Pactiv Evergreen Inc. (NASDAQ:PTVE) Q4 2023 Earnings Call Transcript
Pactiv Evergreen Inc. (NASDAQ:PTVE) Q4 2023 Earnings Call Transcript March 1, 2024
Pactiv Evergreen Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Pactiv Evergreen Fourth Quarter and Full Year 2023 Earnings 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. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Curt Worthington, Vice-President, Strategy Investor Relations. Please go ahead.
Curt Worthington: Thank you, operator, and good morning, everyone. Welcome to our fourth quarter and full year 2023 earnings call. With me on the call today, we have Michael King, President and CEO, and Jon Baksht, CFO. Please visit the events section of our Investor Relations website at www.pactivevergreen.com and access our supplemental earnings presentation. Managements 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. We refer all of you to our recent SEC filings including our annual report on Form 10-K for the year ended December 31, 2023 for a more formal detailed discussion of these remarks. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements, except as required by law. Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.
Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, let me turn the call over to Pactiv Evergreen’s President and CEO, Michael King. Mike?
Michael King: Thanks, Curt. Good morning, everyone, and thanks for joining us today. I'll start with an overview of our key messages on slide four. 2023 was a pivotal year as we continue to reshape the company. First, we set records for our primary financial metrics, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Full-year adjusted EBITDA increased 70% to $840 million, marking the third consecutive year of growth. Our adjusted EBITDA margin of 15.2% improved 260 basis points compared to the last year. We also generated almost $250 million in free cash flow, up 60% year-over-year. Second, we made significant progress on our transformational journey by launching new initiatives to drive operational excellence, improving our overall productivity, and achieving a number of important milestones in our beverage merchandising restructure.
Third, we achieved one of our top priorities by reducing our net leverage ratio to 4.1 times at year end with live site to reach the high threes in 2024. Our performance underscores the resilience of our business, our ability to meet the evolving needs of our customers, and the significant operational improvements we've implemented since 2021. I also want to recognize these accomplishments would not have been possible without the tremendous effort of all of our employees. Our underlying value proposition remains the same. 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 we continue to make progress emphasizing the higher margin products, focusing on operational excellence, and improving our balance sheet.
We're confident that concentrating on these strategic priorities will allow us to enhance shareholder value. Turning to the rest of the agenda on slide five, I'll start with an overview of our performance and discuss the progress we made against our strategic priorities during the fourth quarter and the full year for 2023. Jon will then provide updates on our key financial metrics and discuss our outlook for 2024. At the end of the call, we'll open it up for Q&A. Turning to slide seven, one of the themes we emphasized over the past year is that our company is in the midst of a transformational journey that touches all aspects of our business. This slide includes an overview on the progress we've made during the past year and highlights the path that lies ahead for Pactiv Evergreen as we strive to unlock further value for our stakeholders.
First, we announced the combination of our food merchandising and beverage merchandising businesses into one segment and completed the closure of our camp mill and converting facility in Olmstead Falls. These decisions were a major step forward in becoming a pure play converting operation and support our broader efforts to reduce ongoing capital intensity and fixed costs, as well as reduce the volatility associated with our earnings and free cash flow. Beyond the restructuring, we have concentrated on fundamental changes in our approach to the marketplace. This past year, you've heard us talk about our approach to value over volume, but it goes beyond simply driving price. It really comes down to being deliberate about how we position our portfolio to create the most value for our customers and our stakeholders.
Over the last two years, we've completed extensive analysis across the organization with the goal of identifying how we deliver value to our customers and where we could potentially optimize profits. Through this effort, we've allocated resources to our longstanding customer relationships and partnered with category leaders to grow relative to the market. Our customers also look to us to innovate and develop the highest quality sustainable products to help them achieve their own sustainability goals. An important goal in our transformational journey is not just to develop sustainable solutions for our customers that help them meet their goals, but to develop our own solutions that help reduce the mark we leave on the world. Our goal is packaging a better future starts at our operations level, which at Pactiv Evergreen we continuously evaluate for improvement.
Early on in our journey we recognized the need to drive operational excellence. This realization quickly led to us identifying several opportunities that would improve productivity, quality and reliability while at the same time taking costs out of the system. This was a top-down company-wide effort that ultimately led to the implementation of our PEPS or Pactiv Evergreen production system with the goal of driving improved operational performance across the entire organization. As a reminder, PEPS isn't just a production system, it's a holistic management philosophy that touches all aspects of our operations. 2023 was the first year of our PEPS rollout and we set a goal for eight facilities to achieve ground [ph] status by the end of the year.
I'm pleased to share that 15 facilities achieved brand status during 2023, almost doubling our initial target. Today, in 2024, two additional facilities have already achieved bronze status and we recognize our first silver facility in early February. We expect to have 100% of our locations reach bronze status by the end of next year with an additional two to four locations achieving silver status in 2024 and our first gold facility by 2025. We've seen the velocity pick up across the company as more facilities become PEP certified, they're able to share their lessons learned with other locations which helps the remaining facilities get up the curve that much faster. I want to take this opportunity to recognize and applaud our team for their discipline.
However, there is more to do as we continue our transformational journey and position our company for long-term sustainable growth. Looking ahead to the rest of 2024 and beyond, we intend to build on these accomplishments to conclude the strategic alternative review of our Pine Bluff paper mill, continue to roll out of PEPS, drive operational excellence and generate solid free cash flow. Achieving these important milestones in 2023 has allowed us to pivot to the next phase of the transformational journey through a targeted optimization of our operating footprint. Over the next two years, we intend to rationalize a portion of our physical footprint and shift existing production and warehousing within our network to better match our capacity with the industry demand.
We estimate this will yield approximately $35 million in annual run rate cost savings by 2026. We expect these cost improvements will help position the company to continue to meet the unique needs of our customers and compete and win in the markets we serve. We also firmly believe these actions will enhance the long-term margin profile of our business and contribute to improve overall plant utilization and network productivity. Before I turn the call over to Jon, I want to touch on what we are observing across our end markets as well as how we continue to win with our key customers. Turn to slide eight. While overall inflation is moderated in recent months, food prices are still elevated compared to historical levels, particularly in restaurants where many prices continue to outstrip inflation.
Consumers have responded by trading down and shifting their food budgets towards lower cost options like quick serve restaurants instead of dine-in restaurants or by opting not to dine out if they were filling their pantries. Within the grocery store, consumers have reduced purchases of more discretionary items like baked goods. This dynamic has persisted for the past several quarters and we believe the consumer has become more stretched in recent months, which may impact industry demand through 2024. It's also important to note that weather conditions can impact volumes and consumer demand. While this wasn't a headwind during the fourth quarter of 2023, we saw the severe winter weather in January of 2024 reduce restaurant foot traffic and temporarily restrict our customers' supply chains.
This has an unfavorable effect on our volumes during January. We expect the impact of the severe weather will be isolated to our first quarter results. Driving profitable growth and generating consistent returns for our shareholders are top priorities. Like everyone, we have experienced inflation-driven headwinds. However, we believe the underlying business remains resilient. We continue to invest in our customers and strategically allocate resources to those that are well-positioned and taking share in the marketplace. On that front, we've seen limited promotional activity by some of our customers. Although we haven't seen large-scale promotional activity yet, to the extent that overall customer promotional activity picks up, we believe it would be a net positive for the sector as well as for Pactiv Evergreen.
As mentioned in prior calls, we've mostly worked through our customer destocking, and we're confident that that dynamic will have a minimal impact in 2024. From a raw material standpoint, the trend in 2023 was towards lower cost when compared to 2022 as broader inflationary pressures ease. We've seen that trend flow through the overall price levels, which are generally lower than last year due to our contractual pass-throughs. Additionally, we've made a concerted effort to reduce the lag with our contractual pass-through mechanisms. So we don't expect that recent commodity price volatility to have a material impact on results in the near future. Separately, we've seen some of our customers attempt to offset consumer price sensitivity by reducing their input costs, including packages.
And we expect that trend to continue through 2024. At the same time, we continue to identify opportunities to leverage our value over volume strategy, which was evident in our food and beverage merchandising segment during the fourth quarter. Overall, we remain uniquely positioned to capitalize on favorable long-term fundamentals across our end markets. These core strengths underpin the base of our transformation, and they're designed to propel profitable growth into the years to come. With that, I would now like to turn the call over to Jon. Jon?
Jonathan Baksht: Thanks, Mike. I'll start with our fourth quarter highlights on slide 10. Before I cover the results in detail, I'll provide some context for the financial performance. Recall in our fourth quarter of 2022, our end markets were still experiencing inventory destocking, and we were still contending with historically high inflation levels across our cost structure. Both of those dynamics have moderated over the course of 2023. As a result, our Q4 2023 performance reflects the impact from lower raw material costs, as well as underlying demand, that has modestly improved, but is still weaker than historical levels. We reported net revenues of $1.3 billion for the quarter, which represents a decrease of just over $200 million compared to last year.
Similar to our third quarter results, the majority of decline was due to the beverage merchandising restructuring plan and the impact of the Canton Mill closure last May. Excluding those items, our revenue is down just over $70 million, largely due to a lower raw material cost environment versus the prior year, unfavorable mix, as well as strategic value over volume decisions. Overall volumes were down 3% in the quarter. Food service volumes increased year-over-year, while food and beverage merchandising volumes decreased mainly due to strategic value over volume decisions as we continued to optimize the portfolio. Price mix was down 4%, which is mostly a function of lower contractual pass-throughs, driven by lower raw material costs compared to the prior year period.
We continue to strategically align ourselves with our core customers, and we are positioning the business to grow with their success. The price mix trends over the course of 2023 reflects those efforts. Adjusted EBITDA was $207 million, which is a 24% increase compared to the prior year and slightly ahead of our guidance range. We benefited from lower raw material costs, net of cost pass-through, and lower transportation costs. Our adjusted EBITDA margin surpassed 16% for the second consecutive quarter, coming in at 16.2%, which is our second highest quarterly adjusted EBITDA margin since our IPO, and almost 500 basis points better than last year. The margin performance is particularly impressive, considering our fourth quarter is typically a seasonally low quarter.
Our fourth quarter free cash flow was negative due to timing of CapEx and cash interest payments. Our full year CapEx of $285 million was slightly above our previous guidance of $280 million. As a result, our full year free cash flow came in at $249 million, slightly below our guidance of $250 million plus. We continue to focus on deleveraging our balance sheet by reducing total debt by $25 million during the quarter and achieving a net leverage ratio of 4.1 times at year end. For the full year, we reduced our total debt by $550 million and brought our net leverage ratio down by half turn compared to the beginning of the year. From a quarter-over-quarter perspective, net revenue and adjusted EBITDA reflected our typical seasonal patterns as the fourth quarter and first quarter tend to have lower volumes than second and third quarters.
The 8% decline in revenue was mostly due to a sequential decrease in volumes and partially due to lower contractual pass-through pricing. Adjusted EBITDA was 9% lower than third quarter, mostly due to lower seasonal volumes. Free cash flow was lower on a sequential basis due to the timing of our CapEx and interest payments, as well as a slight seasonal inventory bill during the fourth quarter. And finally, we are extremely proud of our full year results for 2023. The 11% decline in net revenue was mostly due to the Canton Mill closure and the divestiture of our beverage merchandising agent business in the third quarter of 2022. Excluding those items, net revenue is down 4%, mostly due to inflation-driven impacts on consumer spending and our value over volume strategy.
However, we leveraged our focus on operational excellence to deliver 7% adjusted EBITDA growth compared to 2022, which we achieved an EBITDA margin of 15.2% for the full year, which was a 260-basis point improvement over the prior year. Please turn to slide 11. Similar to the third quarter, our food service segment posted another strong quarter, highlighted by a return to positive year-over-year volumes of 3%, despite ongoing weakness in restaurant foot traffic and overall food service industry volumes. We continue to align ourselves with our core strategic customers that benefit from our unique value proposition and are in turn winning in their end markets. This allowed us to once again outpace our primary food service end markets. Price mix was down 4%, mostly due to lower contractual factors, which were a function of lower raw material costs environment compared to last year.
Adjusted EBITDA rose 32% compared to last year, and adjusted EBITDA margins improved by over 440 basis points as we successfully absorbed lower raw material costs, made a cost pass-through, increased sales volume, and benefited from lower transportation costs. Overall, it was a strong quarter that really showcased our ability to strategically grow volumes, manage costs, and deliver solid profitability. On a quarter-over-quarter basis, our results were impacted primarily by lower volumes, including seasonal factors. Restaurant foot traffic is still down compared to last year, although warmer temperatures across the U.S. in December did provide a slight offset. Net revenues were down 7%, mostly due to the seasonal volume dynamics. Adjusted EBITDA declined 4%, driven by lower sales and higher manufacturing costs, partially offset by lower raw material costs, made a cost pass-through.
Turning to slide 12, food and beverage merchandising experienced a continuation of the themes from the third quarter, as food and beverage prices are still elevated compared to historical levels, despite the recent moderation in consumer prices. The end result is that consumers are curbing their spending and weighing their budgets toward staples like protein and eggs. We also continue to see consumers opting for lower-priced dairy beverages that utilize different packaging formats. In addition, our agricultural channel benefited from easier costs caused by weaker market conditions in the fourth quarter of 2022. This partially offset the residual impact of severe weather during the first half of 2023, which ultimately delayed the fruit harvest and reduced overall fresh fruit quality, causing an unfavorable impact on our third quarter results.
From a year-over-year standpoint, volumes are down 22%, which is mostly due to the impact of the Canton Mill closure in May 2023. Excluding the Canton impact, volumes are down 7%, mostly due to strategic value-over-volume decisions to focus on our core customers that value our unique service offering. Underlying demand was down in the lower single digits, mirroring the broader market impact from higher food prices. Adjusted EBITDA was up 4%, as lower raw material costs met a cost factor, and lower transportation costs more than offset lower volumes, the closure of the Canton Mill and higher manufacturing costs. We're also working closely with our customers to manage production costs and inventory levels to match our volumes, which has helped our profitability.
On a sequential basis, revenue is down 8%. Volumes were lower by 7%, mainly due to value-over-volume decisions, and to a lesser extent, seasonal decline in categories like protein, where the holiday season leads to large format products like turkeys or roasts that use different types of packaging. Price mix was down 1%, mostly due to contractual passages. Adjusted EBITDA declined 13% compared to the prior quarter due to lower sale volume and higher manufacturing costs, partially offset by lower material costs, net of costs pass-through. Turning to slide 13, our transformational journey has been evident in all aspects of our financial results over the past three years. In 2021, our full year of adjusted EBITDA has grown 58%, from $531 million to $840 million.
Over that same time period, our built-in approach to pricing and our cost discipline has also helped us improve our margins from high single digits to the mid-teens and we intend to continue that trajectory into the upper teens over time. The improved profitability also translated into dramatically higher free cash flow. It's important to note that we generated almost $250 million of free cash flow this past year, despite incurring $107 million of cash outflows for restructuring charges. Again, that strongly reflects our company's inherent cash generating ability. Finally, we capitalized on our improved profitability and free cash flow to make progress in strengthening our balance sheet in 2023. During the fourth quarter, we reduced our total debt by $25 million, bringing our total debt reductions to $664 million over the last two years.
As a result, we closed 2023 with a net leverage ratio of 4.1 times and achieved our previously stated goal to reach the low 4s by year end. I'd like to reflect on that accomplishment for just a moment. But this was one of our top priorities in 2023. We began the year with a net leverage ratio of 4.6 times. And through a combination of solid free cash flow and adjusted EBITDA growth, we reduced our net leverage ratio by half a turn in 2023, and established excellent momentum to continue delevering our balance sheet into the high threes in 2024. That brings us to the next phase of our transformation. You may recall that our third quarter earnings, we indicated that the next leg of that journey would include incremental cost structure optimization and right size.
We expect today's announcement of our footprint optimization will allow us to reduce our annual operating costs by approximately $35 million while improving utilization levels across our operations. The initiative will require incremental investments in the near term, which we alluded to last quarter when we discussed the next stage of our transformation. This next phase positions us to be more adaptable and enhances our ability to serve our customer base more effectively and operate more efficiently. We expect this effort to impact approximately 10% of our total footprint. This is important. We have demonstrated our willingness to optimize our portfolio by continuously evaluating non-core businesses to help us focus on our core markets and maintain a disciplined capital allocation process.
As we consider additional cost reduction initiatives, our ability to consistently generate strong cash flow enables us to reinvest in our business for growth. Our capital allocation framework is designed to put our company in the best position to invest in profitable growth, and we expect our ongoing transformational journey to help us achieve that objective. Now turning to slide 14, we introduced our 2024 outlook for the first quarter and the full year. 2023 was a solid year with several important milestones and accomplishments. It also allowed us to build strong operating momentum that we expect to carry into 2024. At the same time, despite the recent moderating of inflation, the outlook for the U.S. economy remains uncertain, as overall prices remain at historic levels.
This may weigh on consumer spending as well as our customers' purchasing decisions and the order patterns in the near term. Starting with adjusted EBITDA, we expect to deliver between $160 million and $170 million for the first quarter and between $850 million and $870 million for the full year. As Mike mentioned, while food prices have moderated, we are seeing the cumulative impact of persistent inflation on consumer demand in early 2024. We also have the impact of severe weather in January, which will flow through our first quarter results. We plan to continue our strategy of aligning with category leaders to drive volumes. We expect to realize benefits from continuous improvement initiatives and are identifying cost improvement opportunities through our supply chain, which we expect to recognize in the second half of the year in order to help us achieve our full year adjusted EBITDA guidance.
Moving to CapEx, we expect to incur $300 million in 2024. As part of our transformational journey, we continue to take actions to reduce the capital intensity and earnings volatility of our business and ultimately improve our free cash flow profile into the future. This year, we are taking definitive steps, making the necessary investments to achieve those goals. While this forecast puts our CapEx slightly higher on a year-over-year basis, a portion of the uplift can be attributed to the footprint optimization we alluded to earlier. Between 2024 and 2025, we expect the footprint optimization to result in $40 million to $45 million in CapEx, with around $15 million to $20 million occurring in 2024. Additionally, we expect to incur total cash restructuring charges of $50 million to $65 million and total non-cash restructuring charges of $20 million to $40 million, primarily during 2024 and 2025.
I'll also point out that these ranges do not include the benefit of any cash proceeds from the possible sale of any property and equipment from the facilities impacted by the footprint optimization. Our CapEx guidance also includes approximately $35 million of capital spending on our Pine Bluff mill. While our view of strategic alternatives to the mill continues, we remain committed to investing in the future success of our business. Excluding both the impact of our footprint optimization initiatives and the Pine Bluff spend, our 2024 CapEx is expected to be approximately $250 million. As it relates to expected charges for our beverage merchandising restructuring, we reiterate our previous guidance and expect to incur total non-cash charges in the range of $325 million to $330 million and cash-based charges in the range of $150 million to $160 million, the majority of which were incurred during 2023.
We have included reconciliation in the appendix to today's presentation. We expect to generate at least $200 million of free cash flow in 2024, which reflects higher cash taxes and a reduced working capital benefit compared to 2023, partially offset by reduced interest expense and restructuring charges. Finally, consistent with our previous guidance, we expect to bring our net leverage ratio into the high 3s by year-end 2024. Although based on our first quarter EBITDA guidance relative to first quarter 2023, we do expect our net leverage ratio to temporarily increase during the first half of the year before declining into year-end. With that, I'll turn the call back over to Mike.
Michael King: Thanks, Jon. Before we open the line to Q&A, I want to provide an update on sustainability here at Pactiv Evergreen. Part of our focus on profitable growth is to build a more resilient, sustainable, and ethical Pactiv Evergreen. One that benefits all stakeholders, from employees and customers to shareholders and to our communities. This is what drives our environmental, social, and governance initiatives, which are aligned with our packaging a better future purpose. The fourth quarter marked the release of our latest ESG report, showcasing the progress we made in 2021 and 2022. In line with our commitment to transparency, our ESG report is based on the GRI and SASB frameworks. We received limited assurance on scope 1 and 2 location-based emissions and energy consumption and energy intensity for scope one and two location-based emissions.
It also details our alignment with the UN sustainable development goals. We're incredibly proud of our team's achievements on this ESG journey, and the report dives into the details. For example, between 2015 and 2022, we reduced our scope 1 and 2 emissions by 21%, which we believe demonstrates that our commitment to environmental action is yielding results. We have over 100 sustainability champions to our facilities, who are driving sustainable practices across our company. And we're innovating to develop more sustainable options, helping our customers achieve their sustainability goals offering over 40 new certified compostable products launched in 2022. Internally, we're also investing in our people and communities. Our new leadership development programs are empowering future leaders, while supplier audits ensure ethical practices throughout our supply chain.
Every day we strive to integrate sustainability in everything we do, from our products to our manufacturing and supply chains. We invite shareholders to explore our full report, found at investors.pactiveevergreen.com in the ESG reporting section. I’m particularly proud of our team for their focused execution through 2023. We've made significant progress in our transformational journey during 2023. We took major steps towards becoming a peer-play converting operation with a capital-led business model. We took decisive actions to optimize our portfolio, eliminate waste, increase our focus on operational excellence. Those actions have positioned us for the next phase of our journey. We are proud of the progress demonstrated by our 2023 results and remain very excited about the future of Pactiv Evergreen.
That concludes our prepared remarks. With that, let's open it up for questions. Operator?
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