Q2 2023 Pactiv Evergreen Inc Earnings Call
Good day and thank you for standing by welcome to the Pact of Evergreen second quarter 20 twenty-three earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you wouldn't need to press star one one on your telephone you within your an automated message advising your hand is raised to withdraw your question. Please press.
Darwin one again.
Please be advised that today's conference is being recorded.
Now like to hand, the conference over to your Speaker today, Kurt Worthington, Vice President's strategy and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone.
Thank you for your interest in fact without the rain welcome to our second quarter of 2023 earnings.
On the call today, we have Michael Chang, President and CEO and John Berks Seattle.
Please visit the events section of our Investor Relations website at Www dot attractive evergreens dot com.
Except our supplemental earnings presentation.
His remarks today it should be hurt in Canada with reviewing this presentation.
Before we begin our former remarks, I would like to remind everyone that our discussion today.
And statements.
Including but not limited to statements regarding our guidance for 2023.
Forward looking statements are not guarantee of future performance and actual results could differ materially from those contemplated by are forward looking statements.
Therefore, you should not put undue reliant on those statements.
For all of you to our recent SEC filings, including our annual report at one 10-K for the year ended December 31st 2022, and their quarterly report on Form 10-Q quarters ended March 31st and June 30th 2023 for a more detailed discussion of those right.
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.
Certain gap.
<unk> financial measures, which we believe can be useful in evaluating Arkansas.
Or non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with cats and reconciliation to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today's presentation.
Otherwise stated all figures discussed during today's call for continuing operations.
With that let me turn the call over active evergreens, President and CEO , Michael K like.
Thank you Curt good morning, everyone.
Yesterday after Mercury close active evergreen reported solid second quarter results, including adjusted EBITDA of $217 million with margin expansion relative to the first quarter.
Regenerated drunk free cashflow $74 million.
Yeah.
You've been poured milestones in her beverage merchandising restructuring.
[noise] performance in the quarter reflected a return from your traditional seasonality.
Phone calls control across the organization as well as we adapted to the current environment and continued our multi your journey to eliminate waste and improve their credit activity.
The first half of the year.
Consistency and the credit card industry has been uncertain macroeconomic environment.
The impact of persistent inflationary headwinds and consumer spending.
Is there a second quarter performance demonstrates our coverage continues to execute on a strategic priorities deliver salad results. Despite these headphones.
Turning to sway for.
I'll start today's call with a brief review of our key strategic priorities.
I will also provide an update on the beverage merchandising restructuring, including an overview of our new segment reporting structure Jerry.
<unk> will then discuss our second quarter results in detail cover or upgrade of 2023, I'll look before moving to your question and answer session.
We're gonna slide number six.
I've never been with the company is the CEO for just over two years. So I wanted to take a moment to reflect on how far we've come and highlight some of the successes we have.
Since launching a transformational journey.
We acknowledge that we face challenges over the last few years and the journey is far from over.
We are extremely proud of the great strides your organization is made in the early stages of their transformation.
Slide really put the transformation into perspective are underlying value proposition remains the same.
We have the broadest product and substrate offering in our markets with leading positions are most of our core product categories.
Commitment to expand our sustainable offerings.
Arrival production and distribution footprint that allows us to deliver any product anyplace anytime.
Our family relationships with Blue chip customers and brands.
Over the years, we build partnerships with our customers to help them. So you can meet the changing needs of the consumer.
And as a result, we are uniquely positioned to capitalize unfavorable longterm fundamentals oppressor in markets generating attractive free cash flows and EBITDA growth.
These core strengths under Kendra base of our transformation that will propel profitable growth into the years ago.
To provide me with some perspective on how far how far we've come.
The beginning of the transformation, we were a global company, you're vertically integrated from paper meals to converting operations at the same time or operations were fairly decentralized and our clients operated somewhat independently.
Lastly, we had an elevated not leveraged profile, reflecting their previous private company structure.
Well, we built is the best in class and implemented a number of operational strategic initiatives to strengthen the business and put us in the best position to execute this transformation.
On the right side of the slide.
You'll see.
We're we're moving through.
Some of which we've already achieved in some areas are still in place.
We are streamline the organization to focus on the regions and businesses that are best positioned to drive shareholder value.
We concluded that we do not have the necessary skill outside of North America, and our paper mills required significant capital investment to generate attractive returns for our shareholders. So he made the decision to reduce our exposure in these areas.
These are not easy decisions, but we strongly believe that resulting focus and they're more capital efficient business profile is more compelling for our stakeholders. We also created centres of excellence across manufacturing engineering logistics supply chain finance to reduce waste and drive continuous improvement across the enterprise.
Original excellence is a very important component of our journey.
We have begun reaping the productivity and efficiency benefits of those efforts.
These advances have already contribute to our performance over the course of 2022 and into 2023.
Going to highlight those efforts today, because we are central to our ongoing transformation and we still have significant room traditional games.
Invested in our product portfolio to stay on trend increase our sustainable offerings with the acquisition of February 2021.
This acquisition increased our exposure to consumer product packaging and brought sustainable brand like green, where in the packed a better grade.
Finally, we have significantly reduced our net leverage ratio.
Pays to be in the workforce by the end of the year and his line of sight to be under four times next year.
Course, we wouldn't be doing all this if we didn't believe that the resulting business profile because it's in the best position to drive profitable growth in the future.
Names that we have the leading physicians and almost all of our product categories and are well positioned to capitalize unfavorable secular growth drivers I strongly believe in celebrating our successes and our company is achieved many impressive milestones, but in order to put all this together into a proper context, it's important to explain the foundational work that has made us all.
Possible.
Please turn to slide seven.
Those who know me know that I'm brutally honest about a meeting on issues need to be addressed.
I'm very passionate about building a winning high performing organization.
For a pack of evergreen, it's not a stretch to say that we are effectively Ria managing your company from the ground up beginning with our mission purpose and values and extending through our key strategic initiatives.
Virtually we had to re establish our common purpose packaging a better future. That's the foundation for everything we do and it's the compass for all aspects of organization.
That's our values are the very fabric of our business together with our purpose They act as our DNA.
We recognize the entire organization needed to adapt to buy into the foundational beliefs to build an accountable high performing culture, ultimately, resulting in improving our results in all areas of the business.
Protective evergreen employees are purpose goes far beyond making great products for great customers and brands. The Senator joint belief that we can make this world better every single day through our efforts as a pack of evergreen family.
Make our communities our neighborhoods and those around us better using our efforts.
Business as a springboard for a better future. Our purpose is truly be covenant inspiring heartbeat of this great organization.
From there we defined our key strategic initiatives with a goal of reinventing our business and all ultimately unlocking packed of evergreens full potential as an excellent focused winning business.
Over the past two years, there really has been a grass roots effort across all aspects of our organization is everyone has embraced our journey towards excellent, particularly within the operational excellent color and two.
Thousand 21 restarted by stabilizing our operation and focusing on eliminating value leakage within our facilities.
We recognize that we needed to do a better job of balancing your costs with the mammals, managing our production schedules optimizing the flow of product across our network.
To their clients are more agile and are better equipped to scale with changing market conditions.
We've seen better overall equipment effectiveness, lower unplanned downtime and higher productivity across the board.
To put this into perspective, our journey from $531 million of adjusted EBITDA in 2021.
785 million dollar adjusted EBITDA last year would not have been possible without these efforts while.
We've made significant progress on our journey.
More exciting Parker packed of evergreen is that we have a great deal of opportunity continued drawing and unlocking our full potential.
With this foundation you are now focused on applying these improvements to a platform that serves as a springboard for future value creation.
Moving to slide number eight.
The next phase of our journey kicked off this year with the implementation of the passive evergreen production system also known as pets.
This really institutionalizing standardized everyone's efforts across the organization.
<unk> just a production system, it's a holistic management philosophy that touches all aspects of our operations.
The measures performance across all of our facilities and a consistent and standardized method.
Drives accountability through all levels are manufacturing plants warehouses and centres of excellence.
It also promotes best practices and continuous improvement in short Pepsins, an investment into a roadmap that reads our facilities to successful in acquiring the company's strategic goal of eliminating waste.
The slide provides an overview of the key elements of pets, how we measure success and where we are in the journey.
Consists of six elements.
Environmental health and safety quality people asset care continuous improvement and supply chain management.
These elements are supported by a total of 250 concrete directions and expectations for implementing the system called requirements in order for a plan to become Pep certified it must demonstrate.
Documented policies and procedures as well as operational adherence where and at least 70% score of the pets requirements, including 100 per cent of the requirements related E H N as in quality.
Each certification level wages of Barford here with the pets requirements with each plant that becomes Pep certified we increase our opportunity to share best practices and improve our ability to replicate operational excellence across the organization.
You can see we have a total of five certification level, starting with burns and concluding with diamonds.
Now I should stress that.
<unk> a full commitment from everyone at the facility to achieve any level of pet certification.
From brands to Diamond. This is also a multiyear effort as we move all of our plans to a unified production system.
We must all recognize this doesn't happen overnight.
With that said all of our locations have completed their self assessments.
Which is a critical first step in their past the operational excellence within that 27 has completed the first formal peps assessment and over those 27 six of the production facilities have achieved brown status and just the first six months rolling out the Pepsi program.
And we are hoping to reach a total of eight certified by year end.
This is a tremendous accomplishment in a very short period of time, and we hope to build on that momentum, but having 75% of our certified by next year.
100% by 2025, we anticipate three to five sites that will achieve silver next year and have.
The goal of having your first old site certified before 2025.
We are still early in the pet's journey, but the operational improvements that our facilities are significant.
We're excited about the impact this will have throughout the organization in terms of waste elimination, improving your scalability and their operations.
Please turn to slide nine another team that I would like to highlight as our ears teaching which continues to execute on our sustainability goals.
As a reminder.
<unk> ability missions provide innovative products that deliver safe fresh convenient food and beverages, while valuing at planet people in our communities.
You set the ambitious goal of having 100% of our net revenues come from products made using recycled recyclable or renewable materials by 2030 and.
Important enabler of our sustainability journey is our ability develop sustainable solutions for our customers and help them meet their sustainability goals, making us a trusted partner and supplier of choice.
In an effort to help our customers make educated buying decisions. We commissioned two studies to measure the environmental impacts of several products we offer.
One study compared our fresh beverage curtains to alternative formats and found it or curtains had less overall environmental impact.
The other study compared to <unk> made from seven different materials and the results show that all her phone versions with recycled content offer our customers a product at the lowest overall environmental impact.
Second we know that investors regulators and other key stakeholders are increasingly emphasising private risk related disclosures and we are executing that our plans to achieve greater transparency when it comes to these matters.
The most significant step we've taken to identify and disclose our climate related risks, which you'll find in our climate related financial disclosure report released earlier this year, along with our CDP disclosure, which was submitted just last week.
Turning to slide 10, or beverage merchandising restructuring continues to progress on schedule and we remain unfazed to achieve the operational milestones there'll be communicated from the outset.
As a reminder, this is an effort to streamline a physical footprint to focus on converting operations, resulting in lower operating costs and the more caprylate operating structure, both of which supports an increased free cash flow generation.
We successfully ceased operations at the camp mill and almost falls facility on May 24th which was the head of our previous guidance will be discussed in the first quarter.
We continue to review strategic alternatives for Pine Bluff, and wait until as well, we do not have a definitive timetable for this process. We intend to provide additional updates on the status of that review throughout the balance of this year.
Lastly, as.
As we previewed and our first quarter results with food merchandising and beverage merchandising businesses have been combined and we are now reporting the results for the new segment. This quarter, we remain unfazed to achieve the expected $30 million and run right cost benefits from the restructuring in 2024, and we are excited about the company's enhanced.
As a physician and food and beverage merchandising as a result of this streamlined operations and lower Capex requirements.
Overall, it has taken a tremendous effort for all of our employees, particularly employees and the impacted facilities to help us achieve is very important milestones and proud of everyone's dedication commitment and continued hard work along the way.
Turning to slide 11, now that we have combined our food and beverage merchandising businesses into one reporting segment. Our company. Now consists of two reporting segments. This is free service and their food and beverage merchandising businesses.
Based on our 20th 22 results are food service segment accounts for approximately 44% of our consolidated revenue Likewise, the new food and beverage merchandising segment accounts for the remaining 56% or consolidated revenue in the <unk>.
Following slides I'll provide an overview of each segment in more detail.
Slide 12.
The shows an overview of our new food and beverage merchandising segment, which combines the blood product lineup of our food merchandising business with the fresh beverage curtains and filling equipment from our legacy beverage merchandising businesses.
These businesses served grocery stores need egg agriculture, and CPG predecessors, as well as beverage companies, we expect our food and beverage merchandising segment benefit from changing consumer behavior, the drive longterm growth.
Our customers are expanding the range of prepared food offerings to address can consumers desire for fast fresh inconvenient meals.
Consumers are also increasing their consumption of fresh proteins and proteins as well as non Gary and specialty beverages and supportive of more healthy active lifestyle.
We're extremely proud of our strong position in the food and beverage market with customers, including nine of the top 10 U S grocery retailers and eight of the top 10 largest companies in the U S.
<unk> team includes an overview of our food service segment, which produces food containers drink, where tableware and service where.
Food services primary channels are chain restaurant food distributors convenience stores and institutional food service outlets like airports schools and hospitals.
We expect their foodservice segments capitalize on secular tailwinds, such as the expansion of takeout curbside pickup and delivery facilitated by e-commerce as well as changing consumer eating habits, the benefit restaurants and convenience stores.
Our food service customers are also training towards products with better performance and sustainability futures, we expect this to drive incremental value for our business.
We are proud to be a tough supplier to many of our customers across our product categories in the aggregate, including for the largest <unk> groups. In addition, we are a top suppliers exclusive ranted items for the top worldline distributors in U S with that I would now like to turn the call over to John .
To discuss our second quarter results in detail, including our segment performance.
John .
<unk>.
I'll start with our second quarter highlights on 515, we reported net revenues at $1.4 billion for the quarter unexpected. This represents a decrease compared to the second quarter of last year, which benefited from a combination of tight supply and careful timing I've contractual pastors to generate historically strong spreads.
The last quarter of the year over year comparison is also impacted by divestitures that occurred during 2022 as well as your operating days of our Cat Mail, which ceased operations may.
Second quarter, adjusted EBITDA was $217 million as we were successful at hydrating, our volume mix, while maintaining cost is flying across the enterprise.
Also allowed us to expand adjusted EBITDA margin, five 200 basis points compared to the first quarter.
Very strong adjusted EBITDA margins from the second quarter of last year.
F. We previewed on our first quarter earnings call, we increase free cash flow with $74 million in the second quarter, which includes $42 million a restructuring related cash outflows.
Excluding those outflows free cash flow is ever $110 million, reflecting as strong inherent cash generating potential of our platform.
This helped us repay $180 million or gas during the quarter.
Free cash flow benefit of this quarter from $47 million of inventory reduction the majority of which was related to closing an account mailed during the quarter. This brings us to $166 million a benefit over the last three quarters.
In the context, we completed our strategic inventory build about a year ago, but the goal of increasing our service levels, which was needed during the period of higher market uncertainty.
We got better line with our customers today, which has allowed us to work towards a more normalised inventory level and free of cash along the way.
As expected net leverage increased to $4 seven times and a quarter due to the second quarter of 2022 rolling off our LTM adjusted EBITDA figure as year over year comparisons used during the second half of the year. We remain confident that we will achieve net leverage in the forest by year end further we expect that the actions taken this year.
Allowed to continue driving free cash flow generation, and Delevering 2024 and beyond.
Turning to slide 16, our end markets are showing signs of Stabilising and supply chain to continue to normalize. In addition, we were driving alignment with our customers to meet consumers' changing demands.
Discounted against the backdrop of inflationary impact on consumer spending raw material costs and interest rates, while each of these areas is moderated sequentially. They remain elevated compared to last year. However, the company has responded effectively to the challenges by managing our control the costs to maximize profitability in free cash flow.
I was expecting overall customer demand rose in the second quarter compared to the first quarter.
Benefited from the traditional seasonal uplift caused by warmer weather, which tends to increase demand for cold beverages, fresh produce and outdoor entertaining which in turn drives demand for our products.
<unk> customer inventory Destocking was mostly complete by the end of the first quarter. So he's not experienced material headwinds on that front during the second quarter.
Side of our material cost passengers pricing levels general or flat accumulative effect of our value of volume strategy over the past year as we focus on meeting our customers needs.
And that's in the last quarter, we benefited from lower transportation costs in line all right to continue to improve compared to this time last year. In addition, we are seeing benefits from agent control the costs by trading efficiency of our internal logistics network and scheduling our production laborer more effectively.
Finally, we continue to manage our interest rate exposure by proactively pangong floating rate that including repaying $180 million of debt during the second quarter.
Now turning to slide 17, before I discuss our second quarter results in detail I want US provided brief explanation for the new second financial reporting using our full year of 2022 results as a reference point.
Starting with food and beverage merchandise games revenue and adjusted EBITDA, mostly consists of legacy merchandising goodness and legacy beverage merchandising business, although it's better line with our customers. We reorganized the management of a handful of product lines from our fruit service segment, and the new food and beverage merchandising segment based on all your twenties.
22 results that reorganization amounted to $169 million of revenue in $21 million. Adjusted EBITDA is added to food and beverage merchandising results. Likewise, the only change to the food service report financial results was the reduction of revenue and adjusted EBITDA by the same amounts are results from the second quarter of two.
Twenty-three reflected in your reporting structure.
Continuing on slide 18 second quarter year over year results.
Does that the stage the second quarter of 2022 represented the seasonal high point for the year, which impacts are year over year comparison of second quarter of last year benefited from historically favorable spreads driven by the timing of our contractual passes coupled with general supply tightness the benefit of second quarter, Michael market dynamics relative to the rest of the year.
The second quarter of 2023 reflects the more traditional seasonal trends.
Net revenues are down 13%.
Volume was down 6%, mainly due to the focus on value of volume and the market softening a medium fish inflationary pressures.
Vice makes us laugh.
Revenues are down 7% due to the divestiture beverage merchandising Asia in August of 2022, and you can't mill impact second quarter of 2023.
Justin EBITDA decreased 13% due to lower sales volume higher manufacturing costs, given button inflationary impacts on conversion costs and lower absorption. This also reflects impact from the divestiture beverage merchandising Asia and the closure of the camp mill, partially offset by lower transportation costs three.
Free cash flow increase due to networking capital benefit driven by an inventory reduction and lower capital expenditures, partially offset a restructuring related cash outflows and higher interest expense.
Moving to 519 for sequential order comparison so.
Second quarter, net revenues or $1.4 billion, approximately flat versus the prior quarter, our sales volumes due to seasonal trends are offset by the closure of the cabinet held during the second quarter of 2023, and unfavorable pricing driven by contractual past due to the large material and material costs.
Adjusted EBITDA was $217 million for the quarter and $28 million increase from first quarter of 2023 levels. Despite.
Despite revenue being approximately flat, we benefit from higher sales volume lower manufacturing costs, and lower transportation costs, partially offset by unfavorable pricing might cost pass through and the closure of the continental.
Free cash flow increase due to the timing of annual incentive compensation payments improved operating results and networking capital asset driven by the closure of our cabinet will partially offset by restructuring related cash outflows and the timing of interest and tax payments.
Continuing on July 20th and are helped by segment.
With two service will continue to have positive momentum with our key strategic customers and we are effectively balancing production costs with demand levels, which has helped offset the traffic and quick service restaurants, and full service restaurants, which are lower than last year as consumers. We responded to higher menu prices across the retail spectrum. It's.
This dynamic has been partially offset by consumers shifting they're starting from any restaurant dining and fast food and from higher and low rent usr's and fast food outlets.
General market volumes are lower than last year.
Pricing and food services lower than last year, mainly due to the timing contractual passengers on our key rather than like polypropylene, which is lower than second quarter of last year.
Starting with year over year Dude service tops are difficult due to the favorable market dynamics last year net revenues were down 12%.
Volume was down 6% largely due to a continued focus on value over volume in general decline in the market demands.
Next is now 6%, partially due to the lower input costs.
EBITDA without 20 per cent due to unfavorable pricing comparison, and a cough pass through lower sales volume and higher manufacturing costs, partially offset by lower transportation costs.
Quarter over quarter benefited from seasonality, primarily in cold cuts net revenues were up $42 million or 7%, mostly due to higher volume, partially offset by pricing adjust.
Justin EBITDA was up $22 million or 21% due to higher volume and Laura manufacturing costs, partially offset by unfavorable pricing and it cost passenger you hire employee related costs.
On slide 21, and food and beverage merchandising the desiccated executed well as a complete it began no pleasure and integrated food and beverage into a single business units all maintaining high service levels.
We are seeing elevated inflation cause consumers to reallocate their food standing within the retail channel to favor certain product categories like protein and eggs, while reducing spend on categories like sacred containers.
And the beverage side of the business. The results are impacted by the divestiture for Asia business, if you're operating gained at the cantina.
We also experienced this lower than I expected ramp up production in Pine Bluff fond Nicole Miller outage that occurred at the end of March into early April .
Overall pricing a mix or higher partially due to the cumulative impact of our valued over volume strategy over the past year.
In addition, our overall mix benefited from reduced uncoated freesheet production at the camp Mail ceased operations during the quarter.
Year over year comparisons are impacted by the divestiture of our age of business and accounting milk closure.
Net revenues were down 11%.
Volume down 7%, mainly due to focus on value over volume in the market softening image inflationary pressures.
Revenues down 9% due to the dispositions price.
Nice mix is up 4% largely due to pricing actions taken toss at higher energy costs.
Adjusted EBITDA down, 2% due to higher manufacturing costs lower sales volume the closure of the camp Bel and the divestiture beverage merchandising Asia, partially offset by Vietnam pricing net <unk> pastor and lower transportation and employee related costs if.
If we know the impact is of disposition revenues down approximately 7% and you could tell us approximately 4% on and adjusted basis.
Order of a quarter net revenues are down by $45 million or 5%, mainly due to the closure of the <unk> Ah higher sales volumes due to seasonal benefits primarily in our agriculture in retail channel was offset by unfavorable pricing.
EBITDA was up $8 million or 8% due to lower manufacturing costs and higher sales volume, partially offset by unfavorable pricing and material costs faster and the closure of the cat mill.
Turning to slide 22, I would like to take the opportunity to reiterate the commitment that we have highlighted throughout the last year.
First we're committed to aggressively deleveraging our balance sheet and preserving our liquidity. We expect are not leverage to end the year and the low force. We also anticipate that our momentum allow us to bring on that leveraged into the three and early 2024.
Not stopping there is our focus will remain on debt pay down not only will that help reduce our interest burden that will help us provide flexibility to invest in our future and drive profitable growth.
Second we are committed to driving free cash flow growth through the economic cycle. This year is a great example of our business is able to deliver on this commitment despite underlying economic headwinds and meaningful one time cash outflows related to the beverage merchandising restructuring plan.
During the second quarter, we proactively reduce subtle dead battery paying $180 million at $1.2 billion term loan do 2026, making a total debt reduction of $410 million since you're in 2021. After the close of the second quarter, we extended the maturity date of our $259 revolving credit facility.
From August 2024 August 2025, and substantially maintain the terms and conditions and the existing credit agreements. This is a favorable outcome as it preserves our liquidity and access to capital while also allowing us to pursue a longer term extension at a more opportune time, and what we anticipate to be a stronger credit profile.
As a result of the debt repayments, our cash balance declined to $302 million in total debt declined to $3.8 billion, resulting in net debt of $3.5 billion in a net leverage ratio of $4 seven times.
I also like to point out that increasing that leverage during the second quarter of 2023 is a function of the second quarter of 2022 rolling off the back end of the LTM adjusted EBITDA metric as you might recall, we posted adjusted EBITDA of $249 million in the second quarter of 2022, which is our strongest quarter of 2022.
As our business exhibit more traditional seasonality. This year, we expect the second half to have performed the same period last year, which will help us to achieve our year end net leverage target.
Now turning to slide 23, similar to Mike I also wanted to take a moment to reflect on my one year anniversary with academic writing.
During my first year of the company, we have rolled out a more robust set kpis, sending around operational performance capital efficiency balance sheet management and volatility management.
Ultimately, we want to execute on the action to drive shareholder value. So you'll look for this broader suite of financial Kpis to yield benefits in the future by focusing on the metrics that directly impact value creation.
Operational performance refers to how profitable we are and how much cash flow we generate.
<unk> efficiency measures, how effective we are generating cash from the accessing edge efficient we are deploying incremental capital.
Go to the balance sheet management to set the right level of debt for our company and the right level of investment in working capital.
With volatility management and want to increase the predictability and dependability of our financial performance. We're excited about the momentum we are building and look forward to quantifying. These kpis further in the future.
Now please turn to slide 24.
Company continued to execute at a high level across both business units and we remain well positioned to capitalize on future growth opportunities.
Cause we've highlighted the outlook for the U S economy remains uncertain as higher interest rates and it's still elevated inflation, we have consumer spending which may also negatively impact our customers purchasing decisions and order patterns throughout the remainder of 2023.
Despite these headwinds our second quarter results demonstrate the resilience of our business and the company's ability to deliver sustainable results. Despite the uncertainty we expect that our full year results will be at the high end of our previously guided adjusted EBITDA range of $775 million to $800 million from a macroeconomic standpoint are full year.
Adjusted EBITDA guidance assumes no material deterioration in the second half of the year compared to current conditions.
For your guidance for capital Spendings remains unchanged versus our original guidance and our expectations for total cash restructuring costs remained $130 million to $160 million with the majority of these costs expected to occur during 2023.
Likewise, we reaffirm our guidance for full year free cash flow, which you expect to be in excess of $200 million, we providing additional detail for the for.
This estimate in the appendix to the presentation. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate that will help us achieve our not leverage ratio target of the low forced by year end.
With that let's open it up for questions.
As a reminder to ask you a question. Please press star one line on your telephone and wait for your name to be announced to withdraw. Your question. Please press Star One line again, please stand by while we compile the Q&A roster.
One moment.
And our first question comes from Gan Chan Jobbie up there. Please go ahead.
Hi, Good morning. This is actually my krieger's, hitting and forgot him I hope you're doing well.
So you know if.
If we're sticking to the letter of the law.
You're you're EBITDA guidance actually implies lower second half earnings despite.
What would appear to be easier comparisons and potentially some.
Raw material or cost benefits, what's driving the.
Lower <unk>.
Second half earnings dynamic and and how much conservatism is baked into the imply check in half EBITDA guidance.
Yeah. Good morning that yeah, you're you're right our guidance and apply for the second half of the year, it's just under $400 million.
Okay, Great. That's that's helpful. And then you know given the challenging volume backdrop across the consumer landscaping in recent quarters and increasing pressure by retailers.
To accelerate throughput what are your thoughts on whether the customer base is ready or willing to ramp promotional activity into the second half of 2023 and into 2024 are you seeing any actions alrighty.
Yeah. So good question.
So as it relates to the volume backdrop.
Promotional activity.
Yeah, I think if you if you look at.
Where we've we've been able to navigate successfully is maximizing the value over value.
When it comes to.
Both price costs, but also.
What we see in terms of demand challenges.
And so you know.
If you look at the first two.
Sequential quarters. This year, we have not seen.
The ramp up in any way in terms of.
In terms of promotional activity and largely see our customers and.
Enjoying the same strategy in terms of value overvalued, whether it be as you highlight retail, but even and the other channels were.
Menu prices through the drive through or.
Menu prices within Ah.
Let's sit down restaurant.
I think.
I think it until we see a shift there we're not going to see a large divergence back to a higher demand cycle for the consumer I think it's a it's a wait and see for us.
Got it that's helpful.
And then if I could just sneak one more in.
Given.
That variability in the market and the Resegmentation can you provide us with an updated you on on segment volume expectations for 2023, just to close it out.
Yeah, maybe just given some color on the overall mosaic would be good and so you know.
Similar to the rest of the sector.
You're a day volumes, especially when you look at it comes from last year and some of the.
Back effect from a strong Q4 21 and then.
Their grand re opening again after an underground variant in Q1.
22.
There was a large by him from from just about all sectors in terms of inventory replenishment weak.
We could sell every unit we can make in a few recall R Q2, Q1, and Q2 of <unk>.
22, and like many others.
Labour was still a challenge and be able to get inventory levels back to help the pendulum swung a little too far.
So you've got to take that chatter out of what's really happening in the market.
And it's been largely.
He reported this in Q1, we saw Destocking.
Moderate significantly and while normal be stacking happens in the normal inventory.
Ah supply cycle.
I think it what it has been historically high in the last 10, a sequential quarters. We reported in Q1 that we felt like destocking across our business and with our customer base was largely moderating and we still feel that way.
Volumes are down.
Sequentially.
And are down you over here and our food businesses.
The other thing you have in our volume Jose that's a little unique is the fact that we close the camp mill, we've divested in Asia business and that skews some of the beverage.
R for me beverage business unit numbers, and so we're fairly flat.
Within that and then our food businesses are strong receipt and outpace of what the market is suing in our food businesses. Despite kind of what we're seeing in the market. So it's just a bit noisy because of the counts I also think that.
Any any of any further destocking.
What you'd make in somewhat different in how we we go to market with our supply chain and so we don't we don't see that these stock and given our category leadership.
To the extent, maybe some other staff.
Got it that's helpful I'll turn it over thanks.
Thank you one moment for next question.
And our next question comes from Adam Samuel send that Pelican checks. Please go ahead.
Yes. Thank you good morning, everyone.
Maybe just taking actually that last have discussion on on on volume Trans My business, maybe dig into the foodservice side a little bit.
Mean, the volumes were down 6% organically versus a year ago, and I know, there's a little bit of noise with the resegmentation.
But if I think about the multi year kind of trend on volumes in relative to.
Going back to pre pandemic levels. It would seem like the volume in that business is still does now meaningfully below pre pandemic levels, even if foodservice traffic is.
Largely.
Normalized and so it just any.
Any additional kind of color or thoughts around that and.
Maybe scope any kind of conscious business exits a product line exits that had that you.
Trying to drive value in and mix over over just pure volume that would help kind of bridge that gap.
Yeah that's.
Great question, and so specific to food service, you Gotta think about our business and too big.
Two big and markets, we've got a deadline and distribution markets and then what we call our chain or kyocera markets.
And they're both a little bit and we absolutely it has been.
Be everything to everyone and we certainly have a focused.
[noise] focused on.
Consciously exited some some areas that were unprofitable or less profitable.
I'll tell ya largely though that.
The way to think about our food service business is.
Where we where we focus and those two channels, whether it's a sit down.
Sue store or.
Fast food restaurants.
We're learning and all those spaces versus what the market seem both sequentially.
And when you look at the back half of 2023, you're.
You're gonna see that.
Our our plans to continue living there even despite some of the pricing list. The city that it's allowed us to enjoy like our customers have the value of rebellion.
And so if the market depending on how you look at the market.
Let's just say the market decline in those two in markets.
Year to date between six and 9%.
Onions are down and.
In that space, 6%.
We've expanded our unit sales and both and markets.
That same period, so despite how it works.
As a as a year over year in a sequential.
Percentage, we are enjoying.
A higher quality of Avenue and a a modest unit growth in this in this environment.
Okay. That's all very helpful passing out thanks.
Thank you one moment for our next question.
And our next question comes <unk> Bank of America. Please go ahead.
Yeah. Good morning, this is actually cash and sending in for George out we had some calls this morning. So just to stay on on volumes for a second from some of the other reports.
We've seen some variability month to month just on volume. So I guess can you first talk about maybe how the quarter progressed from my volume perspective.
How exit rates are trending and I guess, where you see some of that momentum building, whether it be at the product or I guess customer level there.
Exit trends.
Say the back half of the quarter was definitely.
Reassuring from a demand standpoint versus maybe how we entered the queue.
You know you Gotta set some of the memorial day, and mother's day, and Easter chatter aside and some of our end markets, but when you normalize looking at year over year, we really do think.
The resiliency and the consumer is a bit stronger and maybe.
Points to why we feel like at least the back half unit volume is going to continue to stay where.
Where we kind of our from our run rate, which is stronger than I think a lot anticipated coming out of the year.
That's.
Yeah.
The inflection point around what's really what's what are the real step change what needs to happen to see demand return across all in markets to a pre 2019 level.
Do you think that.
Yeah that remains to be seen and we're watching it close.
But we're cautiously optimistic about a Brazilian consumer in the back half and we.
We've definitely seen that get better through Q2 and are in markets.
Yeah, one thing I would add just in terms of revenue is it related to the volume dynamic that Mike talking about as we are expecting that revenues in the second half will be lower just really one of the reasons just due to falling revenue prices.
But we do expect that are priced cost actions, along with cost savings and mitigate any top line softness and keep us on track to achieve the top end of our adjusted EBITDA with as well as free cash forgot what for the year.
Okay got it I appreciate that and.
Longer term I guess as you look at your transformational journey and now you work towards some of your goals, particularly on leverage.
<unk>.
Three times next year you know.
I guess, how can we think about the capital priorities of the business longer term.
In terms of Capex value return and potentially inorganic opportunities.
Packed up here.
So.
Certainly our balance sheet to focus and it's.
High priority for the business, it's been a high priority and we're going to continue to focus on.
<unk>.
Paying down debt.
And getting into the <unk> next year's definitely <unk>.
Starting point and what we'd do beyond that absolutely always remain a priority I would tell you. If you look at the strategic steps. We've made it's really about a shifting geography.
A sustained capital outlay.
Two a how do we get more capital leaning into the growth side of the business and so you are seeing is takes a lot of steps to go capital light as a business model.
And we absolutely acknowledged that we haven't been caprylate in terms of all of our segments and we're we're divesting and we're we're exiting and we're we're taking steps dominion.
To new substrates and other substrates is where you would expect us to be focused and that's exactly what we're doing.
The restructuring of the beverage merchandising business unit, which will not to.
Around $120 million this year and going into next year. We continue to expect a strong free cash flow profile, if anything improve as we continue to try to get some more capital like structure and within that we're going to continue to be aggressive and paying down debt is one of those priorities while balancing.
The growth opportunities in the business, we should be able to do do them all the debt pay down as a as a priority is highlighted.
Okay. Thanks, I'll turn off.
Thank you as a reminder to ask you a question. Please press star one line on your telephone and wait for your name to be announced to Retry. Your question. Please press Star one line again.
And my moment for our next question.
Our next question comes from <unk>.
<unk> F R. B C capital markets. Please go ahead.
Great. Thanks for taking my question have you guys are well.
So I guess first off on on the guidance itself. You know if you look at the upper end of the the range.
Maybe in the seven nineties and you take off the first half it looks like you're around 390 for the second half.
Some restructuring games and it would it depend on a stronger promotional active you know environment or at least a stronger consumer how'd you. How do you think about the growth in the next year. Thanks.
And so we're just starting to see the impacts of that in the first half of the year given that we can't mills closed late May we will start seeing more of that in the second half of the year and then going into next year.
And market is normalized we're seeing we're able to do things more efficiently, we're getting closer to our customers with just giving you a better alignment with our planning improvements in our labor scheduling minimising some of our transfer for a few more efficient on our logistics were being leaner on inventory. So we're in the early stages.
Those improvements, but we should see more of those operational improvements irrespective of the market environment environment coming into next year.
Great Thanks for that.
John and and.
Beyond that just maybe if you could comment on you know maybe some of the longer term.
Dynamics it <unk>. It seems like you know again a lot of our companies are discussing inflation's.
Inflation's impact on the consumer end Destocking for your own business, but it appears that sometimes.
Those could I also access tailwinds as far as shipping.
<unk> you know different channels such as your car that would benefit you are you still seeing those tailwinds and are those are expected to persist at in the next year.
Yeah, It's you know tailwinds.
Tailwinds might be a little bit of a generous term for us, but what we see is.
Ah resiliency that maybe as you need to effective evergreen in that.
That shift in consumer everybody's.
80 calories, so how they choose to get those calories and where we play allows us.
So maybe insulate the business a bit more it's a bit more resilient than the <unk>.
<unk> down that you see going to go.
Going to.
From from in home to a fast food or from interim dining 222, more retail or a few store purchases.
The fact that we're strongly positioned and all those segments allows us to enjoy those sales for those calories.
So those those categories shifts don't necessarily whipsaw the business like maybe other dirty.
Segment and suppliers.
The other thing I would say is.
The consumer display.
Display anything you might read is to continue to prove the bat and trucked wrong and so.
We're watching that close and we continue to have.
R.
Our supply chain in our in our manufacturing footprint on line to continue to.
Scaled down and scale up as needed and you are seeing the results of that in our first.
Quarters of this year.
80 to react with inventory and buffer.
And both of the consumer and our customer forecasts a bit different and so the way we the way we bring product to market through.
Large scale distribution and be able to touch kind of any corner of the country with any products we make.
With a with a buffer allows us to address that quickly and we've used that to grow and they'll.
Sales volume were maybe others couldn't and so we're excited about the shifting consumer because it really helps us land and we expect that actually to to kind of continue is the consumer tries to figure out how they wanted to get their calories.
Thanks.
Thank you I would now like to turn the conference back to 19 for closing remarks.
Thanks for moderating today's fall.
And thank you all for joining as we close out today's I'd like to turn your attention to slide 26 is mentioned pack of evergreen is a strong differentiated growing and socially responsible business.
We're focused on generating sustainable returns under strong experienced leadership team has demonstrated a willingness to transform the portfolio in ways that put us in the best position to deliver on their 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 per cent of our net revenues in 202030 come from products made from recycled recyclable or renewable materials. All this yields strong adjusted EBITDA free cash flow generation, which we carefully managed to drive deleveraging further.
We look forward to update me again in the next quarter and thank you again for joining today.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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