Q3 2023 Pactiv Evergreen Inc Earnings Call
Good day and thank you for standing by welcome to the active Evergreen 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 will need to press star.
One one on your telephone.
Then here an automated message advising you your hand is right to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Kurt Worthington, Kurt you have the floor.
Thank you operator, and good morning, everyone.
Thank you for your interest and tax.
Welcome to our third quarter 2023.
With me on the call today, we have Michael King, President and CEO and John <unk> CFO.
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Our Investor Relations website at Www dot taxes that were green dot com in excess of our supplemental earnings presentation.
Yes, Mark.
Today, it should be hurt in tandem.
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Before we begin our formal remarks I want to remind everyone that our discussion today will include forward looking statements, including those 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.
They 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 31 2022.
Our quarterly reports on Form 10-Q for the quarters ended March 31 June 30, and September 32023 for a more detailed discussion of those risks are forward looking.
Looking statements we make on this call are based on information available to US as of today's date, and we disclaim any obligations to update any forward looking statements.
As required by law.
Lastly, <unk>.
During today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.
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 from continuing operations.
Let me turn the call over active evergreens, President and CEO, Michael <unk> Michael.
Thank you Kurt and good morning, everyone. Thank you for joining us today.
Turning to slide four we will begin with an overview of the progress we've made against our strategic priorities.
Our performance during the quarter and will provide updates on our key financial metrics.
At the end of the call.
Line for Q&A.
Turning your attention to slide five.
I'm proud of the steady progress we've made toward our targets for 2023, our solid performance during the third quarter would not have been possible without our dedicated team we.
We delivered 21% adjusted EBITDA growth during the quarter with adjusted EBITDA margin, increasing to 16, 5%.
In addition, we've generated $176 million in free cash flow and make further progress reducing our net leverage.
Our teams continued to execute at a high level navigating challenging market dynamics.
Our solid third quarter results reflect the resilience of our business and the company's ability to deliver sustainable returns.
As a result, we are revising our guidance upwards, which John will discuss in greater detail.
We continue to leverage our broad range of product offerings channel coverage and distribution network to generate improved margins and free cash flow. We remain focused on our strategy of value over volume and continue to make progress emphasizing our higher margin products focusing on operational excellence.
And improving our balance sheet.
Confident that focusing on these strategic priorities will allow us to enhance shareholder value.
Next recall that last quarter, we introduced the implementation of effective evergreen production system also known as pubs.
Which promotes best practices and continuous improvement during the second quarter, we shared that we anticipate eight plans to reach brand satisfy Europe I'm pleased to share that we are ahead of that target and during the third quarter three of our facilities became certified increasing the number of our plan sharing brown spirits from six Tonight.
Longer term, we expect three to five of our plans to achieve silver status next year with our goal of having our first site become gold certified before 2025.
While we are still early in the purchase journey. The progress we have made since the second quarter is meaningful.
We are enthusiastic about the impact this will have throughout the organization and waste elimination and improving our operations scalability.
We continue to win with our key strategic customers as we highlighted during our second quarter earnings call. Our business is outperforming its end markets.
Partially by aligning with customers that are well positioned for long term growth, we benefit when our customers succeed and our strong partnership to provide better insight into their needs. In addition, our team has been able to adapt to broader changes in demand, enabling us to better align with our customers.
Although our end markets are moderating <unk> of evergreen we are seeing positive momentum as we continue to strategically align with our key customers. Meanwhile, we remain committed to effectively balancing production costs with demand levels.
And we are pleased with the progress we've made to control costs and improve efficiencies.
Traffic and <unk> and full service restaurants was down slightly compared to last year. However, our alignment with key strategic customers load, our foodservice segment to outperform the market.
Over the past year as consumers transition to lower cost calories. They have continued to shift their spending from restaurants to the grocery store within the store, we have allocated their budgets to product categories that benefit back the better grade.
Outside of those elements. We've also been disciplined in our value over volume approach, which has supported our price realizations. During the quarter. In addition, we have been successful in reducing our manufacturing costs to drive higher profits and improve our margin profile.
We've made considerable progress on the beverage merchandising restructuring during the year, including the closure of our canton mill and our own footfalls converting facility.
Reorganization of our management structure and the related combination of our legacy food merchandising and beverage merchandising businesses into a single segment. We remain confident these actions will reduce our capital intensity and overhead cost and position us to remain competitive in the liquid packaging market.
Moving to slide seven.
This past year has demonstrated the resilience of our business model and our ability to grow adjusted EBITDA and free cash flow through the economic cycle.
Last quarter I highlighted the operational aspect of our transformational journey. This quarter I will highlight our diversified end market exposure broad product offering and our nationwide distribution footprint. As these are critical areas that support our value proposition and provide the foundation that our transformational journey and is built upon.
Today, we are uniquely positioned to provide sustainable product solutions to our customers with scale and reach unlike any other foodservice our beverage packaging provider.
With our diversified end market exposure.
We sell across full service restaurants, <unk> convenience stores broadline distributors <unk>.
Outsourcers grocery stores and beverage company.
This means that no matter where consumer spend.
It would be inside or outside the home we have the scale to meet their needs. This partially insulates us against macroeconomic headwinds as consumers shift their behavior to favor one channel or another this is especially important in the current environment as consumers have alternative payment patterns to adapt to the impact of inflation.
As mentioned previously higher menu prices have caused consumers to trade down from higher end restaurants, <unk> to lower tiers fast food restaurants, our foodservice business serves the full spectrum within the restaurant channel. So it is a shift from one outlet to another which gives us the opportunity to capture that foot traffic.
Higher menu prices have also forced.
Consumers to shift their spend from the drive through window to the grocery store with our presence throughout the grocery store and the fresh food and beverage options at the perimeter of the store to other options in the center aisle our.
Our food and beverage merchandising segment was able to capitalize on this shift and secure those volumes as they migrate over from foodservice.
And this dynamic economic environment with ever changing consumer trends, we expect that our diverse end market exposure will allow us to continue to realize profitable growth, even with shifting consumer behavior.
Turning your attention to slide eight.
We believe that we offer the broadest array of products and substrates within the food and beverage packaging industry and we're constantly working to innovate and develop the highest quality environmentally friendly products. This is a sustainable competitive advantage for us and offers convenience and peace of mind FERC customers.
The breadth of our product offering enables us to respond quickly to changing customer needs. We can pivot to where the demand is and insulate ourselves from any singular trend at the product or customer level. We are considered solutions provider with a host of technical and supply chain services, which has afforded us the ability to build strong strategic.
Gartner ships with our customers and become a critical component of their supply chain and future strategies.
Many cases, we are.
Are the supplier of choice to help our customers meet their packaging related sustainability goals, because we play such a vital role in our customers' supply chains and covers such a wide spectrum of their packaging needs. Our customers had a strong incentive to work with us develop to develop next generation products and substrates.
We have the expertise and the knowhow to engineer a sustainable solutions impacted every minimizing disruption for our customers with the convenience of a turnkey solutions provider.
Turning to slide nine.
Our strategically located distribution footprint is another key differentiator that allows us to offer best in class service to our customers. It also gives us an exclusive with vantage point into the value chain from upstream packaging production to downstream packaging consumption and all of the stages in between.
Not only do we have a broad national manufacturing footprint. We also have a strategically located hub and spoke network of distribution centers that allow us to deliver our products quickly and efficiently while meeting the precise needs of our customers.
Many of our distribution centers are also close to our largest most strategically important customers, ensuring we deliver products in a timely manner.
As a result.
Lot of other packaging companies rely on just in time delivery our customers can count on us for just in case inventory management.
Our distribution centers carry stock across all categories to enable us to adapt quickly to changing customer needs.
We worked closely with our customers on demand forecasting, which allows us to better anticipate changes and adjust our production and inventory levels Accordingly.
Our manufacturing operations benefit from reducing variability caused by changing demand levels and our sales teams benefit from the competitive advantage of playing a critical role in our customer supply chains, we remain committed to further optimizing and improving our distribution network to operate more efficiently and meet the evolving needs of our customers.
Also supporting the long term sustainable value creation.
Turning to slide 10, the market backdrop remains challenging as elevated inflation continues to impact consumers purchasing decision.
Recently, we are beginning to see encouraging signs of moderating volumes on both the sequential and year over year basis in general consumers continue to allocate spending to adjust for higher food prices and prioritize channels and product categories that we participate in.
We continue to position ourselves. So that we are strategically aligned with customers that are industry leaders. We believe we are winning in their respective markets. So we benefit when they succeed on that front, we have seen limited promotional activity by some of our customers, which contributed to our third quarter volumes, although we have not seen large scale promotion.
Pricing yet.
Overall customer promotional activity picks up that would be a net positive for the sector as well as pact of evergreen.
Regarding the raw material cost environment. The trend in 2023 has been lower cost in 2022.
We have made a concentrated effort to reduce our lag.
<unk> pass through mechanisms and we don't expect the recent commodity price volatility to have a material impact on our results through the rest of the year.
Finally, we continue to manage our controllable costs by improving efficiency and productivity across the organization as a result of our operational efficiencies. We are seeing significant benefits to our adjusted EBITDA and free cash flow.
And as a result, we've been able to strategically allocate cash to pay down debt, reducing our interest expense and improving our overall net leverage.
Our beverage merchandising restructuring continues to progress on schedule.
And we remain on pace to achieve their operational milestones that we communicated from the onset.
As a reminder, this is an effort to streamline our physical footprint to focus on converting operations, resulting in lower operational costs and a more capital light operating structure, both of which support increased cash flow generation overall has taken a tremendous effort from all of our employees, particularly at the impacted.
Facilities to help us continue to execute according to this plan and I'm also very proud of the dedication and commitment and hard work along the way.
With that I would now like to turn the call over to John to discuss our third quarter results in more detail John.
Thanks, Mike I'll start with our third quarter highlights on slide 12.
We reported net revenues of $1 4 billion for the quarter.
While this represents a decrease of $230 million compared to last quarter. Most of the decline reflects the restructuring and portfolio optimization. We have carried out. This includes the shutdown at the camp Midland May of this year and the sale of our Asia Operation last August excluding those actions our revenue was down approximately eight.
$7 million.
Which is mostly due to the lower raw material cost environment compared to last year as well as strategic value over volume decisions.
Third quarter, adjusted EBITDA was $227 million.
Compared to $187 million in the year ago period, the increase reflects our success with improving our mix, while maintaining cost discipline across the organization.
Our efforts delivered adjusted EBITDA margin expansion of 120 basis points compared to the last quarter and 480 basis points compared to the year ago period to 16, 5%.
As we've discussed in prior quarters, we remain focused on managing our controllable costs to maximize profitability and free cash flow.
We increased free cash flow to $176 million in the quarter, despite $34 million in restructuring related cash outflows will continue to make progress better aligning inventory with our customers and have been successful in maintaining more normalized inventory level, which in turn frees up cash.
Our ability to generate strong cash flow continues to help us pay down debt and during the quarter, we reduced our net debt by $160 million due to our improved adjusted EBITDA performance and debt reduction our net leverage has improved to four two times, which is ahead of our goal to be in the low <unk> by year end, we effectively achieved that.
<unk> during the third quarter.
Continuing on slide 13, I'll cover our third quarter year over year result.
As a backdrop last year benefited from historically favorable spreads driven by attractive supply demand dynamics and the timing of our contractual pass throughs. Those spreads began to normalize into this year as raw material costs moderated while volumes remains under pressure due to elevated inflation levels.
Starting with net revenue, we saw a decline of 14% mainly.
Mainly due to the closure of the <unk> mill within our food and beverage merchandising segment excluding.
Excluding the Cameron closure and the divestiture of our beverage merchandising Asia business revenue declined by 5%.
Volumes are down 4% in the third quarter, primarily driven by strategic value of our buying decisions in food and beverage merchandising.
Price mix was down 2%, mainly due to lower contractual pass throughs as the overall raw material cost environment with lower than last year.
As I'll cover in greater detail with the segment results, we continue to outperform relative to our end market and our financial performance in the quarter reflects this.
We delivered an adjusted EBITDA increase of 21% to $227 million, we benefited from lower material cost and we were able to offset lower overall volumes and pricing by managing our manufacturing and transportation costs.
We are also seeing the benefits of our productivity initiatives and restructuring efforts.
Free cash flow increased mostly due to improved operating results in a net working capital benefit, including the impact of working down the prior year strategic inventory build partially offset by restructuring related cash outflows and higher capital expenditures and interest paid.
Moving to slide 14 for a sequential quarter comparison.
Net revenues were $1 4 billion.
Down 3% from the prior quarter.
The decrease was mostly due to the volume impact from the camp mill closure and value over volume decisions and our food and beverage merchandising segment. We also experienced slightly lower price mix driven by the contractual pass throughs of lower material costs.
Adjusted EBITDA was $227 million for the quarter of $10 million increase from the second quarter, we benefited from lower manufacturing costs, which were partially offset by higher material costs net of cost pass through and unfavorable product mix.
Free cash flow increased compared to the second quarter, mainly due to improved operating results the timing of interest payments and continued optimization and inventory levels, partially offset by higher capital expenditures.
Turning to slide 15 to look at our results by segment.
Our foodservice segment continues to perform well against the challenging market backdrop volumes were essentially flat versus last year, which is constructive given that our end markets were down low single digits are customers, who have implemented targeted promotions that <unk> been somewhat limited at the same time some of our key customers have gained share and we have benefited from that dime.
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As in previous quarters, we continue to emphasize value over volume.
Year over year basis price mix was down 5%. The decrease primarily reflects lower raw material costs, most of which were due to contractual pass throughs and mix as we've been successful in balancing profitability and volumes.
Our adjusted EBITDA increased 9% due to lower transportation and material cost net of cost out there.
On a quarter over quarter basis volumes reflected similar seasonal factors as observed in the second quarter with Cold Cup and back to school products increasing sequentially.
Net revenues increased $19 million or 3%, primarily due to higher volume and favorable price mix.
Adjusted EBITDA was down $11 million or 9% due to higher material costs net of cost pass through and higher manufacturing costs.
Turning to slide 16, food and beverage merchandising experience similar trends as in the second quarter.
With customers responding to elevated inflation by reallocating their budget to categories like protein and AG.
In addition, the severe weather in California that delayed the fruit harvest in the first half of the year reduced overall fresh fruit quality in the third quarter. This resulted introduced fresh fruit availability for packaging as a larger portion of the harvest was used for frozen foods and other uses.
On a year over year basis revenue was down 23%. However, most of that was due to the camp mill closure and the divestiture beverage merchandising Asia.
Apart from those factors volume was down 6%, which included our strategic decision to exit select low margin customer relationships as we reevaluated. Our overall book of business. Following the closure of the camp mill.
Moving those factors underlying volumes were down in the low single digits.
Adjusted EBITDA increased by 27%, mainly due to lower material cost net of cost pass through and lower transportation cost, partially offset by the closure of the camp mill and lower sales volume.
On a sequential basis net revenue was down by 12%, 8% of which was due to the canton shutdown.
Volume was down two 2% due to value over volume decisions.
<unk> mix was down 2%, mostly due to contractual pass throughs.
Adjusted EBITDA increased by 19% primarily due.
So lower manufacturing costs, including the impact from the cold mill outage in the prior quarter, partially offset by unfavorable product mix.
Our margins for the segment increased 470 basis points sequentially, demonstrating the benefits of the restructuring.
Turning to slide 17, we continue to make progress on reducing our leverage profile and maximizing our free cash flow.
Our net leverage ratio declined to four two times in the third quarter driven by a reduction in net debt and a sequential improvement in adjusted EBITDA over the last 12 months.
We expect to make further improvements to our net leverage ratio by year end and are confident that it will be in the threes in 2024.
In terms of free cash flow, we generated $176 million in the third quarter and $275 million year to date, which is ahead of our previous guidance.
Our cash flow generation has allowed us to reduce debt by $523 million year to date, including $229 million of debt reduction during the third quarter.
Based on current interest rates this quarter's repayments would reduce our annual interest expense by approximately $20 million.
A key contributor to future free cash flow growth.
Factoring in the $1 billion of interest rate swaps, we entered into during the fourth quarter of 2022, we now have 81% of our debt fixed with a total average interest rate of 635% as of quarter end.
Regarding our capital allocation priorities, our approach aligns well with our long term strategy and underlying consumer trends, we remain confident in our position as a market leader and our longstanding customer relationships to support future growth. We are committed to delivering profitable growth, which in turn will allow us to meet our aggressive goals to delever.
The balance sheet and preserve liquidity.
As we make further progress on the beverage merchandising restructuring, we expect our business profile benefit from lower capital intensity and reduce earnings volatility.
Importantly, we have demonstrated our willingness to optimize our portfolio by exiting non core businesses to help us focus resources on growing our core markets. As we continue our transformational journey. We expect the next stage is to be less transformational at beverage merchandising restructuring and more incremental including some cost structure optimization.
<unk> and right sizing.
This may require incremental investments in the near term generating cost benefits in the future and making our business model more adaptable.
As we consider additional cost reduction initiatives, our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth.
Believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing returns to stakeholders.
Turning to slide 18, and our updated outlook we.
We are pleased with our solid performance this quarter and year to date, our company continues to execute at an elevated level across both business units and we remained well positioned to capitalize on future growth opportunities as.
As we've highlighted the outlook for the U S economy remains uncertain as higher interest rates and still elevated inflation weigh on consumer spending which may also impact our customers' purchasing decisions in order patterns in the near term. Despite these headwinds our third quarter results demonstrate the resilience of our business and the company's ability to deliver a sustainable.
Results.
To account for our strong performance year to date, we are updating our full year fiscal 2023 guidance to the following adjust.
Adjusted EBITDA is now expected to be between $825 million and $835 million.
Compared to the range of 775 million to $800 million.
We provided earlier this year.
Similarly, our free cash flow is now expected to exceed $250 million, which primarily reflects the increased guidance for full year. Adjusted EBITDA. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate this will help us further reduce our net leverage ratio.
Our full year guidance for capital spending remains $280 million and we have tightened the range for total cost restructuring cost by bringing the low end of the range up to $150 million as we further refined our estimates I'll also point out that that range does not include the benefit of any cash proceeds from the possible sale of any property and equipment from the.
Facilities impacted by the beverage merchandising restructuring.
As we've highlighted previously we anticipate approximately $120 million of cash restructuring costs will occur in 2023.
I'll now turn it back to Mike for closing comments.
Thanks, John.
The fact that evergreen we are committed to sustainability across our product portfolio, our manufacturing and supply chain and our communities.
We take immense pride in what we do and we continue to invest in our ESG strategy to hold ourselves accountable and all areas of our business and operations.
Firsthand the delivering innovative sustainable products at the scale we envision.
With our innovative sustainable operations.
Innovation is key to our goal of increasing sustainable materials and air products. This.
This quarter, we announced a partnership with Exxonmobil offer customers certified circular polypropylene packaging products made with Exxon mobil's extend advanced recycling technology.
This collaboration allows us to offer our customers even more innovative packaging options for expanding our portfolio of circular packaging.
We are also excited to announce the upcoming release of our new ESG report our first based on internationally recommended <unk> sustainability reporting standards.
Report, we will provide detailed updates on our initiatives across our ESG focus areas of planet product people and governance as well as a comprehensive ESG metrics.
Also we report will include the results of our first materiality assessment into third party assurance report for our scope, one and two greenhouse gas emissions and energy consumption.
Our teams across the enterprise are eager to share the stories of their work to fulfill our purpose of packaging and better future.
While we are early in our sustainability journey, we are proud of the progress we have made to date and our progress in other ESG initiatives.
Lastly, again want to highlight our team's execution and thank each of them for their continued dedication and hard work.
We remain committed to leveraging the solid foundation, we have established over the years will be an ongoing objective.
<unk> of delivering sustainable long term value of our stock holders.
That concludes our prepared remarks with that let's open it up for questions operator.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Ghansham Panjabi with Baird Ghansham. Please go ahead with your question.
Yes. Good morning, Thank you operator.
Hey, guys. Good morning, I guess first off.
As we kind of think about <unk> and <unk>.
The outlook for the fourth quarter can you give us some specific parameters as to exactly what's driving that upside.
Is it just progress on restructuring savings, maybe end markets were little bit better than you thought.
What's driving that.
Okay, and then just related to that maybe you could just quantify so that $40 million increase in EBITDA year over year during the third quarter, how much of that was from.
Cost savings and at this point.
Are you able to share any sort of.
Flow through effect into 2024.
Okay perfect. Thanks, so much.
Yes.
Please standby for our next question.
Good morning.
Our next question comes from George Staphos with Bank of America.
George Please ask your question.
Hi, everyone. Good morning.
I don't know if everyone else is having this issue, but I'm hearing for example, ghansham questions, but management over the phone line at least from where we were it was not coming through at all.
If you can hear me I guess my first question would be this.
You've done a wonderful job in terms of leveraging what Pat has already always had.
The distribution network there.
First of all I'd manufacturing and.
Pushing value over volume.
Could you quantify for us if possible what you think your aaas.
<unk> has moved up.
Your segments say this quarter versus last year's quarter or year to date this year versus last year adjusted for inflation. So if we try to figure out how youre doing.
The value or volume is coming through is a way for us to map map that progress in that way.
Second question I had if we go to slide.
<unk>.
Slide 21, and look at your in the index the appendix.
Our cost performance is there a way to break out how the $94 million of Cogs year on year in the quarter split out between raw manufacturing productivity and alike. Thank you guys.
Yes.
Sure. George This is John just to check can you hear me okay.
I can hear you guys now and it's funny My Associate Cashin was hearing you on the webcast, but you are not coming through on the phone lines.
Now if I was the only one but just wanted to mentioned that just in case.
Okay now we can check into that while we do the call I think ghansham was able to hear us.
So let me let me start I think you asked a lot of questions. So let me try to unpack it all and.
And let me know if I'm.
If I'm hitting your your topics so.
The first one I think you're getting to.
Average sales price what are we seeing in the market. How is that we don't we don't get into to pricing.
On these calls for obvious reasons I think what I would tell you is there is an element of the value over volume approach where.
On a blended basis, we're certainly looking at that and we are really focused on margins and the spread and as we are getting.
A better at really assessing which.
Each products, which.
Which customers categories are more profitable we are focusing our efforts on really supporting those customers that drive that better profitability for us and I think youre seeing that come through in our in our margins as we really focus on.
As we focus on.
Building, our overall margins and spreads across the business and so but within that there is there's obviously puts and takes in and in some cases, we have more see more normalization on pricing.
In this market.
Big picture as I highlighted in the opening remarks, our margins overall are improving.
So yes.
John No doubt on that and again congratulations on the margin performance I was just thinking if there was a way that you could somehow not by product line.
But somehow maybe index.
You're either again your revenue per unit on average or maybe your spread per unit or per pound has moved up because of what youre doing that would also be helpful. Along with the margin, but clearly youre getting the progress here I'm, sorry keep going ahead.
Yeah, and again, we're not going to breakout exactly our average sales price, but I would say that.
To reiterate our what you are seeing a bit too in pricing is the commodity price environment has been coming down and so there's been a corresponding bring down in price, but again, we've got past dues is as you know so we're seeing some of that.
<unk> get more normalized.
Okay.
Sure.
And on the.
The $94 million of Cogs, if you can parse out in terms of raws process productivity, perhaps that would be great. Thank you Mike. Thank you. Thank you John.
Yes, so if youre looking at the slide you referenced on our Investor presentation. There is if you break that out looking at kind of the and I think you were focused on the the sequential bridge year over year is that the right one.
The year over year <unk> versus <unk>.
And cargo particular.
Yes, so the vast majority of the Cogs that youre seeing there is going to be on raw material pricing. So as we as we go year over year a lot of the residents have come down.
So that's that's a big percentage of that but embedded in that is also improvements in manufacturing and logistics. So if you were to.
Disaggregate that a bit.
I would say more more than half of that is raw materials and.
Which we have past dues for.
Then probably a bit more than 50% is raw materials and then the remainder is manufacturing logistics and just overall kind of savings for them from the restructuring.
Okay. Thank you I'll turn it over.
Okay.
Standby for our next question.
Our next question comes from Erin fixed one at time.
Sure.
Erinn go ahead with your question.
Great. Thanks for taking my question.
I had that same issue that George had on the first question hopefully.
We continue to hear everyone.
So I guess congrats on the great results.
I guess I just wanted to dive into kind of the outlook here.
You are guiding to.
No.
Our year on year improvement in Q4.
Obviously sequentially lower due to seasonality and some other issues.
But as you kind of look out you are posting about 6% EBITDA growth.
For this year.
Is that kind of within your targeted range I mean should we continue to see pack of kind of.
Post that kind of mid single digit EBITDA growth and is that mainly because of low single digit volume growth or is there maybe some upside to that from restructuring and some of the other actions you're taking.
Yes, so from a from an annualized basis I think thats those are all quite fair characterization I think.
The benefits of the restructuring.
Starting to see those in Q3, we expect that to come on that further in Q4, as we get more to a normalized run rate and then some of the other dynamics that you saw from Q3 to Q4 basis are going to be.
Consistent in terms of just the operational savings the efficiencies that we built into the business, we expect those to <unk>.
Continue into Q4.
As I mentioned to George one of the factors leading in with.
The material prices have come down and so from a pass through basis.
We're seeing some of some of that come through and then just back to the value over volume. We are we are.
But it really will focus on our business mix and customer mix and really getting that to a better place and you'll see that in the fourth quarter as well.
Okay, and then just as a follow up you did increase your free cash flow guidance of 250, plus so as you look out into 2024.
Would you expect maybe.
Similar kind of growth in free cash flow.
That would that would dovetail.
The EBITDA growth or could maybe the free cash flow growth exceed EBITDA because of our working capital or any other discrete items.
Do you expect to kind of be below four turns of leverage.
Sure.
So we are.
Thank you and controllable and manageable, we're not really talking about 2024 at this point what I would tell you is we're keenly focused on free cash.
And deeply committed to.
Reducing our net leverage so.
That's right I think as we've said in our prepared remarks.
Into the threes as certainly.
A top priority for us.
But I wouldn't.
I wouldn't I wouldn't guess of free cash for next year at this point.
Okay.
Standby for our next question.
Our next question comes from Anthony Pettinari of Citi.
Anthony go ahead with your question.
Hey, good morning.
Good morning.
The range for cash cost for restructuring I think ticked up with the revised guide.
I think from $131 60 to 150 to 160 does that mean 24, maybe has less than the I guess $30 million to $40 million cash costs that were previously expected or is that unchanged and then.
Working capital is still looking like.
I think $150 million to $170 million source of cash.
So on the first one yes, so just to confirm that that is the revised guidance. So we took up the bottom end of the range $20 million.
But what we did not change was our guide for.
At 2023 cash impact and so effectively I would think and we haven't provided overall guidance for 2024 as Mike highlighted.
But the way to think about that.
The incremental cash.
Relating to that Ken closure, and the restructuring that's going to be a 24 item.
So 'twenty or 'twenty three guide does not change as it relates to the cash cost there.
Just to confirm you can hear me, Okay, Anthony Yes, I can hear you.
Great.
That's helpful and then on working capital in terms of a source of cash.
Yes, so in terms of our cash.
Outlook for this year.
That's right the change in working capital we have a bridge in our investor deck on slide 23.
So that range of $1 40 to $1 50 remains the same.
And the earnings presentation.
Got it got it.
And then in foodservice and I guess in food and beverage merchandising as well is there like when would you expect kind of the value over volume.
Decisions can kind of run their course or maybe maybe a related question like as you just kind of look at the comps.
And would you expect.
<unk> to inflect positively and then was there anything in October that made you feel maybe better worse or the same about sort of <unk> demand.
Yes, I think that's it.
If you look at foodservice specifically.
There's a lot of things.
Promising so we.
Our mix, specifically looking at both year over year and sequentially.
We're starting to see that.
Things are moderating.
From a.
Normal seasonality things feel like we're getting back to pre 19 seasonality. If you look at the end of Q4 as we kind of noted previously.
And so.
When do we get to that inflection point I think it comes down to when does the consumer start to.
Start to change their behaviors, just a little more.
Hi menu pricing, we're watching that close I think.
Looking at.
Yes.
Traffic metric that we continue to use to measure our foodservice success and gains and losses all of those things I think are starting to moderate.
As the quarters two quarters away.
We'd be guessing to say, but I can tell you Q3.
<unk> better Q4 seasonality will tell us a lot more.
I'm afraid you beverage and merch I think yes.
Yes.
We're largely seeing.
That.
The fresh trend people people get their calories.
Both in the center and perimeter of the stores is very real that trend.
I hate to call it a buy down because all calories are expensive right now, but it is yes.
Yes people water.
Spending less discretionary early so baked goods.
Some of the more.
Less healthy alternatives.
Ernest priority people are focused on consumers are more focused on obviously the core.
Proteins and <unk>.
Basics.
That would lead us to believe that until we start to see more discretionary spending against the beta on some of the more discretionary food items.
We're not there yet and non food and beverage merch, either so I think we're probably yes.
Wait and see but things are looking positive for us.
Okay.
Okay. That's super helpful I'll turn it over.
And our next question.
The next question comes from Adam Samuelson of Goldman Sachs.
Adam go ahead with your question.
Yes. Thank you good morning, everyone.
Good morning, good morning.
So maybe continuing on the line of questioning on the value over volume and I'm wondering if there is any.
Distinction or color you could provide by product category that where maybe that youre seeing a particular emphasis or.
Youre, emphasizing kind of proportion of the portfolio.
Grant to a greater extent than others and Conversely is there any distinction or anything notable.
Glean there by substrate are you seeing kind of a.
More of your volumes in some of the higher.
More sustainable solutions.
Or vice versa, or Conversely, the opposite that has margin implications.
Yes, I would say.
There's not any one.
Segment customer.
Product type.
Over volumes.
Prevalent in versus others for us, it's really more of an overall.
<unk> that we're taking as it relates to.
Working with our <unk>.
Our customer partners to drive volume growth.
And making sure that where we.
Where we can kind of extract the kind of value we see him that we provided.
Not just.
Packaging producer, but as a supply chain partner.
That's what we're that's what we're saying is it's not just a product or a category.
We are seeing.
To your question.
When do you think about our sustainable sustainable offerings, we are seeing that.
Yes.
Our customers continue to evolve their strategies, we are winning in those spaces.
<unk>.
<unk>.
<unk>.
It is a driver of value for us and that's a focus for us So I don't want to under under value that comment. So there is no there is an ability.
Take advantage of better margins.
Better product growth profile, there and we're doing that but separate from our volume our value over volume strategy.
Okay. That's helpful. And then maybe one for John just as we think about cash flow and deleveraging.
Into 2024.
Can we think about working capital next year.
Continuing to be an incremental source of cash or do.
Do you think the working capital levels are.
Now kind of where they are.
In terms of where the where they will they will settle out your cash flow will more closely track kind of the EBITDA trends.
Yes, it's a great question, so we and thanks for asking that from a from a free cash flow standpoint going into next year, while we're not providing guidance per se.
Clearly.
Bye.
By targeting to get into the threes on net leverage by next year.
Would certainly imply that we're going to be generating some free cash flow into next year, which we intend to do as as you look at the components that drove a lot of that free cash flow this year.
It just on an LTM basis.
Our inventory reduction was $241 million or $183 million this year to date.
Certainly we don't we don't anticipate that repeating into next year.
Inventory dynamics as we built up that that incremental inventory last year to help really drive service levels during that environment, we've gotten more efficient with that inventory this year as evidenced by.
That that inventory that our ability to really work down our inventory working more closely with our customers.
Frankly, I think we're even moving into next quarter I think we're getting to the point, where we're getting to probably more more normalized inventory levels and our ability to pull that lever for incremental free cash flow.
It is not going to be the driver going into next year or even into next quarter.
What I would say is that the EBITDA trajectory, we are on the margin trajectory.
Would that were on margin growth that we've shown I think those are going to be really some of the key drivers going into next year.
Really extrapolating some cash from the business.
I appreciate that color I'll pass it on thanks. Thank you.
Yeah.
Okay.
Sure.
I am showing no further questions at this time I would now like to turn the call back over to Mike King for closing remarks.
Thank you Stacey.
As we closer to APAC of Evergreen is a strong differentiator and socially responsible business.
We are an industry leader in foodservice and food and beverage merchandising. We are confident that our markets are largely recession resilient. We are focused on generating sustainable returns and our experienced leadership team that has demonstrated our willingness to transform the portfolio to put us in a best in class position to deliver on our commitments.
We offer a broad array of products and substrates and the longstanding strategic partnerships with our customer base.
Nathan 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 from recycled recyclable or renewable materials, we continue to deliver strong adjusted EBITDA and free cash flow generation, which we are.
Carefully managing to drive deleveraging and further growth through disciplined capital allocation process.
We look forward to updating you again next quarter.
<unk> for your time.
This concludes today's presentation you may now disconnect.
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Sure.
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Okay.