Q1 2024 Pactiv Evergreen Inc Earnings Call
Good day and thank you for standing by welcome to the Pact of Evergreen first quarter 2024 earnings conference call. At this time 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 on your telephone.
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Draw. Your question. Please press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker, Kurt Worthington, Vice President of strategy and Investor Relations you may begin.
Thank you operator, and good morning, everyone welcome to our first quarter 2024 earnings call with me on the call today, we have Michael King President and CEO and John <unk> CFO.
Please visit the events section of our Investor Relations website at Www Dot tact of evergreen Dot com and access our supplemental earnings presentation.
Management's remarks today should be heard in tandem with reviewing this presentation.
Before we begin our formal remarks I want to remind everyone that our discussions today will include forward looking statements, including those regarding our guidance for 2024.
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. These statements 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, 2023, and our quarterly report on Form 10-Q for the quarter ended March 31, 2024 for a more detailed discussion of those risks.
We're looking statements we make on this call are based on information available to US as of today's date and we disclaim any obligation to update any forward looking statements, except as required by law.
Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.
Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to the most directly comparable GAAP measures are available in our earnings release and the appendix to today's presentation unless otherwise stated all figures discussed during today's call are for continuing operations.
Okay.
With that let me turn the call over to pack of Evergreen as President and CEO, Michael <unk> Michael.
Thanks, Kurt and good morning, everyone. Thank you for joining us today.
Let me begin by commending our team on their efforts and contributions during the first quarter of 2024.
Michael: The team's dedication to our continuous improvement culture and commitment to delivering for our customers positions pack of evergreen to adapt to dynamic market conditions and create value for all stakeholders.
Turning to slide four.
I'll start by highlighting the progress we made against our strategic priorities during the first quarter.
Then I'll discuss some internal and external dynamics, we have been observing and actions, we're taking to position the business for long term success.
John will then provide updates on our key financial metrics and discuss our outlook for 2024 at.
At the end of the call we will open it up for Q&A.
Turning to slide five.
I will start with a few key themes that underpin our performance during the first quarter and also provide some context on our progress against our strategic priorities.
First despite the first quarter presenting us with an irregular business environment, our team delivered solid results.
Adjusted EBITDA for Q1 of 2024, it was $168 million, which was at the high end of our guidance provided during our fourth quarter earnings call.
Our results largely reflect a lower pricing environment, which was partially driven by lower raw material costs and the cumulative effect of sustained price inflation.
<unk> spending resulting in lower volumes.
We also saw higher employee related costs, partially offset by lower manufacturing and transportation costs.
Volumes decreased 3% in the quarter compared to the prior year, primarily due to a focus on value over volume in the food and beverage merchandising segment.
Michael: Volumes also reflected the market softening amid inflationary pressures during the fourth quarter earnings call, we highlighted weather related reductions in restaurant food traffic and the residual impact on our customer supply chains, we were able to mostly offset this dynamic as well as the impact it had on our results.
Michael: Second we find ourselves navigating a landscape that remains dynamic.
While there are signs of the economy is still blend and overall inflation has moderated compared to the last two years.
Michael: We hear from our customers that the financial health of the average consumer in the United States is still strained.
Since early 2020 consumer prices have increased 21%, while food prices have increased 26%.
At the same time reports indicate that the total household savings have been depleted to below pre pandemic levels.
The net effect is a cautious consumer who is still adjusting to a potentially lastly step change in the cost of living.
Third I want to underscore that we are executing on our multiyear playbook of cost management initiatives as.
As I mentioned earlier, the broader market environment remains dynamic.
We believe our disciplined approach and focus on managing our costs will help us navigate the current market conditions.
Brian your fracturing cost reductions to logistics process improvements our teams are focused on identifying inefficiencies and eliminating unnecessary expenses.
We expect sequential improvement into the second half of the year, providing an additional layer of earnings momentum in 2024.
While we expect the effects from the recent inflationary uptick to persist through the second quarter before I see before seeing signs of improvement during the second half of the year, our focus remains on building volume momentum.
We are leveraging our long standing partnerships with Blue chip customers. In addition to our innovative product portfolio to gain share across our end markets.
On that front, we've entered into agreements with new and existing customers across our business, including <unk> distributors and CPG customers and expect those to ramp up during the second half of 2024, demonstrating our ability to execute and win.
We continue to invest in robust data analytics.
Enable us to better allocate resources to the markets that maximize our profitability.
We are then able to leverage this capability to make informed choices that ultimately guide our portfolio and underpin our value over volume approach. We're also prioritizing our customer service levels.
Which have remained strong the actions we are taken today are consistent with our transformational journey and we believe they position us for long term sustained growth.
Fourth we are reiterating our full year outlook, while Jon will provide great greater detail around our specific assumptions I want to provide some context.
We are well positioned and expect to see an improvement in volumes during the second half partly due to seasonality, but also due to our pipeline of customer wins, which are expected to ramp as we progress through the rest of the year. In addition, we have line of sight to a number of cost saving actions through the second half of 2024 that we expect to help us generate.
Year over year adjusted EBITDA growth.
Given the actions that we've taken previously our company is better equipped to adjust to market signals than in past years, we were able to scale quickly to evolving market conditions, while simultaneously capturing cost savings opportunities.
Regarding the recent rise in inflation data, which.
Which is a bit of a divergence from the previous multiyear improvement trend. We do not currently anticipate a meaningful change in the market dynamics during the second quarter.
At the recent uptick in inflation and the resulting effect on both the consumer and our customers' persist beyond the second quarter, we would expect our full year guidance to come in at the lower end of our guidance range.
Turning to slide six I will address other key drivers influencing our performance through 2024.
Year to date restaurant foot traffic is down compared to last year, reflecting a weakened consumer health to continue trading down to lower cost food options and to a lesser extent the severe weather experienced in January.
We continue to leverage our unique value proposition with our customers, which we believe has allowed our foodservice business to outpace its end markets and his support and strategic value over volume decisions within our food and beverage merchandising segment.
Over the last few months the pace of inflation has accelerated which has made the current environment less conducive to a volume improvement.
Any of our customers.
That we're able to grow earnings over the past several years by trading volumes for pricing are leaning more heavily on their own cost structures to offset heightened price sensitivity by consumers.
We have reached a point.
After several years of persistent inflation consumers are less able to absorb further food price increases.
While commodity input costs have trended down over the past two years recent macroeconomic developments suggest that raw material costs may trend a bit upwards.
For example, the price of oil has recently increased which is introduce more volatility in resin prices compared to last year.
That said, we ultimately pass the resin costs onto our customers and do not expect recent volatility to have a material impact on results in the near future we.
We are also taking actions to mitigate the impact of higher oil prices and our transportation costs.
We continue to monitor and navigate the dynamic nature of our business.
We are confident in the actions we have taken over the last several quarters to position us to deliver against our long term strategy as evidenced by our Q1 results with that I would now like to turn the call over to John John.
Thank you Mike I'll start with our first quarter highlights on slide eight before I cover the results in detail I will provide some context for our performance in the quarter as we outlined in March we expect that our Q1 results to be impacted by lower volumes and a continued adjustment of consumers to higher for longer inflation. We also outline the actions we're taking.
To build earnings momentum for the remainder of 2024, including volume growth and cost improvements.
Michael: Based on that backdrop Q1 was generally as expected we reported net revenues of $1 3 billion for the quarter, which represents a decrease of about 13% compared to last year.
Michael: The decrease was largely due to the closure of our Canton North Carolina Mill operations. During the second quarter of 2023, lower pricing due to the pass through of lower material costs and lower sales volume.
Lower sales volume generally reflected our focus on value over volume in the food and beverage merchandising segment and market softness amid inflationary pressures excluding.
Excluding the impact of the cabin mill closure, our revenue was down approximately $95 million or 7%.
Overall.
Volumes were down 3% in the quarter.
<unk> service volumes are slightly negative year over year, but outpaced industry foot traffic trends, which are down more than 3% during the quarter.
Food and beverage merchandising volumes decreased mainly due to strategic value over volume decisions as we continue to optimize the portfolio.
Underlying industry demand in food and beverage merchandising was roughly flat outside of those actions.
Price mix was down 4%, which was mostly a function of lower contractual pass throughs, driven by lower raw material costs compared to the prior year period.
Adjusted EBITDA was $168 million at the high end of our guidance range provided in March, but an 11% decrease compared to the prior year. The decrease in adjusted EBITDA reflects lower pricing net of material cost faster reduced sales volume and higher employee related costs, partially offset by favorable manufacturing.
Actually and transportation costs our.
Our adjusted EBITDA margin was 13, 4% compared to 13, 2% in the prior year period.
Our year over year adjusted EBITDA comparison also reflects the onetime impact from the extension of key business of approximately $8 million in Q1 of last year.
This had a positive impact on prior year adjusted EBITDA margins.
During the first quarter free cash flow was negative $74 million, which is impacted by seasonal factors, including typical inventory build ahead of the summer season in Q2 and Q3.
By comparison during Q1 of last year, we experienced a working capital benefit as we were in the process of working down our strategic inventory build from 2022.
Entering this year, our inventories are closer to normalized levels as.
Michael: As a result, I would characterize the inventory build in Q1 is more typical for our company. We remain committed to deleveraging our balance sheet and are focused on maximizing long term free cash flow generation.
From a quarter over quarter perspective revenues declined 2% due to lower sales volume.
The decrease was generally driven by seasonal trends in the foodservice segment.
Adjusted EBITDA was 19% lower mostly due to higher manufacturing and material costs and lower sales volume, primarily due to seasonal trends in the foodservice segment.
Yes.
Continuing to slide nine we will look at results by segment beginning with foodservice.
Net revenues were down 3% year over year, mainly due to lower pricing, reflecting the pass through of lower material costs and unfavorable product mix.
Lines are down marginally.
<unk> is still contending with challenging consumer dynamics, but we believe our business is more resilient than the broader industry with our segment volumes outpacing industry foot traffic data.
Price mix was down 2%, reflecting lower than expected demand from some of our higher margin transactional relationships as well as a higher weighting to lower margin product categories.
Price was down slightly due to the lower contractual pass throughs.
As Mike previewed during his prepared remarks, we have started to see increased price sensitivity from some of our foodservice customers.
While we were largely able to offset this dynamic during the quarter. We anticipate this headwind will persist through the balance of the year.
Adjusted EBITDA decreased 15% compared to last year to $90 million and adjusted EBITDA margins decreased by just over 200 basis points.
The margin variance reflects unfavorable product mix higher manufacturing costs and lower pricing net of cost out there.
On a quarter over quarter basis, our results were impacted mainly by lower volumes, which are attributable to seasonal trends similar to our year over year comparisons our volumes on a quarter over quarter basis outperformed broader industry foot traffic trends, which is consistent with our strategy to align with customers winning in their respective end markets.
Michael: Net revenues were down 5% sequentially, mostly due to seasonal volume dynamics adjusted EBITDA declined 20% driven by lower sales volume and higher manufacturing costs.
Turning to slide 10.
Food and beverage merchandising experienced a continuation of the themes from the fourth quarter as retail food at home prices are still elevated compared to historical levels. Despite moderating more noticeably than food away from home prices DM.
The end result is that consumers are curbing their spending and weighing their budgets towards staples like protein and eggs.
Proteus packaging benefited from easier comps as heavy rains and flooding in California last year delayed the harvest into the later part of 2023.
Our beverage card business also benefited from non dairy drinks that utilize our packaging formats.
On a year over year basis, net revenues were down 22%.
Earnings were down mostly due to the Canton North Carolina mill closure in May 2023, and lower pricing largely due to the pass through of lower material costs and lower sales volume.
Excluding the impact volumes were down 4%, mainly due to a focus on value over volume and lower demand for discretionary food products like bakery items.
Adjusted EBITDA decreased 1% compared to last year, primarily due to lower sales volume.
Unfavorable product mix lower pricing net of material cost, partially offset by lower manufacturing costs.
Adjusted EBITDA margins increased by just over 300 basis points due to progress in our beverage merchandize restructuring.
First quarter of 2023 also included the one time impact from the extension of key business of approximately $8 million in Q1 of last year mentioned previously.
On a sequential basis.
Net revenues were up 1% due to a marginal improvement in sales volume, while pricing and mix were consistent over the prior period.
Adjusted EBITDA declined 12% largely due to higher manufacturing and raw material costs, partially offset by lower transportation costs.
Speaker Change: Turning to slide 11.
We have a summary of our balance sheet and key components of our cash flow.
Slight uptick in our leverage during the quarter was expected as a result of an increase in net debt and lower LTM. Adjusted EBITDA. However, we still anticipate ending 2024 with a net leverage ratio in the high threes in terms of free cash flow, we experienced a $74 million outflow, which partially reflects lower profitability compared to last year as we.
The seasonal inventory build heading into the summer months.
On Wednesday.
And we further amended the credit agreement to increase the capacity on our revolving credit facility from $250 million to $1 1 billion <unk>.
Materially enhancing our available liquidity and extending the maturity date to May one 2029, we also amended the applicable interest rate and other pricing terms, including by replacing the facility fee with a lower fee Unutilized unutilized capacity.
There were no other material changes to the terms of the credit agreement.
As it relates to our capital allocation priorities our approach remains aligned with our long term strategy and underlying consumer trends, we are committed to delivering profitable growth, which in turn will allow us to meet our goals to de lever the balance sheet and preserve liquidity.
Our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth and we 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 12.
As Mike mentioned, we are reiterating our financial guidance for fiscal 2024, including our adjusted EBITDA range of $850 million to $870 million, we expect near term challenges such as lower consumer demand to persist into the second quarter.
Said, we are also optimistic about the actions we are taking to mitigate costs drive operational improvements and increased volumes during the second half of the year.
As Mike noted earlier, our Q2 results may be unfavorably impacted by the recent rise in the consumer price index and overall food prices in March which may temper the magnitude of the volume inflection outside of typical seasonal factors during Q2 against that backdrop. We believe the actions we have taken to build volume momentum in the <unk>.
Half of the year. In addition to cost reduction initiatives, we have implemented position us to achieve adjusted EBITDA within our full year guidance range.
To put a finer point on the second half inflection we are guiding to we expect an improvement in adjusted EBITDA for the second half of the year of more than 30% compared to the first half approximately half of that improvement is related to our playbook mill, which just completed a planned outage in April.
So the remaining sequential adjusted EBITDA growth volume accounts for the majority of the expected improvement while the remainder is attributable to cost savings and favorable price mix.
For further context on the block volume growth component, we expect most of that to be driven by seasonality and general market improvement with the remainder resulting from our strategy of aligning with core customers that are outperforming their end markets. In addition, our full year guidance is based on modest improvement in industry volumes predicated on.
Continued moderation in inflation throughout the year, coupled with expanded volumes with several new and existing customers.
If inflation pressures persist and in fact, the consumer our full year results will trend towards the lower end of our guidance range.
Our full year guidance for capital spending and free cash flow remains unchanged versus our original guidance and we still expect net leverage to be in the high <unk> by year end.
With respect to the beverage merchandising restructuring, we have narrowed our guidance to approximately $160 million of cash restructuring charges and approximately $330 million of noncash restructuring charges.
As of Q1, we have recorded substantially all of the expected restructuring costs for that initiative.
With respect to our footprint optimization plan the expected restructuring charges remain at 50 million to $65 million and total noncash restructuring charges remain at 20 million to $40 million. These costs are expected to occur in 2024 and 2025, we will provide further updates on.
On the footprint optimization as it is implemented.
To wrap up our first quarter tracked closely to our expectations driven mainly by the actions we undertook to position our business for second half momentum and long term growth, while we expect relative weakness in the near term we are confident in our plans to the rest of the year with.
Within both segments of our business, we expect to deliver margin expansion in the second half of the year paired with improvements in the trajectory of volume and mix. Our team remains focused on executing our strategy and positioning our business to build momentum and achieve our full year guidance.
With that I will turn the call back over to Mike.
Thanks, John.
Before we open up the line to Q&A I want to reiterate that we believe we have a robust platform that enables profitable growth and sustainable returns long term.
We're an industry leader in foodservice and food and beverage merchandising and remained focused on generating sustainable returns.
Our management team has demonstrated a willingness to optimize the portfolio and deliver on our commitments. We continue to leverage our longstanding strategic partnerships with our customer base, many of which are blue chip companies and are constantly working to innovate and develop the highest quality sustainable products.
We expect that the actions we are taking today will yield solid adjusted EBITDA and free cash flow generation, which we carefully manage to drive deleveraging and further growth through our disciplined capital allocation process.
In closing I would like to thank all of the pact of evergreen workforce for their continued commitment and hard work I would also like to thank our valued customer and vendor partners for their continued commitment to our mutual success.
That concludes our prepared remarks with that let's open up the line to questions.
Operator.
Thank you.
Sure.
Asked a question. Please press star one on your telephone and wait for your name to be announced.
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One moment for your first question.
Okay.
And our first question will be coming from Anthony Pettinari of Citi. Your line is open.
Good morning, Brian Birchmeier on for Anthony Thank you for taking the question maybe.
Maybe just to start just a question on kind of the revised outlook I totally understand that ongoing inflation is concerned can you just maybe help us kind of understand the magnitude is.
Is it greater on the top line in the form of consumer spending and volumes is it going to be greater on the bottom line from rising costs and can you help us frame, maybe which segment is seeing the greater impact right now.
Yes, I'll take the front end of that.
We reiterated our guidance we didn't revise our guidance. So I just want to make sure we get that out there.
Got it got it yes definitely.
And then John I don't know if you want to.
Yes, sure ill reiterate a few comments that I made in the prepared remarks here just to give you a sense of where the improvement is coming from.
The second half improvement, we're expecting 30%.
<unk> growth year over year during the.
First half to the second half from an EBITDA perspective, so 50%.
Approximately 50% is coming from Pine Bluff.
Mentioned, we had a planned outage in April which is now behind us.
Hudson weather related downtime at that mill in the first quarter. So.
Meaningful improvement from just the operations of time loss.
The remainder the majority is driven by volume.
Some of that is seasonality going into the back part of the year.
Part of that is general market improvements as some of the.
The current market environment, we are expecting some easing there and as we mentioned growing with some key customers and so we've had some customer wins that will ramp up.
With some volume going into the second second half of the year.
The remainder is cost savings and some favorable price mix that we're expecting.
Got it got it thank you.
Thanks for that detail and then maybe just on those new business wins that you flagged you've been talking about kind of winning alongside your strategic customers for a while now.
Maybe which end market is may be winning the most it sounds like it's in <unk>.
And then is there any sort of trends are our people.
Asking for more paper more plastic because it about comps or trace just any detail on kind of where those business wins are.
I'll turn it over.
Yeah. Good question so.
I Wouldnt say its in any one segment I would say.
We're kind of.
Seeing our partnership across all of our end markets yield success shows.
We've partnered.
Both on the beverage and food merchandising side as well as the foodservice side.
We're seeing new.
Volume and share gains in just about every one of our channels I would tell you.
We are we are not seeing any substrate major substrate shift or anything at the moment.
It's really pretty mixed across both fiber based in politics.
Hope that covers it.
One moment for our next question.
And our next question will be coming from Ghansham Panjabi of Baird. Your line is open.
Hey, guys good morning.
Good morning.
Michael just kind of go back to your comments.
I'm just trying to reconcile them so at least from our vantage point.
Last year was the year of.
The recession, if you sold into the CPG channels.
And it's logical to assume that that sort of morphs into the foodservice channel as well.
Is it is it your assumption that.
Are you assuming that things.
Get tougher in terms of foodservice as the year goes on are you actually seeing that I'm just trying to disaggregate your comments.
So if you take Q1 as an indicator.
Speaker Change: Broader foodservice foodservice end markets I think if you will.
Look at foot traffic as we look at foot traffic is one of our indicators down close to 4%.
And if you look at our performance we were substantially less at low single digit one five ish.
How many units for foodservice and Margaret.
And if you think about.
Kind of the.
But early days of Q2 here.
Our key customer earnings reports.
Foodservice side, it's no secret that their beat up right now.
Speaker Change: There needs to be.
Change and so back half.
Volume recovery for us and kind of what we're anticipating is kind of that low single digit.
Recovery promotional activity.
We've seen inventories get healthy year over Q1 with our customers.
And we fully expect that.
Speaker Change: The joint kind of recovery would be.
The value they are trying to create a supply chain our customers are creating the supply chain.
Creates.
The ability for them to promote and we'll see that come through largely in that low to single digit recovery.
<unk> customer.
Thanks for that and then your comments on the customers less able to push pricing and focusing on the cost structures.
You can expand on that and then just.
Related to that would be if your foodservice customers started stressing the value portion of their menus, which seems to be the case just judging by the comments they've made this week how does that impact you if at all.
Yes, it definitely has an impact.
We reported.
In Q4 that we started to see the.
The customer approach start to shift.
Certainly.
We're looking for ways to create value.
Turn to the.
The other vendor bases and so we're not insulated from that.
And so as we partner with our customers, we're looking for ways to help them.
A.
To create value within their own portfolios and then B there's certainly.
Continue to be pressure on.
The entire cost structure. So I would say that has certainly ramped up here in Q1, and we don't expect that to slow down in Q2.
So yes, I think you got to get that right.
Yes.
Shifting their inventory approaches or anything that would.
Make the supply chain more fragile, but I do expect that.
Theyre going to our customers and certainly we are looking to leverage our inventory help.
To grow sales and promote the customers' foot traffic.
Especially in foodservice.
Okay perfect. Thank you so much.
And one moment for our next question.
And our next question will be coming from Phil Inc of Jefferies. Phil Your line is open.
Hey, guys, Mike I guess.
Piggybacking on <unk> question on where perhaps you're seeing your customers under more stress is that largely a foodservice comment because a lot of the.
Packaging companies that have more food and beverage consumer staple exposures are talking about hey, the destock happen in fourth quarter things are kind of bottoming out in <unk>, and perhaps getting a little better in <unk>, just kind of help us contextualize, perhaps where things are a little more choppy here.
And how we think about the back half I guess, perhaps.
Yes, thanks for clarifying that.
Certainly a foodservice comment kind of took <unk> question specific to foodservice.
And yes, I would say, it's more mixed broadly so we view.
Better than half of our business at foodservice.
The other bit is our food and beverage merchandising segment.
Speaker Change: So those segments.
Largely.
It's a mixed bag really and so destocking I would agree with your comments on the destocking largely being over.
Speaker Change: And we've now seen real normal seasonality in <unk>.
The normal consumption trends happening so heading into memorial day mother's day father's day.
We're seeing protein season kick in grilling season, with our with our protein business exit has been really strong is the lowest cost protein in the market.
Produce season is ahead of last year, and it's ramping up sooner as we enter Q2. So thats a good thing if you. If you think about last year. When we had all the flooding which delayed the berry season in the fresh produce season, which we participate in.
And then we've also seen the mix point, we participate.
And in retail.
So we still see a very depressed.
Big baked goods bakery with the consumer electing to spend there.
Speaker Change: Their discretionary dollars elsewhere.
<unk>.
Discretionary cakes with those kinds of things so.
Hopefully that.
I think I answered your question with that.
But in terms of volume for food and beverage food and beverage merchandise segment I know, there's some noise with the.
Compares with.
The mill at year end business, you're exiting but like on an organic basis apples to apples basis should we shouldnt expect a lot youre volume cadence. Since you gave me the word be softer rate on a yearly basis, maybe some modest improvement.
Yes flat to maybe low single digit improvement.
What we're looking at.
Speaker Change: Helpful. And then one question for John You gave some color in terms of how to think about the first half versus back half a year from an EBITDA Apple it sounds like <unk> will in all likelihood be down a little bit on a year over year basis, you inflect positively by <unk> and what are some of the things that you have you introduced falls right.
Now last quarter, you talked about playing catch up on Carlyle, We're obviously seeing some movement on inflation on Brexit, but just kind of help us think through the EBITDA cadence on yearly basis in <unk>.
Speaker Change: Progressing our <unk> and certainly you guys sound pretty upbeat about the back half.
Yes, no. Thanks, it's a good question and so I think thats the right way to think about it Q2.
Maybe I'll just start with Q2 and then we can talk about the back half of it further so Q2 benefited from seasonality on a sequential basis and then if you look at year over year volumes are relatively going to be flattish.
On Mikes comment one thing to note about Q2 as it relates to just kind of EBITDA, we do.
I mentioned that we have the pine Bluff planned outage that was completed in April and the net effect of that is probably $20 million impact to Q2.
<unk> behind US we don't have any other.
Planned outages for the remainder of the year and then if.
If you look at Q2, we still are anticipating.
Anticipating the impact of inflation on food prices consumers still being felt we're seeing net so in April I think as you kind of go on to the <unk>.
That part of the year, we're expecting some of the actions that we've talked about to build some volume momentum in the second half and so part of that is on the top line. When we talk to Mike answer your question around customer wins during.
During the call. So we are expecting some of that too to start being felt.
And then the cost initiatives as you mentioned.
The Cola Cola does have a bit of a lag effect, we tend to do some of our labor increases.
At the start of the year and as those labor.
Kind of add backs come back in you'll you'll start seeing that kick in more as the year goes on plus we have several cost initiatives that are underway and those do take a bit of time to see start to start recognize that in the P&L, but we expect several of those cost initiatives and cost savings to start building up <unk>.
The year and when I am talking about some of those cost savings, even just bifurcated out there is.
<unk> continuous improvement.
Those are initiatives that are that are underway and those are those are more than just the back half of the year benefits, where those are longer term programs that we have in place that we believe will continue to see some.
Saving John and then just also to delineate the footprint optimization, which is the bigger program, we introduced last quarter.
In last quarter's call just to reiterate a lot of those benefits will be seen really starting 2025, although we will see some benefits of that program again in Q4.
Speaker Change: Okay I appreciate the color guys.
Okay. Thank you.
Speaker Change: And one moment for our next question.
Our next question will be coming from Arun Viswanathan of RBC capital Arun Your line is open.
Great. Thanks for taking my question.
Just wanted to maybe get your.
Food Bev merch seems like there's been some improvement there and.
You guys are.
Still going through some restructuring but.
Nice to see a little bit of improvement there. So maybe it sounds like foodservice could be a little bit softer, but what are you seeing on the food and beverage side. Thanks.
Yes, I think on the food and Bev merch, it's like I said in the prior question. It's still mixed I think we're ahead of where we could be given year over year seasonality. So I mentioned the AG season.
I think the biggest thing youre seeing improved.
Improvement wise in our food and Bev merges some pricing fidelity and so as we have.
Speaker Change: Kind of eclipsed some some contracts and started to get some help on.
Price cost side.
Our value over volume strategy start to come through.
And that business, which was a little behind our foodservice business. If you recall from the Q4 call.
So overall.
That team is doing well I think they're also benefiting.
Quite a bit from from the Peps improvements we've made in those operations to become more stable. That's also flowing through.
Great Thanks for that.
And then I guess just on price cost.
Resin prices may have maybe ticking up here a little bit.
Obviously, you guys have pretty robust pass through mechanisms, but maybe you can just give us your thoughts on.
Potential volatility if that would cause any volatility on your margin side.
Speaker Change: And maybe your outlook is for the.
Next couple of quarters.
Yes in terms of some of the.
The impact of kind of inflation impact on <unk>, we are seeing some of that I think we are.
I think we're seeing on a cost perspective, and probably in two places in resin and then also on.
Maybe some transportation I'll take them in pieces, so from a resin standpoint, we largely have pass throughs on the resin.
The majority of our business and so we do expect to recover that there. We've made a lot of efforts to reduce the lag that we have for those recovery programs and so really on a year over on it.
On it this year basis, you really shouldn't see much of an impact.
Really.
Where you might see it as if we have a big spike or a big decrease at the end of the year.
Turning to November December and we don't recover that within the year that might have an impact on our annual results.
<unk> really anything that youre seeing coming in the near mid term really shouldn't be an impact too.
To the P&L, we do pass a lot of that through I think.
Relates to the transportation were relatively flat.
<unk> flat, we pass that through as well we have some capacity there as it relates to customers.
It impacts us it could be an impact is on our transfer freight as we move.
Some products within our network, but we have other cost initiatives savings programs, we're getting more efficient there, which will largely offset any impacts to the increase.
Net net we're really not factoring in anything for through the year in terms of we should be able to.
Insulate the business from any type of volatility in material pricing.
And just lastly, sorry, just on the leverage so it sounds like you guys are pretty committed and pretty confident that you will finish the year in the high threes.
Obviously the deleveraging.
I imagine will continue so what's kind of the optimal target that you ultimately want to strive for over the next couple of years.
Yes, we're continuing to deleverage we've only put out targets for this year, we haven't put out multiyear targets, but I can just say that we're not going to be satisfied in the high threes, that's where we can get to this year and we're going to keep going and we're looking to.
I'd love to substantially improve we feel like some of the actions we've undertaken.
To date.
It helps and we're continuing.
It's down that path and even on top of that we took a substantial action.
Increasing our liquidity and our available capacity under our revolving credit facility I'll, just take a minute to point that out.
In terms of raising our to pass our borrowing capacity from $250 million to $1 1 billion.
It is something that.
From a liquidity standpoint.
A substantial improvement.
Two our tour overall credit profile on top of the Delevering that we're that we're undertaking.
Thanks, a lot.
Speaker Change: One moment for our next question.
And our next question will be coming from Adam Samuelson of Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
So I guess the first question John maybe just.
To be clear in trying to tie together the point on the $20 million.
The Pine Bluff.
Turnaround.
EBITDA cadence during the first and second half.
You're kind of implying second quarter EBITDA.
Plus or minus $200 million will be how that works if you lease.
<unk> is tracking well.
Lower in the lower half of our full year range is that the right.
Is that the right understanding.
You're generally on the right track and I think if you take my comments were not providing explicit guidance for Q2, but what I would tell you is when you look at my comments around second half improvements with 30% plus.
The midpoint of our guidance range that would imply.
206, four for Q2.
Roughly speaking just the math, but we're expecting a 30% plus improvements are really that.
That would take you down too.
Lower than the <unk> from the.
Over 30% and so we're tracking to that I think the $20 million of defined block is.
That that will impact Q2.
That.
Thats factoring into the results there are expectations, there I should say.
Got it.
That's very helpful. And then as we think about the footprint optimization and the beverage merchandising restructuring.
Restructuring.
From a cash perspective.
The beverage merchandising.
Restructuring the cash expenses are.
Most complete there's only a couple million dollars left doing what <unk> had spent last year and what your cash principles here I just want to confirm that and then from a footprint optimization. There was $8 million spent and so thats still most of that program is still to come.
I presume over the balance of this year is that correct.
Yes, that's correct. So when you we haven't changed any of our guidance for the footprint optimization as that program is really just getting underway.
And maybe taking pieces in the food and beverage merchandising restructuring as I mentioned on this call. We are largely complete with that program and so our total cash charges.
Did end up around the $160 million Mark that we had guided to from a cash basis and just to reiterate on this footprint optimization.
Much of that is we're anticipating and this year, we're anticipating 2020 forecast charges in the $15 million to $20 million area for this year.
Okay. That's helpful. And then just one final one I know seasonally working capital.
Picks up.
In the first quarter and Thats, what you saw.
Speaker Change: Do you think that there is room to get cash out of working capital this year, especially given the.
More unit volume environment that youre seeing in the near term.
Yes, I think thats.
That is the right way to think about it I think working capital, we do expect to get some benefits there.
Speaker Change: Despite the negative working capital in Q1.
The big piece of that clearly was some of the timing of our accounts receivable.
And if you look back to last year Q1 was we had a similar dynamic and we anticipate that that should be worked through through the remainder of the year and we will get some benefit of working capital.
Included in our $200 million guidance 200 million plus guide for free cash flow for the year.
Alright thats it.
That's all very helpful. I'll pass it on thank you. Thank.
Thank you.
One moment for our next question.
And our last question will come from George Staphos of Bank of America. Your line is open.
Hi, Thanks, very much good morning, guys. Thank you for the details can you hear me okay.
Yes, good morning, George.
Good morning, So two questions. One can you give us sort of a deeper dive into perhaps how you're integrating that where you stand in terms of the continuous improvement program Derek what it could mean in terms of margin in the next couple of quarters and next couple of years across the two segments.
Speaker Change: Second question to.
Speaker Change: To the extent that.
Freight and rail and trucking have been relatively benign to some degree that is it creates a competitive disadvantage for you because of your logistics and distribution network to the extent we saw reversal.
And are you seeing that at any by any chance how do you leverage your active distribution model and network.
To improve volume and sharing an advantage versus your peers. Thank you guys. Good luck in the quarter.
I'll take the pups so good question.
So we're still early days and so I just want to reiterate that and so we've got 18 sites that are certified brands three silver and we just had our first gold site in Kinston North Carolina.
So 22 sites total certified.
The program has largely been rollout from independent standpoint, so independent evaluations have happened across the board. So all plants are operating on the same operating system.
In terms of actually value creation. So so if you think about the first stage of pets, it's really about stability George.
And so having the plants all on one system. It creates the portability of talent allows us to insulate ourselves from.
Labor challenges and be able to move labor.
And so we have a total labor management system that allows us to leverage that and when you can go from plant to plant.
Understand the operating systems. The same in every facility. It really allows us to leverage that so the first phase is really about cost avoidance and stability when you get to silver and you start to see cost improvement.
Teams are building six sigma projects and when Youre gold.
You actually have a forecast that savings that we built into the system. So with only one gold site.
It's really.
Not about the dollars today, but long term we look at this as a lever that we'll do a lot more than just offset inflation.
And really generate that ability that lever to handle.
True EBIT growth and performance.
We're not there yet.
We have 31 more sites to be certified and thats going to happen over the coming quarters.
Well into next year so.
No victory speech, there yet, but we are seeing green shoots we are seeing.
Shifting our plant's ability to be proactive.
And it's allowed us to really kind of stay ahead of the inflation that used to really hamper.
On a Q over Q and.
One of the reasons, we've been able to.
To whether some of the mix.
Next market and inflationary pressures, we've gotten just because of the pep so far and so we expect more out of that too early to really quantify there George.
But it's something we look forward to.
Update the market on.
But presumably Mike without getting in putting a number on it I can appreciate that as you roll this out more and more entities degree you got more stability across your system.
You should get also require less working capital and you'll be able to take inventory out of the system, you'll be able to.
Obviously produce that are at a more predictable level not mature obviously out of line right now and that should accrue benefits on return as well, which I think sometimes we don't appreciate.
Sorry go ahead.
Youre, 100% rate.
And in fact, we are.
From an avoidance standpoint, and efficiency standpoint, we are seeing those things come through.
But youre exactly right.
And on the package distribution network and whether you are able to really leverage that are not at this juncture.
Yes, Joe as rates rallied trucking institution.
Yeah, I'll take that one and I think if I if I understand your question right I think.
Youre applying that with without seeing more inflation in the in the logistics side of the business may be our distribution network, which is a differentiator isn't quite as differentially correct yes.
Yes, I don't know if I would necessarily agree with that it is still a differentiator for our business and having having to built out distribution network and being a light low cost distributor and having that value add to our customers I mean to your point.
It's still a value added differentiator for us.
Pricing was to go up.
Speaker Change: Across the network.
Everyone I suppose that.
That competitive bridge.
Would would only increase.
But it's still there today and it's something that.
That we are able to take a benefit from.
They add I would make to this is if you look at if you look at our foodservice business is.
As an indicator foot traffic was down near 4%.
The fact that we're able to provide mixed product and create value that our customers don't have to rely on themselves for.
Regardless of inflation continues to set us aside and we saw that with our performance in the.
The one five type.
Percent down on a unit basis, so we outpaced food.
<unk> service.
Foot traffic largely because of our ability to create value.
And partner with the customers that see that value now what I would also tell you. There is our network is scalable so.
I would tell you to your earlier question on perhaps one of the one of the good things about our hub and spoke network is.
We can adapt our R. R.
Our plant operations.
Regional demand signals, we can adapt it to broader market and product trend signals.
So our ability to scale back or scale up.
Is something Thats.
US been a focus and we've seen that come.
Come through as well, so, whereas a big supply chain could often be await an economic downturn, we use it as a lever to actually adjust and scale.
If that makes sense.
It does thank.
Thank you for the thoughts guys I'll turn it over.
And Im showing no further questions I would now like to turn the call back to Mike for closing remarks.
Thank you as we close today I want to again, thank the entire package of evergreen team for their hard work during the first quarter. We are executing on our strategy and we'll continue to progress on our transformational journey in 2024, we look forward to updating you during our second quarter conference call. Thank you for joining today.
This concludes today's conference. Thank you for participating you may now disconnect.
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Speaker Change: [music].