Pactiv Evergreen Inc. Q1 2023 Earnings Call
[music].
Good day and welcome to the pack this evergreen first quarter 2023 earnings conference call.
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I would now like to turn the conference over to Curt Worthington, Vice President strategy and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thank.
Thank you for your interest in fact of Evergreen and welcome to our first quarter 2023 earnings call.
With me on the call today, we have Michael King, President and CEO and John box CFO .
Please visit the events section of our Investor Relations website at Www Dot pact of Evergreen dotcom and access our supplemental earnings presentation.
Management's remarks today should be hurt in tandem with reviewing this presentation.
Before we begin our formal remarks, I would like to remind everyone that our discussions today will include forward looking statements, including but not limited to statements regarding our guidance for 2023.
These forward looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by our forward looking statements.
Therefore, you should not put undue reliance on those statements.
<unk> are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
For all of you.
To our recent SEC filings, including our annual report on Form 10-K for the year ended December 31st 2022.
And our quarterly report on Form 10-Q for the quarter ended March 31st 2023 for a more detailed discussion of those risks.
The forward looking statements we make on this call are based on information available to US as of today's date and we disclaim any obligation to update any forward looking statements, except as required by law.
Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.
Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today's presentation.
Unless otherwise stated all figures discussed during today's call are for continuing operations only with that let me turn the call over to pact of Evergreens, President and CEO , Michael King Mike.
Thank you Kurt and good morning, everyone.
Yesterday after the market close pact of Evergreen really strong first quarter results, including adjusted EBITDA of $189 million exceeding our guidance and establishing solid momentum heading into the second quarter our.
Performance in the quarter is a testament to the resilience of our platform the diversity of our product portfolio and the tremendous efforts.
Our dedicated employees.
We will continue to outweigh.
Sections of this presentation. This morning. This is an uncertain macro environment for many sectors of the economy.
However, our results underscore the inherent strength of the pack of evergreen business model and reinforce our confidence in executing the next phase of our strategic journey.
Turning to the agenda on slide four I will start today's call with the highlights from the quarter along with an update on our previously announced beverage merchandising restructuring plan John .
John will then discuss Q1 results in more detail along with an update on our 2023 outlook.
Finally, I will close with an update on our strategic journey. We will then move to a question and answer session.
Moving to our first quarter highlights on slide number six we reported net revenues of $1 $4 billion is solid performance that reflects the many strengths of our platform and our unique ability to service our customers. While the first quarter net revenues represented a 4% decrease compared to the first quarter of 2022, excluding the.
The impacts of divestitures, primarily beverage merchandising Asia in 2022, we were essentially flat to last year sales.
Sales volumes declined due to a focus on value over volume in the foodservice and food merchandising segments in the market softening amid inflationary pressures in the beverage and merchandising and food merchandising segments.
Pricing levels were slightly higher than last year as a result of the actions we took to manage price over the course of 2022, our input costs have largely stabilized as compared to recent periods and our pricing strategy reflects our contractual pass through mechanisms and our competitive value proposition.
First quarter adjusted EBITDA was $189 million, which is ahead of our guidance.
The outperformance compared to our guidance was primarily driven by favorable mix and lower SG&A. We also benefited from an extension of key business that was previously expected to occur in the second quarter.
During the quarter, we generated $25 million of free cash flow and reduced our net leverage ratio to four to five times as.
As we will cover in more detail later in the presentation, we remain committed to deleveraging our balance sheet and we are focused on maximizing long term free cash flow generation.
We do not expect our beverage merchandising a restructuring plan to prevent us from driving solid free cash flow in 2023, and we expect our net leverage ratio to improve by year end.
Further we expect the beverage merchandising restructuring plan will put us in an even better position to generate free cash flow and accelerate our deleveraging path in 2024 and beyond.
Turning to slide seven.
2023 is an important year for packages evergreen as we execute on a number of strategic actions designed to help us focus on our core converting operations for food and beverage packaging, but position us for profitable growth in the future.
First we have already made significant progress in our beverage merchandising restructuring plan and we are confident that we will cease operations at the mill and owns that falls facilities by June .
We've also taken steps to support a smooth transition of our paperboard supply to avoid disruption to our customers and our remaining operations as we outlined in March the beverage merchandising. Our restructuring plan is expected to result in non cash and cash charges. We have since refine those estimates as follows.
Noncash charges are expected to be $320 million to $330 million, which reflects updated noncash costs associated with accelerated depreciation of property plant and equipment and other noncash charges.
Cash charges are expected to be $130 million to $160 million.
We have reduced the high end of the range to reflect lower than anticipated severance and other expenses at the impacted facilities.
Finally, as we outlined previously we have implemented a new management and operating structure for our fluid merchandising and beverage merchandising business as of April 1st.
This is a major step toward achieving the run rate cost benefit that we highlighted in March.
By combining the converting operations of our food and beverage merchandising businesses and exiting the canton, though we intend to leverage our collective efforts on active evergreens core food and beverage merchandising end markets and allow for more profitable liquid packaging operation in the future.
Not only does this aligns with our strategy to focus our consistently growing higher margin businesses. It also yields meaningful savings in annual operating cost and Capex.
We will begin reporting the financial results for the new food and beverage merchandising segment with our second quarter earnings release and 10-Q.
Lastly, we have progressed the review of strategic alternatives for the Pine Bluff mill in Waynesville facility, we do not have a definitive timetable for this process, we intend to provide additional updates on the status of their with you throughout the year.
Turning to slide eight as our results indicate we exited the first quarter on a solid trajectory and are taking the steps to improve our future EBITDA and free cash flow profile.
As a result of the strong start to the year. We are now expecting our 2023 adjusted EBITDA to be in the 775 million to $800 million range.
Of course, none of these accomplishments would be possible without the tremendous efforts of the great team at pact of evergreen.
I want to take this opportunity to thank everyone for their outstanding performance.
I'll now turn it over to John to discuss our first quarter results in more detail, including our segment performance before I provide an update on our strategic direction and closing remarks.
John .
Thanks, Mike turning to slide nine as noted in our fourth quarter 2022 earnings call. Our operating backdrop continues to be influenced by inflationary pressures not only affect our cost structure with consumer behavior as well recently, we have seen a slight moderation in broader inflation measures they remain elevated relative to historical levels.
And we expect interest rates input costs in consumer spending to remain under pressure through 2023.
Starting with volumes and demand the destocking that impacted our fourth quarter volumes was largely completed during the first quarter. So we expect that particular headwind to subside for the remainder of 2023.
The primary impact on consumer demand continues to be inflation in foodservice foot traffic in the quick service restaurant full service restaurant market segments has trended down compared to 2022 and consumers are also shifting their spend from higher end full service restaurants to mid to lower tier full service restaurants and <unk>.
Dude merchandising consumers have been balancing their food spending to de prioritize certain that certain items such as bakery products.
For beverage merchandising board sales were impacted by scheduled cold mill outage, while uncoated freesheet continues to face secular headwinds and consumption.
With respect to pricing and mix overall pricing levels are higher compared to the first quarter of last year.
As a result of our efforts to balance price versus volume throughout the course of 2022.
Relative to fourth quarter of 2022 material costs have improved slightly with more recent moderation in the current quarter.
This dynamic has also benefited other aspects of our cost structure as transportation costs natural gas energy and chemicals are all lower compared to last year.
Lastly, we continue to monitor the interest rate outlook and capital markets volatility in the wake of the recent shocks to the banking sector to assess what if any impact that may have on the broader economy and the health of the consumer.
Continuing on slide 10 first quarter year over year results.
Net revenues were down 4%.
<unk> was down 6% largely due to a focus on value over volume in the foodservice and food merchandising segments in the market softening amid inflationary pressures and the beverage merchandising and food merchandising segments.
Price mix was up 6% due to the contractual pass through of higher material costs and pricing actions in all segments.
Revenue for the first quarter of 2022, you also included the results of divested businesses, notably beverage merchandising Asia.
Adjusting for these impacts revenue was essentially flat.
Adjusted EBITDA also benefited.
From year over year price favorability and lower transportation costs.
The decrease in cash flow was impacted by lower operating cash flow due to higher incentive compensation payments and interest expense, partially offset by a strategic inventory investment in the prior year period.
Moving to slide 11 for a sequential quarter comparison first quarter net revenues were $1 4 billion down 3% versus the prior quarter volumes were down 2% versus the fourth quarter, while price and mix were down 1%, partially due to declining resin prices.
Adjusted EBITDA was $189 million for the quarter at $22 million increase from fourth quarter 2022 levels.
Despite the slight decline in revenue, we benefited from lower material costs and lower employee related costs, partially offset by higher manufacturing costs compared to the fourth quarter.
First quarter free cash flow of $25 million was lower than Q4 due to lower operating cash flow caused by the timing of our annual incentive compensation payments, which occur in the first quarter.
Continuing on slide 12, our results by segment.
In our foodservice segment year over year net revenues were down 6%.
Volume was down 5%, primarily due to a continued focus on value over volume.
Price mix was down 1%.
Adjusted EBITDA was down 3%.
The decrease in adjusted EBITDA was due to higher manufacturing costs and lower sales volume, mostly offset by lower material costs net of cost pass through and lower transportation costs.
Quarter over quarter.
Net revenues were down $19 million or 3%, primarily due to lower pricing driven by the contractual pass through of lower material costs.
Adjusted EBITDA was up $23 million or 26% due to lower material costs net of cost pass through partially offset by higher manufacturing costs.
On slide 13, our food merchandising segment.
Year over year net revenues were up 9%.
Price mix was up 15%, primarily due to pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier.
And the contractual pass through of higher material costs.
Volume was down 7%, primarily due to a focus on value over volume in the market softening that inflationary pressures.
Adjusted EBITDA was up 55% the increase was due to a price mix benefit partially offset by higher manufacturing costs and lower sales volume.
Quarter over quarter, net revenues were down slightly by $7 million or 2% as the decline in sales volumes of 3% was partially offset by favorable pricing as pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier.
I'll say that the contractual pass through of lower material costs.
Adjusted EBITDA was up $10 million or 12% due primarily to a price mix benefit partially offset by higher manufacturing costs.
On slide 14, I'll discuss the beverage merchandising segment.
Two important items to note here to put first quarter results into proper context.
Q1, we performed scheduled cold mill outage at our mill in Pine Bluff, Arkansas. These are typically done every three years and until approximately 10 days of downtime for maintenance and service at the same hill, we were impacted by winter storm Elliot at the start of the year, which also adversely impacted production either that's led to a meaningful degradation of EBITDA for the quarter.
However, since early Q2, the mill has been back up and running with normal operations.
Now for a comparison to prior periods.
Year over year net revenues were down 8%.
Mix was up 7%, primarily due to pricing actions taken to offset higher input costs and the contractual pass through of higher material costs.
Volume was down 6%, primarily due to the market softening amid inflationary pressures and a decline of 9% was due to the impact from the disposition of beverage merchandising Asia.
Adjusted EBITDA was down 96%. This decrease was primarily due to higher manufacturing costs and the impact from the disposition of beverage merchandising Asia, partially offset by favorable pricing net of material cost pass through higher manufacturing costs included $15 million related to the scheduled cold mill outage.
Quarter over quarter net.
Net revenues were down $15 million or 4%, primarily due to 4% lower sales volumes, primarily due to the market softening amid inflationary pressures price mix was flat.
Adjusted EBITDA was down $20 million or 95%, primarily due to higher manufacturing costs, partially offset by lower material costs net of cost pass through.
Next on Slide 15, we have a summary of our balance sheet and the key components of our cash flow.
We proactively reduced total debt during the quarter by repaying and repurchasing $110 million of our $1 $2 billion term loan due 2026, marking a total debt reduction of $228 million since year end 2021.
Working capital increased compared to first quarter of last year, primarily due to the strategic investment in inventory over the course of 2022 since year end, we've reduced our inventory positions in food service and food merchandising, while we built inventory in beverage merchandising in advance of ceasing operations in Canada in the second quarter. Additionally, we have tightened the range of estimated cash.
<unk> Costa can send falls, which we expect will afford us additional flexibility with respect to capital allocation, we expect to pay out the bulk of the cash restructuring costs over the course of the second quarter.
Q4 of this year.
As a result of the debt repayment, our cash balance declined to $427 million and total debt declined to $4 billion, resulting in net debt of $3 $6 billion and a net leverage ratio of four and a half times.
We remain committed to maximizing our long term free cash flow and reducing our net leverage while maintaining our focus on driving profitable growth. We also remain committed to our dividend policy as part of our long term capital allocation plans.
Looking ahead to the rest of 2023, we anticipate ending the year with a net leverage ratio in the low fours. We also plan to make additional debt repayments in 2023 as conditions warrant.
Finally, as we progress our beverage merchandising restructuring plan and strategic alternatives process for Pine Bluff in Waynesville, we'll update our cash deployment plans accordingly.
Now please turn to slide 17.
Our company continues to execute at a high level across all our business units and we remain well positioned to capitalize on future growth opportunities. Despite the near term emphasis on the beverage merchandising restructuring plan as we have highlighted the outlook for the U S economy remains uncertain as probably interest rates and still elevated inflation weigh on consumer spending which may also negatively impact.
Our customers' purchasing decisions in order patterns throughout the remainder of 2023. Despite these headwinds our first quarter results demonstrate the resilience of our food and beverage packaging business and the company's ability to deliver sustainable results. Despite the uncertainty as.
As we highlighted earlier, we have increased our full year adjusted EBITDA guidance to 775 million to $800 million. This reflects the expectation that we will build on the momentum of the first quarter to further improve productivity throughput and customer service levels.
We expect our quarterly performance in 2023 to follow a more traditional seasonality compared to 2022.
Typically our seasonality is driven by higher consumption during the summer months and into the third quarter last.
Last year, the second quarter was our strongest quarter for adjusted EBITDA. This.
This year, we expect a modest sequential upward trajectory from Q1 to Q2 and into the second half of the year, which will result, and challenging year over year comps for Q2, the more favorable cost for Q3 and Q4.
From a macroeconomic standpoint, our full year adjusted EBITDA guidance assumes no material deterioration in the second half of the year compared to current conditions.
Our full year guidance for capital spending remains unchanged versus our original guidance, while our expectation for total cash restructuring cost has been narrowed to $130 million to $160 million with the majority of these costs expected to occur during 2023.
As a result, we are introducing new guidance for full year free cash flow, which we expect to be in excess of $200 million. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate this will help us achieve a net leverage ratio in the low fours by year end.
I do want to provide some additional color on free cash flow and net leverage ratio of timing from quarter to quarter with respect to free cash flow. We expect to have negative free cash flow in Q2, followed by positive free cash flow during the second half of the year. This is due to the timing of the cash severance payments and closure costs of our canton and homestead falls, which are heavily weighted in Q.
Two.
With respect to our net leverage ratio, but we are targeting to end the year in the low fours, we expect a modest increase in Q2 as the second quarter of last year rolls off our LTM adjusted EBITDA figure. In addition to the cash dynamic I just discussed.
In 2023 is expected to follow a more traditional seasonal trend, we expect to see more consistent adjusted EBITDA results from quarter to quarter and declining net leverage through year end.
Moving to slide 18, we have provided a bridge from our reported 2022 adjusted EBITDA to our previous and updated guidance for 2023 adjusted EBITDA.
On the far left is our 42022 adjusted EBITDA of $785 million as we outlined in our fourth quarter earnings call. The adjusted EBITDA contribution in 2022 from divested businesses and our Canton mill operations on a partial year like for like basis was approximately $30 million.
This brings our pro forma 2022, adjusted EBITDA to $755 million, which represents a like for like basis compared to our guidance for 2023 adjusted EBITDA.
Our original guidance was for 755 million to $780 million of adjusted EBITDA for 2023, which represented one 7% growth at the midpoint compared to 2022.
With our revised guidance today, we now expect full year adjusted EBITDA in the range of 775 million to $800 million, representing four 3% growth at the midpoint compared to 2022 to put this into perspective, the congressional budget office's. Most recent estimate for U S. Real GDP growth in 2023 is only 0.3.
3%.
I'll now pass it back to Mike for further comments.
Thank you John Please turn to slide 20.
This is an important year for pact of evergreen as we build upon our foundational strengths and increase our focus on our core competencies.
Just as important to put 2023 into context of our strategic direction.
Over the last two years, we expanded and strengthened our position in foodservice and consumer packaging goods through our acquisition of fabric Hill integrating great brands, such as Greenware and recycled where we.
We made great progress in refining our portfolio to focus on our core operations in North America by executing multiple divestitures of non core businesses, including the sale of our beverage merchandising Asia business.
This year through the beverage merchandising restructuring, we have taken significant steps to solidify our leadership position in large growing end markets, while prioritizing our distinctive core strengths.
Through it all we've made strides in our ESG stewardship.
Goal of having 100% of our net revenue come from products made of recycled recyclable or renewable materials by 2030.
This past quarter, we published our first ever task force on climate related financial disclosures.
Report and plan to integrate the results into our enterprise risk management program in.
In addition, we are actively working with our customers to develop unique products to help them meet their sustainability goals.
A copy of the Tcf Pea report may be found at investors that cause evergreen dot com under the ESG documents section finally, we have dramatically reduced our net leverage profile from seven six times at the end of 2021 to four five times as of <unk> 2023.
Through a combination of solid free cash flow proceeds from divestitures of noncore businesses and improved EBITDA performance.
While 2023 is a transition every year, we do expect to grow EBITDA and generate solid free cash flow. Despite the beverage merchandising restructuring costs, we anticipate a continued reduction in our debt levels and our net leverage over the course of 2023.
As John mentioned, we are targeting a net leverage ratio in the low fours by year end we.
We believe these actions will build additional momentum on our existing position as the market, leading north American food and beverage packaging company.
We expect our streamlined focus on our core converting operations to help us drive incremental revenue and EBITDA growth as well as enhanced free cash flow conversion.
This in turn would help us deliver dependable returns and reduce our net leverage to under four times.
In summary, we believe we have a robust platform that enables profitable growth and sustained returns with the financial wherewithal to pursue organic and inorganic opportunities to add to our business. We continuously evaluate our portfolio to ensure that we have the optimal mix of products and capabilities to meet our customers' needs and to ensure.
Sure that we are deploying our capital to maximize shareholder value.
We also maintain the flexibility to divest noncore businesses to help us focus on our core markets as well as delever our balance sheet.
On slide 21, I'd like to reiterate what makes pack of evergreen a strong differentiated growing and socially responsible business.
We are an industry leader in foodservice and food and beverage merchandising and our markets are largely recession resilient.
We are also focused on generating sustainable returns and the leadership team has demonstrated our willingness to optimize the portfolio in ways that put us in the best position to deliver on our commitments.
We offer a broad array of products and substrates, we have longstanding strategic partnerships with our customer base, many of which are blue chip companies.
We are constantly working to innovate and develop the highest quality sustainable products.
We set a goal of having 100% of our net revenues in 2030 come from products made of recycled recyclable or renewable materials.
All of those yields strong adjusted EBITDA and free cash flow generation.
We carefully managed to drive deleveraging and further growth through our disciplined capital allocation process.
In closing I would like to thank all of the purgative evergreen workforce for their continued commitment and hard work.
Also like to thank our valued customers and vendor partners for their continued commitment to our mutual success with that.
Let's open it up to questions.
Operator.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Paul <unk> from JB with it I think go ahead.
Hey, guys. Good morning, and congrats just a very strong start.
I guess, you know Michael going back to your prepared comments on you know the obvious which is the consumer spending environment and the associated uncertainty can you just give us a sense as to how youre thinking about volumes on a segment basis as you cycled through the rest of 2023 your comparisons are quite a bit easier.
But there is that aspect of and.
The end market weakness, so any updated thoughts there.
Yes.
When you think about around like.
The way, we're thinking about it is that.
This environment, albeit challenging.
We expect that same kind of challenge to continue through the balance of the year.
Yeah, we are.
We are seeing a consumer.
Consumer moderation in foot traffic.
The room dining.
<unk> is real.
Good news for our business is that when the consumer does not it just moves the business from our foodservice channels, where food merchandising chairman. So looking at our Q1 results was the challenging macro.
That's kind of that's kind of how we view the year that there won't be.
It won't be a big pop or an improvement in the.
And the consumer sentiment. So we do believe that this is sustaining through the balance of the year.
And that's included in how we're thinking about our outlook.
The other thing to add to that would be.
If you look at 2022 comps in the back there was a large.
Destocking in many of our customers kind of kind of ran and dribbled into Q1, we do believe that's largely complete.
No.
Could be an interesting back half of the year should show the consumer.
Stay stay where they're at today it could be a benefit even through our forecast.
Okay got it and then your comments on the extension of business in the food merchandising anything you called that out as one of the positive variances relative to your internal expectations for <unk>.
Just expand on that you know is is that is it going to start to impact on your volumes as you go through the year for that segment.
In terms of the extension of the business so that was.
In terms of.
So to give you some context and theres a bit more disclosure in the 10-Q that we filed today. So that was essentially a extension of some of the key terms that we had with the <unk>.
<unk> It was a two way agreement under which we supply products RCP and RCP supplies product to pass that screen.
Because there was a cola revision that was signed in Q1.
It was we expected decided in Q2, which is why we had an incremental benefit to the quarter and there was a bit of a.
Is it retroactive recovery for inflation in there.
And just to give a little bit of color as a color revision applied in both direction. There was a net benefit to package of evergreen based on the difference between the old and new pricing and the fact that we saw more of the RCP that we buy from RCP.
We received a true up during the first quarter, which resulted in a roughly 12 and a half million dollars adjusted benefit in the quarter.
This includes roughly $75 million related to prior periods.
Okay, that's very clear thank you.
The next question comes from clearing the ground with Mizuho. Please go ahead.
Hi, good morning.
I was wondering if you could talk a little bit more about pricing and how we should think about pairing like the cost pass through with what we may call. It structural price increases that would stick because as costs subside in and how you think about that trending throughout the rest of the year. Thank you.
Yeah, So really the way we think about pricing.
We have structured index based mechanisms in our contracts.
From a raw materials and those are all on a pass through.
I would say.
The non index or the more cost of living associated costs.
We are.
<unk> built into most of our contractual pricing that allow us to do.
We continue to get the support from our customers where inflation and cost pressures continue.
So a few.
Looking at our.
Improved margins, it's really a result of just how we think about pricing as you know we're pretty elastic in on both the index that you stand up the cool stuff. So.
That's kind of how we approach it.
How are we approaching in their outlook.
No that's very helpful and maybe along those lines you know when we think about the pricing.
For value and against volumes, how how do we think about the impact potentially on volumes from those actions throughout the course of the year. I mean is there a way to parse out maybe Q1how much of the volumes.
How much is volume impact was from like Destocking versus just general market weakness versus some of the initiatives that you're taking to.
Price for value as opposed to just chasing volume. Thank you.
Yeah. So.
So to understand the difference between what would the destocking versus maybe a value over volume impact could be but what I would tell you generally is.
With where our service levels continue to be well over 99% and will be kind of supporting our customers as given.
<unk>.
And supporting inflationary costs.
We'd expect that to continue we have no large.
Volume degradation assumption related to our value over volume strategy.
And certainly.
Aren't chasing volume by any means.
As a strategy linked to pricing.
I'd, probably just add if where we are losing some of the where you do see some of that volume did a great degradation. It is more on the margin and its more towards the towards the lower margin margin customers, which is what are you seeing the value.
The benefits of that approach paying off in the in the EBITDA.
We're reflecting.
Mark I would say no more I should say.
Great. Thank you.
[laughter].
The next question comes from Arun Viswanathan with RBC capital markets.
Go ahead.
Great. Thanks for taking my question Congrats on a strong first quarter.
You you gave some very helpful comments in the prepared remarks regarding the EBITA bridge. So when you think about that midpoint of the guidance now.
Yeah, Hi, seven eighties.
It sounded like your second quarter facing some tough comps so maybe that looks a lot like first quarter.
And then you know that that would remain that would leave about a 400 million for the second half. So it would imply a little bit of a better.
Better second half.
Am I thinking about that the right way, maybe just provide.
Provide some more detail on how you're thinking about the EBITDA progression through the year.
I think you have the right.
Certainly the back half of the year.
Just just with.
Destocking that reoccurring.
Our assumption around a softer.
Macro economic manner.
Certainly things getting worse, but with the current.
Challenges.
Through the end of the year, that's exactly right.
Q2 last year, obviously the comps look.
Declining input costs.
And us rebuilding our strategic inventories and things like that.
Really solid Q2.
They had some uniqueness that won't reoccur so.
I think you have the right to be considered.
Exactly how we're looking at.
Great.
Yeah.
I agree with all that Mike.
We expect our QQ volumes and adjusted EBITDA, both improved compared to Q1 levels, mainly due to seasonality as we just mentioned.
Again to note, we do not expect the second quarter 'twenty three to exceed the second quarter of 'twenty two volumes or adjusted EBITDA just given the.
The strength of Q2 of last year, which was our best quarter.
Yeah right.
And then when you look into the medium term. So you have some strategic alternatives for Pine Bluff U exited.
Exited some other noncore businesses.
That accounted for I think 30 million of EBITDA last year. So when you look into 'twenty for them. We should still expect growth is that correct on better maybe slightly again no destocking.
You know, maybe a little bit healthier consumer.
And are.
Some of the actions that you've taken internally.
So would you expect kind of mid single digit EBITDA growth as it is kind of a steady state or how are you thinking about the medium term now.
Yeah, we would expect growth.
I think I think it remains to be seen as to how strong our growth, but I don't think you know single digit who's out of the question I think thats probably more realistic.
Absolutely.
We're expecting them to grow.
Okay. Thanks.
The next question comes from Anthony Pettinari with Citi. Please go ahead.
Hi, good morning.
Your your your <unk> EBITDA margins I think we're up 100 bps year over year, you know as we think about <unk> is there sort of a directional way to think about margin trajectory and then just more broadly is there a way that you think about sort of normalized margins for the company or maybe a long term target.
I think last year, you were at 12, 5%.
Wondering if you can give us sort of a near term view and then if there's kind of a long term.
Bull or sort of normalized view.
Yes, sure so just to put it into some context.
This current quarter Q1, we did see some from a corporate standpoint, some mark the margins were better as you you you referenced but they were still brought down by.
Some of the events in the beverage merchandising segment, which are some one time as I mentioned in the prepared remarks due to the cold mill outage and the effects of a winter storm.
Getting beverage merchandising more normalized we do have a little bit of noise. There this quarter as we are closing.
We are closing cabinet that fall this quarter.
As we get that more stabilized you would see that the margin from that segment will improve and then add that and.
And is that is.
Is that gets normalized youll see that the overall corporate margins will improve going into the outer year quarters, I would say on a long term basis.
We're generally trending towards we we aim to be in the mid to high teens in terms of where our normalized EBITDA margin should be in and by the way that's not a stopping point, we will continue to push ourselves to exceed that but that's I think that's the right way to think about where we'd expect to be in the near term.
Okay. Okay, that's very helpful.
And then just you know there was a kind of a spike in polypropylene prices in the quarter I'm. Just wondering if you could kind of remind us your impact.
Or your exposure rather than a polypropylene and then just more broadly kind of assumptions about resin costs as we go through the year for your guidance.
Yeah, we did experienced that as a reminder, we do have a majority of our contracts do have resin pass throughs and those that are not contracted we tend to price on the spot market and so we'll recognize the material price path that resin price pass throughs things like propylene on the spa.
What market I would say that as a reminder, there is a lag effect with with those as you know and so as we are seeing a bit of spike more recently in polypropylene.
There will be some margin impact in the short term that which we will get back as that normalizes or it comes back down a.
But the current current environment for our propylene specifically use factored into our.
Our guidance scenario based on what we're seeing in the marketplace.
Okay. That's helpful I'll turn it over.
The next question comes from Kyle White with Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for taking the question S.
SG&A inflation was a fairly large headwind all of last year. This quarter was actually positive on a year over year basis.
With some of your cost management should we expect SG&A to be lower this year and for that bucket to be positive and any kind of range of benefit that we should expect that's included in the outlook.
Sure.
Do you do pick up on that trend. We are working very actively on cost management. We did we are we did see a decrease in SG&A you know part of it is the restructuring that we mentioned so we are going to be recognizing some benefits to that we should see the full run rate of that into going into next year to the tune of around 30 million.
So you're seeing some of that there are some other lower.
Kind of onetime incentives pieces that were in 2022 that we're not seeing in 'twenty three.
That is offset by some inflation. So we are seeing inflation in certain areas, but as you can tell we're proactively managing our <unk>.
SG&A costs. So despite some of the inflationary headwinds we are doing everything we can to continue to lower SG&A costs.
Got it and then on foodservice you talked about consumers trading down, but curious if you're actually seeing a similar dynamic as it relates to your business customers are.
Are they going to are they trading down to cheaper options that may not be viewed as sustainable is that having any kind of <unk>.
Applications on your mix.
So we're seeing the trade zone, I would say to a lesser extent.
It's a mixed bag, whether it's favorable or unfavorable to mix.
With people choose them to get their calories at a lower cost.
Things.
In room dining in.
The trade down to you know more.
Chain or fast food base.
Consumption and uneven largely if you use Q1 as a good example.
People, returning returning to eating at home quite a bit more has the lowest wage costs, where they get calories. So.
The good news for US as you know, we don't lose the volume when the consumer trade down.
These shifts where they ship the chairman, which they consume.
And largely our products are channel agnostic outside of the branded space. So we don't see them.
Our margin mix impact per se we.
We do we do experience.
The shift.
And in the legs behind that consumer shift so.
It's really the.
The impact to our business as you know were just there.
Our our production and inventories to meet that shifting consumer.
Got it thank you I'll turn it over.
As a reminder, if you would like to ask a question. Please press Star then one entered the question queue.
The next question comes from questions together with Bank of America. Please go ahead.
Yeah, Hi, good morning. This is Catherine sitting in for George Staphos. This morning.
So you called out a couple of times that manufacturing costs were higher across the segments. So I was just hoping to get a little bit of a better understanding as to what was driving that and then how can we think about that.
Okay.
Trending for the rest of the year. Thanks.
Yeah.
The inflationary challenges around labor and the cost of labor is real.
No.
Get the right kind of applicant flow in and get the right folks trained.
Costs are all higher coming into the year.
We would expect that to continue.
You know what.
One of the one of the key focuses for our businesses to ensure we maintain the.
The highest service levels and protect our customers.
In order to do that.
We've made it a focus to ensure that we're bringing in.
Alrighty candidates and investing in them. So that's really.
Where we're seeing seeing the costs continue it's really more about.
We've seen over the last kind of 12 to 18 months.
Albeit it is starting to taper off that's really the gist of it and that is that is contemplated in our outlook as well.
One other thing I'd add is just you know as you look at some of the volume declines that we're seeing albeit modest you know there is a bit of an absorption impact here.
That's influencing that manufacturing cost.
Got it got it.
And then just secondly, I guess longer term in terms of the capital needs of the business. How can we think about kind of what the normalized capex level should be.
Maybe as we move into 2024, and then Relatedly I guess on on free cash flow and our leverage how can we think about that particularly as you move beyond kind of the restructuring actions that you're taking this year.
Yes.
Yeah sure love to cover on that so first on the capital needs for the business. So.
Given the restructuring that were undergoing part is the goal of that restructuring around the bedroom merchandising segment is to lower our run rate of our ongoing capital need. So this year for example in the business.
We're expecting to have about $150 million of sustaining capital about $50 million of which is which is in the mill.
The remainder of that you know there are a portion of that that is.
Another portion of the 280 of our guidance. This year is focused on.
Smaller business.
Opportunities in growth projects, including the $60 million new.
New equipment that we mentioned on the last quarterly call from a run rate basis going into next year, we haven't provided guidance, yet, but you know.
It's from a sustaining and kind of the minimal capex to run the business it will be coming down due to the restructuring that if that's helpful.
As it relates to free cash flow guidance you know that's probably helpful. For me to just give you a walk of what's the what's going into that to build up to the 200 million plus that we're guiding to.
To start the bridge.
That's beginning EBITDA, if you take our $775 million to $800 million.
You subtract out the $280 million of Capex that we guided to.
Cash interest were expecting to be around $250 million, which is a bit lower from the guidance from last quarter.
Part of that is LIBOR has come down and we've also done that.
Repaid some debt, which has lowered that overall interests cash taxes about $70 million and then the beverage merchandising restructuring charges. As we mentioned the majority of that is going to be in 2023 with probably a disproportionate amount in Q2.
Call that somewhere around 120 to 130.
For for this year.
So the remainder then for the free cash flow is working capital benefit we expect this year.
And to give you a sense of that that includes <unk>.
Net inventory reduction once we cease production in Canada, one of the primary drivers will be the transition stock of paperboard inventory, we built to facilitate that and we expect to work through that stock through the end of the year.
Additional opportunities to further reduce overall inventories without impacting.
Our service levels.
One area to highlight is working more closely with our customers as well on forecasting and while they are also improve their own forecasting and so by aligning our planning we've been able to improve service levels and improved efficiencies, which allow us to manage our inventory more effectively and then we're making concerted efforts to improve other overall working capital efficiency as well.
And then finally, just don't want to reiterate our commitment to pay down debt and so you've seen that throughout our actions and will continue to look for ways to pay down debt with our with our excess cash.
Great. Thanks.
This concludes our question and answer session.
I would like to turn the conference back over to Mike King for any closing remarks.
Thank you all for joining US today, we appreciate your interest and questions. We are excited about the momentum we are building effective evergreens, we continue on our long term strategy.
We look forward to updating you again in the next quarter. Thank you.
Uh huh.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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