turn your attention to slide 8.
Turning to our year today highlights net revenue was up 8% for 2.516 billion.
Due to strong volume recovery and increased pricing.
Year to day, adjusted EBITDA was 200 or $207 million, which includes a 50 million dollar 1 time impact from winter storm here, an estimated 43 million dollar impact from COVID-19, and a $16 million impact from a planned cold know outage.
Please know turn to slide 10.
As we've previously discussed packed of evergreen continues to have many EBITDA growth leathers that will deliver benefits in 2021 and beyond.
We're starting to see the impact from some of these levers as we see strong year over year volumes as the economy recovers.
We believe that in addition to the economic recovery the secular themes around sustainability shipped to more online ordering delivery and take out will also help drive our volume growth.
We also remained focused on cost reduction initiatives and optimization, especially in the current environment of higher and higher raw materials and logistics costs.
Like a turn your attention to slide 11.
We are continuing on our ESG journey and remain focused on initiatives around the planet products people and governance when.
When it comes to a central metrics like greenhouse gas emissions energy water and waste we know we can't manage what we don't measure.
For that reason, we have identified a best in class platform that will allow us to better track. These key metrics at all of our 60 plus facilities.
After this robust data gathering exercise.
We plan to be able to set performance targets at both the facility and corporate levels.
Related to our product Spiller, we can't we continue to build the broadest offering a sustainable packaging in the industry.
Which helps us reach our goal that by 20.3100 per cent of our products will be made with recycled recyclable are renewable materials.
Our longstanding commitment to the environment and customer choice continued during the second quarter, we launched 13, new product skews, which included first to market tamper evident French Fry curtains, and tamper evident takeout containers, both made a paperboard and support today's growling delivery market.
Additionally, we have expanded our meat tray offering with a new version made for him recyclable P T.
That brings the total number of new items, we've introduced to 97 and the last year and a half.
Diversity equity and inclusion is top of mind for packed of evergreen.
As it is for a growing number of companies.
We've created a new internal D E I team and are undergoing a diversity spend analysis of our suppliers. This will inform our future policy and help us to understand where we can make improvements.
Finally, we recognize the critical role are bored plays on overseeing our ESG initiatives. The director's recently formalize their responsibilities as they relate to ESG and will continue to receive quarterly updates from our chief sustainability officer.
More details on these and other activities may be found at our investors dot packed of evergreen Dot com and the is G section like.
If I could turn your attention to slide 12.
We share the slides and the last quarter to provide an overview of our strategy to return to a more profitable packed of evergreen.
As an update we remain on track to complete our strategic investment program in 2021.
We've announced our first steps in the beverage merchandising operational review for the exiting of Dakota Groundwood business.
We also remain on <unk> on track.
For the planning of our next generation packed of evergreen waste elimination program.
There'll be more to come on these programs later in the year.
With that I will now turn it over to Mike Reagan for a detailed financial review.
Thanks, Mike move.
Moving to slide for Dane looking at out second quota 2021 financial performance net revenue was 1.352 billion. This is 110.7 billion in the same period last year, an increase of 22% the.
The increase was primarily due to high sales volume laci largely due to high demand as the economy recovers from the COVID-19, pandemic as well as favorable pricing.
Adjusted EBITDA was $130 million. This is $127 million in the same period last year. The increase was primarily due to high sales volume on favorable pricing, mostly offset by material costs net of higher cost posture to customers high logistics costs and high on manufacturing.
[noise] costs and a beverage merchandising segment free.
Free cash flow defined as adjusted EBITDA, let's capex cause I'm favorable to the same period last year due to higher capital expenditures.
Moving to slide 15.
Looking at Aida date, 2021 financial performance net revenue was 2.516 billion versus 2.319 billion in the same period last year, an increase of 8%.
The increase was primarily due to highest sales volume laci due to the high demand economy.
Economy recovers from the kinds of 19 pandemic as well as favorable pricing.
Adjusted EBITDA was $207 million versus $272 million in the same period last year.
The decrease was primarily due to the impact of winter storm eerie. It continued impact from COVID-19, and inter incremental costs from a cold meal outage free.
Free cash flow defined as adjusted EBITDA, let's capex cause on favorable to the same period last year due to lower adjusted EBITDA.
Moving to slide 16, and our results by segment for cute too.
Ah Foodservice segment, so net revenues up 41% driven by strong volume recovery and high pricing to recover raw material cost increases.
Service volumes for the quarter are up 33% on 2020 and within 1% of 2019 volumes.
Adjusted EBITDA for the segment was up 88% most of the same period last year due to strong sales volumes, partially offset by higher logistics costs and higher material costs.
Food merchandising segment, so net revenues up 11 per cent driven by favorable pricing and volume.
Food merchandising volumes for the quarter were up 4% on 2020 and within 1% of 2019 volumes.
The slight decrease in adjusted EBITDA is due to high logistics for manufacturing costs, mostly offset by higher sales volume.
Ah beverage merchandising segment, so net revenues up 11% driven by strong volume recovery.
Adjusted EBITDA for the segment was down $23 million for the same period last year, the key drivers being higher manufacturing costs, hi, material and logistics costs, an unfavorable pricing and customer mix, partially offset by higher sales volume.
Moving to slide 17.
We estimate the impact of COVID-19, and winter storm year each of our business.
The year to date adjusted EBITDA impact of Covid, 19 was $43 million, mostly driven by volume price and high on manufacturing costs, most notably you know foodservice on beverage merchandising segments.
In Q1 Winter storm youri impacted our business.
The impact was concentrated on how facilities ins in Arkansas, and Texas, where we encode higher energy costs and needed to shut down sites quickly and carrying damage in the process for you.
Year to date adjusted EBITDA impact is $50 million, we do not expect any further impact.
Moving to slide 19.
Looking at our outlook for 2021, the ultimate impact of the COVID-19 pandemic packed of evergreen remains uncertain and.
And now for Castaway have made certain assumptions for getting a second half recovery of food service and beverage merchandising revenues that are dependent upon increase mobility I may not eventuate with they need a conservative nor aggressive in these assumptions.
We are maintaining a full year adjusted EBITDA guidance at $630 million to $645 million.
We expect the volume recovery to continue through the second half of the year with key rich 12th forecast being material cost pressures and labor shortages, we continue to push price to recover these cost increases.
Thank you for your time as an appendix to the presentation. We've included queue to you to day highlights by segment Q.
Q2, and Q2, you Tonight revenue and adjusted EBITDA bridges, that's the same period last year.
Consolidated statements of income loss are.
A reconciliation of net income loss to adjusted EBITDA and free cash flow and a summary of progressing as strategic investment program.
I'll now pass it back to Mike King for closing comments.
Thank you, Mike and closing the second quarter came and consistent with our expectations and the guidance. We provided at the end of Q1.
Consumers ritual returned to Prepandemic activities, we anticipate continued increases in volume on the second half for 2021.
If raw material input cost moderate or contracted pricing actions will catch up and lead to improve margins.
Long term we remain committed.
For the plans, we have in place to improve our beverage merchandising business.
We took an important step by exiting the COTA groundwood segment and are very pleased to have Byron raki, joining our team across the business. We are intensively focused on increasing productivity, reducing costs and taking steps to maximize our cash balances. We will monitor closely the rate of inflation and price on.
Products appropriately in the marketplace.
Finally on confidence of the people of packed of evergreen for work hard every day to serve our customers and enhance the value of the company to all of our stakeholders with that will now open it up for questions operator.
Thank you if you would like to register a question. Please press the 1 followed by the for on your telephone you will hear a 3 tone prompt to acknowledge your request.
If your question has been answered. Thank you would like to withdraw your registration. Please press the 1 followed with a free.
1 moment please for the first question.
[laughter] and our first question comes from the line of Gumption Punjabi with Bird. Please proceed with your question.
Hey, guys good morning.
[noise] mourning.
Morning on the Foodservice improvement, you know, which is quite significant and shaquille versus the once you run right.
You know do you do you think there was any sort of benefit for minimum tree restocking has mobility increases in channels get sort of normalized and then also was there any pre by ahead of pretty significant resin cause in the head up your own price increases or was that not the case.
Say, hi gang Chauvinists Smart Reagan good morning.
Oh, sorry, what I'll tell you is.
Yeah, I can't be 100 per cent certain on either of those things having said that.
You know we have been.
Working hard to service every single customer we've been very.
A measured and what we pushed out because labour challenges continue to be a major problem implants, Emily and we're working hard on those.
And where we would stay that way, we would see any you know crazy by.
Prior to price increases on race stocks.
We would have held back not because we don't want a fulfilling <unk>, it's simply because the stress on the whole supply chain, whether it's theme with raw materials all the way through to you know ally in manufacturing hour in inventory levels et cetera et cetera.
Plus the tightness of the logistics market has meant that we've we've been servicing people to what we think is really you know.
Day out the door.
And you know and and I think a lot of that you know.
We see some of our key customers, we say they're out the door sales and yeah. They they flying as well so we're not really saying that.
But you know I copy I can't say with 100 per cent certainty that there isn't pockets on it.
Got it and then for my second question I mean, you know, obviously 207 million of EBITDA for the first half on and pretty significant step up in the back half a can you sort of give us a breakdown between the waiting between 3 Q and for Q and then second you know what was unfavorable price caused do you think you know for 2 Q and then.
Well, what do you think a realistic number is for 3 Q based on what you know at this point.
Yeah, so the unfavorable price cost and Q2 was.
Around $52 million.
So it it.
It hit us hard.
I'm, just taking a step back in terms of the the house.
I just want to give a bit of background. So I know that this is going to be something that people are gonna ask me. So.
You know when we get out last forecast, we would have expected a pretty even balance between the 2 you know that stood on the fourth quarter.
Okay. So you know so and you guys can infer from guidance.
What I was just numbers would be so out you to day, unless we kind of coming where we said we'd be.
And you know, we would have expected third and fourth quarter to be approximately half H O. The remainder of the year.
What we you know when we did out Q1 guidance, we were expecting around.
Year on year around $300 million in raw material cost increases Judah right.
That's gone up to $400 million, Okay, sorry, and as you know we chase price, we have a say for 4 and a half on flag and so what I'll tell you. It's false we've maintained out guidance on Mike highlighted highlighted some race and decided I when I talked to the guidance.
There's been a push of the of the.
<unk> of the EBITDA from Q3 into cute for to the extent of sort of $40 million to $50 million, So where I would've thought that queue. Thank you for would've been.
The same for a similar sort of ebitdas.
Now there's been a sort of a <unk>.
Push that out into queue for.
Does that answer your question Gotcha.
It does it does thank you so much.
Okay.
And our next question comes from the line of Kyle White with Deutsche Bank. Please proceed with your question.
Hey, good morning, Thanks for taking my question I wanted to follow up on on the price costs that you've just laid out I guess I'm a little confused if I look at him slide twenty-three the the kind of the year on year Bridge that you have you have price makes a 50 million and then a material head wound up 70 on can you break out the parts of the material and what how much was driven by kind of lag in the past.
For a resin and then does that mean mix was roughly a 32 million benefit based on what you just said price classless. Thanks.
Sorry so.
You said that quite quickly sorry, sorry, it's slide twenty-three did you say.
Yeah. Just this at the end, where you have the kind of the bridge on EBITDA year over year.
Yeah.
Got it.
Yeah. So what I'll tell you is you know the.
What I'd call spread.
Price mix on material you can say day of it that's negative 20.
And you can also say is high logistics costs of of around $7.8 million and yeah, Hi, manufacturing costs say those high on manufacturing and logistics costs on.
Ah, mostly driven by right.
And so when I look at this that for age the the price makes we are pushing price to recover not only the materials, but also high labor costs on high logistics costs.
And so you know the the the the net day Israeli debt and I'm about that that you should really be looking at not just the price mixed versus material because we tried to cover off the whole day the.
The whole inflation rather than just.
Materials ugly.
That answer your question call.
Yeah that does that makes sense I get I get I see how you get to the fits 2 now on that could I just follow up on how much of the material was driven by the lag on the passenger a resident though [laughter].
So much for Ya.
It's it's about.
In terms of day the difference there it's about $30 million.
Kinda that's helpful. And then my second question could you just kind of discuss the rationale for exiting the kind of the toilet groundwood market and then what kind of financial implications should we expect from this decision.
Yeah, Okay. So I'll cause on answering questions and I'll answer for that and then Mike can come in after me.
Sort of a high level.
So in terms of the credit groundwood market.
I think anywhere on.
No it's no surprise to anyone that magazines are.
Gone down even worse for it the pandemic.
And so for us.
<unk> you know an obvious.
Yep reduction in volume and reduction across okay. So <unk> not to mention.
<unk> that you know just for this.
We produced this in a manufactured.
Manufactured.
Plant, where we also have produced that could packaging board, which is out most important product, which guys into our cottons.
And and we sell on the open market and in that in that facility, we have challenges around labor.
And we're constantly investing so.
First and foremost.
Day to day as a financial.
Implication here in terms of last year sort of EBITDA numbers.
You know and obviously with price on volumes changing all the time.
I'll I'll just talk to last you for it.
It would be probably a positive EBITDA benefit of.
Around 10 ish me in Dallas for like clothing, this down but more importantly, we're gonna be avoiding $15 million to $20 million fee of Capex on.
A line of product that is in decline.
And that's per annum.
15 to 20 million Bucks per annum, it's a dying market, we don't need to be you know and Oh by the way what we can do is we can.
Protect out profitable cole.
Based on this better in in Pine Bluff Mail, we can focus on producing liquid packaging board.
We can concentrate the the the expectation people in that nail on producing out how most profitable product. So.
It's it's very much cash flow positive and also allows us to concentrate more on on our on our core business.
Do you have anything to add.
Oh, My God I think you said, a well I would say.
Summarized on what you said is better financially for us on a lot of friends, but bigger picture it'd be clutters, our meal and let's just get back to the basics.
[noise] got it sounds good appreciate all the details.
And our next question comes from the line of unnoticed Shaw with BMO capital markets. Please proceed with your question.
Hi, Good morning, everyone I just wanted to go back to the inflation pressure since it's such a big issue.
You manage to hold on for guidance constant for the full year I decide which is quite an achievement given that inflation.
What are the offsetting factor so you're getting out from I guess rising paper or anything as fast prices can you just walk us through the office that Sir.
So it's Ah I know just how I, it's Mike right and again, it's a bit of a knife fight at them on [laughter] I'll tell you that much yeah first of all we're we're out getting price that obviously lax I think you know you can obviously see the volume cowens that we're getting.
You know we have upscale procurement efforts there's.
Theme is is is working hard to try and find offsets.
To hold back on inflation, where we can and you know we we continue.
To drive out strategic investment programs to.
Real life savings out of that so and you know and all the other programs. We have on the go in every single plant. So there's a lot going on those those are the key things that we're doing.
I think.
Price increases are pretty much yeah, we'd just pushing price every way that we possibly can.
[laughter].
Oh, Okay. Thank you and.
And I just wanted to go back to that pension transfer.
<unk>.
Does that mean can you just talk to any financial implications and does it mean, you will no longer have on underfunded position and your pension once it's done.
So.
The the pensions.
[noise] at the moment the pension liability.
But on the net position is and this changes on a daily basis, but it's it's circa 99 per cent funded okay.
So.
Yeah somewhere between 90.899, what we've done is we have effectively.
[noise] transferred both assets and liabilities to an externally insurer.
There's not a detriment to.
Pensioners.
But it reduces that risk on our balance sheet. So.
Yeah, we had circa for $2 billion of liabilities in the past.
We now have a billion dollars less round numbers.
And we have a billion dollars less assets round numbers you can see that there was a in the announcement that there was on there will be a a profit.
Profit recognized from that which would.
I mean that you know by by a small margin, we transferred less assets and liabilities.
Across.
[laughter].
I mean, the whole for the whole idea of this is true.
As the.
The the pension gets more.
More and more funded to reduce the risk throughout our business to reduce the risk for future cash flows and we've taken let's call. It 25 per cent about liabilities out. So it's a it's a really good result for us with no detriment to to pensioners.
Okay.
Yep, that's Claire Thank you very much on it.
The only other add Mike I would say is we we didn't use any of our cash to do this this was all done with assets just to be clear.
Yeah, that's correct.
Okay.
And our next question comes from the line of Anthony Pettinari with Citigroup. Please proceed with your question.
Hi, This is astrocyte on standing in for Anthony around the time of the I P. O. I think there was a view that company EBIT margin could ultimately get back for more historical levels I think he did around 17% margin in 2016.2017.
And now there's obviously a lot of moving pieces with inflation Covid. The beverage review, but looking longer term do you see any structural reason that you can't ultimately get back to those sort of mid to high teens EBIT margin, maybe anything structurally changed.
The 3 businesses.
I'll I'll answer that and then like can you can weigh in is cause you want.
Short answer is no I I don't see any well I do see hard work ahead of us absolutely, but I don't you know I I think we can get a you know if I look at our food service business over the last.
A couple of years, we were hit by.
Inflation pressures.
However.
And you know we were obviously hit by Covid. However.
With we're continuing to push fries for imagines coming back and we would expect to see improvements for.
All of the various programs, we have most notably the strategic investment program and so I think we can get back to a historical levels in terms of food merchandising.
Yeah, I'd sleep merchandising.
Historically been above that.
That's sort of the average at the business and so similarly, they should say towel wins.
On on on cost as a strategic investment program Roseanne.
And you know I guess, then when they look at the beverage merchandising business, it's been suffering and it's been suffering for a few reasons carpet is impacted it. We've had we had winter storm youri. We've we've had a lot of investment day now milson downtime is associated with that.
In terms of getting back to those historical margin as well you know you heard me talk about.
<unk> grandmother, well you know negative EBITDA margins, yeah, we'll lose sales, but no ordinarily that's gonna help right in terms of if you've got negative EBITDA margins as a result of Ah.
Of a of a product in your portfolio and you discontinue it well that'll be accretive to the.
2.2 to margins.
And then it comes down to you know returning the meals to somewhere near to where they they've historically round. So from our perspective, you know the on going business pieces in the beverage merchandising segment you know they can absolutely on a weighted average basis get back.
J historical levels so.
I mean, it's a long winded way of me going back to my initial point, which is is yes, I think we can get back day.
[noise]. Thanks.
For.
Is it just possible to talk about the performance on the first choice portfolio and your other sustainability product I think for him you know faster than company average and then just from a broader perspective are you seeing any particular consumer preferences and stuff straight for example, a faster growth on paper vs plastic or metal.
Okay and so.
Do you want like yeah.
I think right now we're in an environment, where people will take any sub street. They can get so it's tough to answer that there's no.
There's no preference per se and we have shifted customers 2 or more of a choice in an environmentally friendly substrates.
But we've actually if anything seen.
And acceptance of you know.
Any substrate, particularly when you look at our.
Protein tray or.
New business for protein businesses, where we saw a large transfer to other substrates that we've had to rebirth some of the less for a friendly assets to meet demand. So.
It's a difficult way of saying that you know.
Right now demand outpacing I think the priority on some of the sub streets. So.
And I think that'll be it it'll be that way until inventories in the supply chain pressures for this.
Okay, I'll I'll turn it over.
[laughter].
And our next question comes from the line of Georgia, Staphos with Bank of America Securities. Please proceed with your question.
Hi, This is castle curious sitting in on behalf George day.
I'm just looking at your strategic investment program. It appears that there was a bit of a shift in spending from automation 2 combined digital transformation supply chain and cost reduction what was the main driver behind this.
So.
In terms of Ah. So you you.
Your question really goes to you know.
The total spend on the.
The digital transformation integrated supply chain and cost reduction is that is that.
What you're asking sorry.
Tracking and kind of just you know the split between those and kind of why there may have been shipped from from automation to the others.
Yeah. So I think automation, we've already spent the full program. However, we're just we're continuing on with that so and will continue to to push automation and not only because you know what we're doing it more more because.
Now, we're shifting our focus from pure crossed out.
2 we.
We need to service our customers and there's a war for people out there at the moment, Yeah. We just can't get enough people into plant. So we're gonna have to automate position that so I'll automation program continues to pace in terms of the the digital transformation pace.
And the integrated supply chain based on.
Other areas, where it was sort of doubling down we've.
With.
I I think it's fair to say on our integrated supply chain piece, we started the journey at it on a on a 5 level journey, we would probably have won.
Yeah, I would say we were for we're continuing to invest for a continuing to invest in people into systems and you know we want to get to a 5 and so we're continuing to invest day in terms of digital transformation.
We've done a lot, but I would say you know we can do a lot more so again, we're continuing to invest day. So.
Insurance for that shift.
It it <unk> numbers on a page might look like we're shifting but we were all like it's almost like with doubling down in in.
In my opinion on all of those categories.
The thing I would add Mike is just you shouldn't think of these things mutually exclusive.
Digital enablement enables automation I mean, there's a lot of cross pollination is hard to draw. The line. So we haven't we haven't changed the geography of our spend.
We made bucketed or label it different what day it is interlinked digitally.
Digital digital enablement does.
Enable some of the automation.
And there is some cross pollination so.
I wouldn't I wouldn't think I wouldn't take any of the bucketing as us backing off 1 or the other and to Mike's point.
It's actually us leaning in much smarter with cross pollinated initiatives.
Great. That's helpful. And then I guess, just going back to the reduction of the pension liability will this impact earnings in any way with regards to pension income going away.
Yeah I think.
Yeah pension income you know, it's adjusted out of.
EBITDA, but it's obvious and net income.
Net income benefit of amendment, where with.
Any money off the assets.
So you know if we have less assets arguably.
Yeah, we'll we'll we'll unless off that but to us.
Earning money off of off of pension is is not really where we're focused you know what we're focused on is reducing risks for making sure that that the pension is looked after and and and.
Reducing the risk of having to pay out large amounts in the future.
And and to us that's far more important than that.
<unk>.
Did that Oh, my son Northern cash.
Profit number that shiny now paying L for pension income.
Great. Thanks.
Thanks.
Uh-huh.
And our next question comes from the line of Sam Mcgovern with Credit Suisse. Please proceed with your question.
Hey, guys are good morning, it's just with regard to the working capital line when when I look year over year, obviously it sir.
And the first 6 months of this year for significant use of cash a year ago, how should we look at what that looks like in the back half of this year.
Exactly.
Yeah, Sam I I think like you were a little fight there, but I think what you were talking about was the use of cash in terms of working capital.
So.
Let me.
Phrase it up for you.
And during the first time for this year.
We've used cash on working capital B.
Because raw materials of run up so much.
<unk>.
Al the dollar value of al inventory has increased substantially due to high raw material costs.
However, physical inventories are down.
And they've been driven down by a couple of things number 1 being.
The demand and the you know the.
The snap back and number 2 because we are because of how integrated supply chain program, we've been working towards optimizing out our inventory levels.
And so you know what what we would expect to see them in the second half of the year is their <expletive>.
Raw materials stabilize we wouldn't expect to say they use of cash from that however, al al.
Ah physical inventory levels will probably increase a bit as.
As we get our feet on an atheist and have plants.
And Ah snapback becomes more normalized.
Got it that that's helpful and hopefully my audio is a little better now yeah getting back to gone sums question earlier about you know prebuying and sort of the restocking ahead of I had a reopening I mean, it sounds like you you feel like that really hasn't been the case I mean in terms of what you guys are seeing.
Week by week or the conversations you're having with your customer base I mean, what are they seeing in terms of Ah returned to normal or are they seeing changed consumer behaviors or is there anything that makes you feel like the business looks different you know a year or 2 from now versus what it was free COVID-19.
I can take a run at that Mike and then you can fill it with.
Yeah, there's certainly some some shifting in the consumer obviously has mobility increases I think the buy in of.
You know home delivery and take out yeah, there's gonna be a.
All signs point to a new normal and so.
The shifting categories for US you know there's.
You know, there's there's things we're tracking that yeah.
You look at People's returned to work largely people are coming into the office of the shift from a hot Cup of coffee in the morning, like a starbucks or something like that.
You know, they're getting up in the middle of the day and getting a cold Cup and so shifts from.
Cubs, Nicole Cups for something that was putting pressure on the cold Cup category or the poly cups.
We're seeing that on the take outside with other or take out to go containers.
Yeah, where.
Think of the numbers in the mid 40% of the meals now are.
Yeah in the home, but in it take out for delivery fashion and that's that's a big shift in as those things stick in consumer behavior moderates, who knows what happens 2 years from now, but what we can say is.
The pressure, it's putting on the supply chain now just with our customers, but on the manufacturing side, even outside of our business.
I'm not I'm not sure that the capacities until those capacities and those categories ketchup does that pressure goes away and so.
In terms of rebuild of inventories I would I would say, it's slim I don't think anybody's getting out in front of that yet based on our customer discussions.
And largely the snapback specific the categories.
Yeah, I think that's Ah.
If somebody had a crystal ball, we'd love to see it but you know.
Like Mike said, a knife fight in terms of.
Our ability to address that shift in consumer demand and and where the categories that will win and lose and.
And so yeah, when I said sustainability being a focus on the the question around.
R. R E. S. G friendly products people are taken any product that can get right now spill and so until that moderates I think this pressures here to stay a bit.
And we're.
We're gonna see the pressure on the supply chain and our customers are feeling it just like we are.
Okay, great. Thank thank you very much I'll I'll pass on.
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Our next question comes from the line of Iron. This 1 often with our a P. C capital markets. Please proceed with your question.
Great. Thanks for taking my questions Yeah.
Yeah, I guess, congrats on that day turnaround in a couple of those businesses, there and especially bad for March.
So I just wanted I guess [laughter] you know get your get an update on your thoughts here as you kind of and now turned the corner here or at least you know kind of looked at the operations on it more would you would you say that you're on your on your way to some improvements in Bev March.
In the mill operations, and then similarly with food service Uhm.
Guess you know maybe you can just characterize as to if there's any specifics and you're looking forward to to signal that the business is kind of back to a for recovery uhm, what should we be kind of thinking of and and in that vein. Thanks.
Yeah. So.
I'll, just say that you know nobody's declared victory on the beverage merch business with them on our team here I think we're still.
Largely uhm and.
Recovery mode and that we've we've done a lot to diagnosed the business.
We still have a lot to do to to bring your meals back to what I consider standard and best practice.
And you know in their food.
Really a tale of 2 cities so controllable elements of the beverage merch, we feel like we've got a handle on the fundamentals in the business you know we've got a handle on and we've made some decisions around.
Strategic product is we've shared on Dakota groundwood.
And the teams or the teams are focused on the right stuff So times, our friend in times our enemy there.
On the food's on our food businesses, you know I think it's largely.
Yeah volumes of recovering nicely you know.
If things continue the way, we anticipate and.
You know, we're able to see the input costs for the input supplies moderate.
We're well positioned to see the you know I feel really good about where we are in terms of our ability to perform.
And our supply chain engine will function and we will.
We have every reason to win in this space Controllably and certainly the the manageable elements or what we're focused on there.
So controllable and thanks for the beverage business well into uncontrollable elements of the or the manageable elements of our foodservice business or understood and we're tracking so.
Understood and and just as a for a follow up when you think about price cost obviously, you're you've taken some action here and and you can continue to take action off set the inflation.
Do you usually hold on to those price increases I guess when raw materials recede you know maybe you can just discuss what how we should think about 22, assuming <unk> raw materials, you know our stable from here. Thanks.
So in terms of whether or not we hold on to price increases.
But you know most of al Fayed.
Is is contracted.
And you know if if.
This goes up.
Raw material goes up.
Then we we follow on price so.
Essentially if if raw materials got down prices will go down, but there'll be a lag to that suddenly to win the raw materials go up.
In terms of where we're not contracted.
We we would aim to you know as as most people do hold on to price. If we can ultimately I guess, there's going to be pressure on those prices.
Depending on what happens with raw materials.
You know, it's a competitive market you know, we'd expect competitive as to their <expletive> materials go down to 2 yes tight prices down but.
We would.
Logically.
Try to hold on to price, but you know there's no guarantees day, so next year.
No.
We have been lagging in terms of.
<unk>.
Cost inflation and getting price back.
And and you know I say they might be a little bit of a tower next year, but that all depends on on what happens with raw materials.
Okay.
Great. Thanks.
And our next question comes from the line of Andy Sheffer with next credit partners. Please proceed with your question.
Good morning, Thanks for taking my question in terms of exiting the Covid groundwood can you describe for US you know.
With the cash course might be and then the capex for converting that over to Covid Carton and then how does it how does the timing work in terms of you exit by the end of the year.
Does that mean that it.
You're fully converted that line.
By the end of the year or is that does that go into 2022.
So other speak to the fact that you know there is no plan conversion I just want to be clear this isn't a product shipped.
This is a take out of capacity.
Yeah, I don't know I don't want to Miss at the table that this is a shift of.
A resource our assets so there's no.
Strategic element for that no additional capacities.
I'll, let you talk to the members my.
In terms of that the costs you know we recognized in the quarter.
Some cost around.
<unk> it was.
[noise] surface $7 million.
And then there'll be some capex spend over the next few years.
That that is really around reconfiguring various pieces of the mail.
Uhm.
And it it it it'll be in the realm of for $915 million.
Thank you and then.
If you could give us any insight in terms of what you're seeing currently on the raw material front.
In terms of you know.
Alright for the leveling off for beating.
Mhm maddeningly holding steady not going down just just what you're saying because you know.
Prices that we as investors may see don't always correlate exactly on.
On on the timing front in any.
Any discussion that would be helpful.
So at the moment with you in terms of raw materials. It's [laughter], it's a week to week proposition all site, yeah and and.
Supply chain to tie.
It varies by room by the type of raw material.
Whether it's polyethylene polystyrene polypropylene P.
P. T Board you know all of those things have different dynamics in the market. What we are seeing now is.
That you know on material costs, so not really a biting at the moment.
That there has been some ups some downs, but they're not they're not coming off so.
Without getting into specific sub stripes for a little yeah.
Sort of got to enter in a very general way like that.
Thank you.
Okay.
And we have no further questions over the phone lines at this time. Please continue with your presentation or closing remarks.
Great. Thank you all for Ya. Thank everyone for your time today, and we look forward to ketchup day. Later, if you have any further questions. Please feel free to reach out to me.
Thank you.
Thank you.
That does conclude the conference calling for today, we thank you for your participation and ask that you. Please disconnect your line.
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