Pactiv Evergreen Inc (PTVE) 2024 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Pactiv Evergreen second-quarter 2024 conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Curt Worthington, Vice President of Strategy, Investor Relations. Curt?

Thank you, operator, and good morning, everyone. Welcome to our second quarter 2024 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. 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. 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, and our quarterly reports on Form 10-Q for the quarters ended March 31 and June 30, 2024, for a more detailed discussion of those risks.

The forward-looking statements we make on this call are based on information available to us as of today's date. And we disclaim any obligation to update any forward-looking statements, except as required by law.

Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance. Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only.

With that, let me turn the call over to Pactiv Evergreen's President and CEO, Michael King. Mike?

Thanks, Curt. Good morning, everyone, and thanks for joining us today. Before we dive into our second quarter results, let me first begin by saying that Pactiv Evergreen accomplished a significant milestone in our transformational journey over the last few weeks.

In mid-July, we announced a definitive agreement to sell our Pine Bluff paper mill in our Waynesville extrusion facility to Suzano, a global paper and pulp producer with deep mill expertise. Upon closing of the transaction, we will exit our final remaining paper mill, allowing us to focus on our core North American converting operations.

Overall, we view the pending sale as a testament to our disciplined focus on value creation and believe it will be a win for all stakeholders. We plan to provide more details on the strategic benefits and rationale for this transaction later in our presentation.

Turning to our results. The second quarter fell short of our expectations. From a customer and end market perspective and in response to still weak consumer demand profile, we've seen our customers become more price sensitive and begin pulling additional levers to preserve their margin profiles.

Some have been willing to trade high service levels and product quality for lower price. We've taken a long-term approach in responding to those situations and upheld our unique value proposition. In some instances, we've made the decision to exit certain business.

From an operations standpoint, we experienced temporary operational disruptions at our Pine Bluff paper mill during the quarter, which accounted for the majority of the variance. As we will cover in detail through the call today, we are taking decisive actions to address the year-to-date performance and expected end market headwinds to position the business for future success.

These actions are consistent with the stated objectives of our transformational journey, and we believe they will position us to emerge from what continues to be a period of economic uncertainty as a stronger and more resilient company.

Turning to slide 4. I'll begin with an overview of the key themes for the second quarter. Then I'll provide an update on the actions we're taking to advance our transformational journey and address the current environment, including how those are expected to help position the business for long-term success.

I'll close my initial remarks with an update on what we're observing from customers in the marketplace. Jon will then provide updates on our key financial metrics and discuss our outlook for 2024. At the end of the call, we will open up the line for Q&A.

Turning to slide 5. We took a big step on our transformational journey by announcing the sale of our Pine Bluff mill to Suzano on July 12. We launched our strategic alternatives review for Pine Bluff over a year ago. During this time, we evaluated all viable options and identified a partner with deep mill expertise.

We are enthusiastic to be entering into this long-term partnership, and we have confidence in Suzano's ability to continue improving the performance at Pine Bluff into the future. We expect the transaction to close in the fourth quarter of this year.

Throughout the remainder of our remarks, we'll refer to Pine Bluff, Waynesville and the associated assets being divested collectively as Pine Bluff for ease of reference. Transitioning to our second quarter results.

We entered the quarter cautiously optimistic that end market demand would begin to show signs of improvement in the quarter. However, Q2 was negatively impacted by increased pressure on demand and volumes and the impact of strategically exiting certain business.

In addition, our Pine Bluff mill experienced temporary operational disruptions following its planned annual outage. While these have been addressed, they contributed to the lower performance. While our results during the quarter fell below our expectations, we remain committed to our long-term strategy and creating value for all stakeholders.

We believe we are well positioned to drive profitable growth into the future. Adjusted EBITDA was $183 million during the second quarter, which was meaningfully below our internal forecast and our year ago adjusted EBITDA of $217 million.

The negative variance compared to our expectations reflects our customers taking material cost actions in response to the consumer being more price conscious, following multiple years of above average inflation, which we highlighted during the first quarter. It also reflects temporary operational disruptions at our Pine Bluff mill following the completion of the planned annual mill outage in April, which accounted for the majority of the variants.

While we expect the cumulative impact from multiple years of food price inflation to persist through the back half of this year, our focus remains on building volume momentum, reducing cost and taking strategic actions to align with our transformational journey.

As we said in May, we have entered into agreements with new and existing customers across our business. While we remain on track to deliver on our customer wins, we expect some of the volumes associated with those contracts to slip into early 2025. This is largely a function of the end market-related risks we mentioned during our first quarter earnings call.

We are taking actions to scale the business as we navigate the current market environment and expect to reduce our operating costs by approximately $15 million through the remainder of 2024. The planned cost actions will focus on overhead expense, including targeted headcount reduction and lower spend. These savings, which are unrelated to our footprint optimization announced in the first quarter reflect our continued focus on operational excellence.

In light of the ongoing uncertainty about the timing and extent of near-term volume growth as well as the increase in pricing pressure in our end markets, we believe these actions are necessary to maintain our competitive cost structure. Similarly, as Jon will cover in more detail, we took proactive steps to strengthen our balance sheet and reduce our annual interest expense during the quarter.

Transitioning to our full year outlook. We've adjusted our expectations for the remainder of the year. Jon will provide greater detail around our specific assumptions. However, I want to provide some context. Our updated guidance assumes a delayed recovery in end-market fundamentals with a modest sequential improvement in the second half of the year.

Following the annual mill outage in April, more consistent performance from Pine Bluff through closing of the transaction. And lastly, we realized the savings from cost reductions announced today during our second half of 2024.

Overall, we continue to monitor and navigate our end markets, and we will look to offset the operational disruptions at Pine Bluff and deliver against our long-term strategy. Turning your attention to slide 6. I wanted to briefly touch on the announced sale of the Pine Bluff mill in the Waynesville extrusion facility to Suzano.

I want to revisit the steps we've taken in our transformational journey to enhance our position as a leader in food and beverage packaging in North America. In March of 2023, we completed an extensive review of our portfolio and concluded that being vertically integrated into our paper mills will not yield sustainable value creation and was not in line with our strategic ambitions.

As a result, we initiated our beverage merchandising restructuring plan with the goal of transitioning the company to a more capital-light business model focused on our distinctive core strengths in converting. In conjunction with the announced restructuring, we closed our Canton paper mill and almost at Falls converting facility. W

e also launched a strategic alternatives process for the Pine Bluff paper mill and Waynesville extrusion facility. We diligently reviewed all valuable alternatives to ensure Pine bluff and Waynesville we're adequately positioned for the future.

The recent announcement to sell both facilities to Suzano ensures Pine Bluff and Waynesville will be successfully managed by an operator with deep mill expertise. The transaction represents a win for all stakeholders.

In closing, this transaction will represent the successful completion of our strategic alternatives review. Importantly, it will also mark a significant milestone impact of Evergreen's transformational journey. We could not have completed the transaction without the tireless efforts of Evergreen's team. Without their dedication and commitment, this outcome would not have been possible.

Before I turn the call to Jon, I'll address other key drivers influencing our performance through the rest of 2024. Please turn to slide 7. The most important thing to note is that after almost three years of elevated inflation, the average consumer is financially stretched and has become more price conscious. Not only do they continue to trade down where possible, they've also reduced their spending in certain categories.

First, overall disposable income growth has slowed materially since last year and is currently below the average monthly rates going back to 2000. This has been coupled with a corresponding drop in household savings and an increase in credit card delinquencies as consumers have taken on more debt in recent years to fund their spending.

The consumer continues to adjust discretionary spending to account for this environment. This can be seen in monthly restaurant foot traffic, which throughout 2024 has been slower than the exit velocity of last year. In fact, industry foot traffic has declined from Q1 to Q2, consistent with these dynamics.

While the first half of the year proved to be challenging, we are taking decisive action to navigate near-term headwinds and reduce costs in response to the current market environment. We believe we are well positioned to capitalize on a number of cost savings actions through the balance of the year. These actions are expected to partially offset the impact of the market challenges and operational disruptions that Pine Bluff we experienced during the first half of the year.

Pricing in Q2 generally reflected higher raw material cost pass-throughs compared to last year. As we've talked about on previous calls, we have reduced our raw material pass-through lag to reduce volatility in our earnings. Partially offsetting the higher raw material pass-throughs, pricing pressure was more acute during Q2.

This dynamic was a result of our customers looking for ways to contain costs in light of the increasing price competition across both segments, impacting several of our customer categories. This has also impacted mix as customers opt for lower-priced products within our portfolio are moved down market and adopt a just-in-time approach to managing their supply chains rather than a just-in-case approach.

As I previewed earlier, we've responded strategically with the goal of preserving the value proposition of our service model. From an operating standpoint and in response to a higher cost environment, we are focused on controlling what we can. Our commitment to positioning the business for more balanced and profitable growth is further emphasized by the actions we introduced today to reduce overhead costs through targeted headcount reductions and to curtail spending.

In addition, we continue to leverage our Pactiv Evergreen production system or PETs, to increase productivity and drive future cost savings. While we are still in the early stages of PETs, we are building momentum and expect to see material improvements in our operating efficiency in the future.

Before concluding my initial remarks, I want to reiterate, while the quarter did not meet our expectations, our team continued to execute at a high level. We took actions to scale the business as we navigate the current market environment, and we made significant progress on our transformational journey, evidenced by the expected sale of our Pine Bluff mill.

As our business continues to evolve, so too does our approach to innovating and delivering the highest quality sustainable products. We continue to focus on the controllables, improving the operations of our company and executing against the evolving needs of our customers.

With that, I would now like to turn the call over to Jon. Jon?

Thanks, Mike. I'll start with our second quarter highlights on slide 9. As Mike pointed out, our Q2 results were impacted by end market weakness and temporary operational disruptions at Pine Bluff. We reported net revenues of $1.3 billion for the quarter, which represents a decrease of about 6% compared to last year. The decrease was driven mostly by the closure of our Canton, North Carolina mill during the second quarter of 2023 and lower sales volume.

Excluding the impact of the Canton mill closure, revenue is down 3%. Overall volumes were down 3% in the quarter. Food service volumes are flat, outpacing broader industry foot traffic trends, which were down almost 3% due to consumers cutting spending.

Food and beverage merchandising volumes decreased 5% during the quarter, mainly due to the market softening and inflationary pressures and the strategic exit of some business as certain customers shifted their supply chains down market.

Price/mix was roughly flat, which was mostly a function of higher contractual pass-throughs driven by higher raw material costs compared to the prior year period. This is offset by unfavorable product mix and increasing price competition.

Adjusted EBITDA of $183 million, representing a 16% decrease compared to the prior year. The decrease in adjusted EBITDA reflects higher manufacturing costs and lower sales volume, partially offset by lower incentive-based compensation costs.

Our adjusted EBITDA margin was 14% compared to 15% in the prior year period. While we expect this dynamic to persist in the near term, we are confident in the actions we are taking to adjust our cost structure to position us for long-term growth and enhanced profitability.

Our PEPPs program continues to underpin our focus on continuous improvement and operational excellence. As more facilities become pet certified, we expect this will enhance our ability to mitigate inflationary headwinds and scale the business to meet demand.

During the second quarter, free cash flow was $37 million. Free cash flow was lower than last year, largely due to lower earnings. As expected, we drew down our inventory in the second quarter as we entered our seasonally busier months.

Moving forward, 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 increased 7% due mostly to higher sales volume caused by seasonal trends, partially offset by unfavorable product mix.

Adjusted EBITDA was up 9%, mostly due to higher sales volume and lower incentive-based compensation costs, partially offset by higher manufacturing and transportation costs and unfavorable product mix. Continuing to slide 10, we'll look at results by segment, beginning with Foodservice. Net revenues were up 2% year-over-year, mainly due to higher contractual pass-throughs, partially offset by unfavorable product mix.

Our foodservice segment is still coping with challenging consumer dynamics across QSRs and food distributors. Compared to the end of last year, the pace of year-over-year industry foot traffic decline accelerated in Q1 and continued into Q2, impacting our performance.

That said, we believe our Foodservice segment as a whole was more resilient than the broader industry during the second quarter, with segment volumes roughly flat. Some of our Foodservice customers increased promotional activity at the end of second quarter and into third quarter to help mitigate these declines.

With that backdrop, we continue to see price sensitivity, which we expect to persist through the rest of the year. Adjusted EBITDA decreased 15% compared to last year to $109 million, and adjusted EBITDA margins decreased by a little over 350 basis points. The margin variance reflects higher manufacturing costs and the unfavorable product mix, partially offset by higher pricing, net of material cost pass-through and lower incentive-based compensation costs.

On a quarter-over-quarter basis, our results reflected higher sales volume, which was attributable to seasonal trends and higher pricing due to the past due of higher material costs. Similar to our year-over-year comparisons, our volumes on a quarter-over-quarter basis outperformed broader industry foot traffic trends. Net revenues were up 12% sequentially, mostly due to seasonal volume dynamics.

Adjusted EBITDA increased 21%, driven by improved sales volume and lower incentive-based compensation costs, partially offset by higher manufacturing costs.

Turning to slide 11. Food and Beverage Merchandising results reflect the scheduled outage at Pine Bluff in April as well as unforeseen operational disruptions at the mill following the planned outage. Aside from operational disruptions, we've seen customers place greater emphasis on their own cost structures to help preserve their margins.

To accomplish this, some customers have opted to choose lower-priced products within our portfolio while others have gone down market. We've strategically taken a long-term approach across our customer base and in some instances, have exited certain business when necessary.

In terms of the consumer, we generally observed a continuation in reallocating food budgets from discretionary items towards staples. On a year-over-year basis, net revenues were down 16%. The decrease was primarily due to the closure of our Canton, North Carolina mill and lower sales volume. Lower sales volume was due to the market softening the inflationary pressures and the strategic exit of certain business.

Excluding the impact of the Canton mill closure, revenue was down 6%. Adjusted EBITDA decreased 15% compared to last year, primarily due to higher manufacturing costs, lower sales volume and lower pricing, net of material cost pass through. These are partially offset by lower incentive-based compensation costs.

Adjusted EBITDA margins were relatively unchanged versus the prior year, benefiting from the Canton mill closure in 2023, offset by higher manufacturing costs and lower sales volume. On a sequential basis, net revenues were up 2% due to seasonal trends, partially offset by unfavorable product mix.

Adjusted EBITDA declined 7%, reflecting higher manufacturing costs, mostly due to the planned annual mill outage and temporary operational disruptions at Pine Bluff and unfavorable product mix, partially offset by higher sales volume and lower incentive-based compensation costs.

Now turning to slide 12. Before I provide an update on our balance sheet and full year guidance, I wanted to briefly touch on the financial impact of the Pine Bluff transaction. With respect to the transaction structure, he gross purchase price of $110 million, which is subject to certain customary adjustments at closing such as working capital, we expect that the transaction will result in a noncash impairment charge of $320 million to $340 million in Q3.

At the closing of the transaction, we also entered into a long-term supply agreement with Suzano to use Pine Bluff to supply liquid packaging board to pack of Evergreen's converting business.

As we have disclosed previously, most customer and supplier agreements we enter into are driven by market-based pricing, which will include adjustments based on changes in raw material and other input costs. The agreement we reached with Suzano is in line with our standard approach on pricing. We will continue to include Pine Bluff in our quarterly results until the transaction closes, which is expected to occur during Q4, subject to regulatory approval.

As I'll cover in greater detail during our formal guidance update, we expect that the sale will reduce our full year 2024 reported adjusted EBITDA by approximately $16 million. Hence, it is important to note that due to weather-related issues in Q1 and the planned outage and temporary operational disruptions in Q2, the adjusted EBITDA contribution from Pine Bluff is heavily weighted to the second half of the year.

As a result, we expect Pine Bluff to be closer to breakeven adjusted EBITDA for the full year 2024 and the transaction will be a deleveraging event for Pactiv Evergreen on an annualized run rate basis.

Turning to slide 13. We have selected balance sheet items and key components of our cash flow. One of the highlights for Q2 was our successful repricing and upsizing of our senior secured term loans due in 2028 from $990 million to $1.3 billion. Together with the proceeds of a $350 million draw on our recently upsized revolving credit facility, we fully prepaid our $690 million term loans due to 2026.

We expect the repricing and prepayment to reduce our annualized cash interest expense by approximately $14 million. Overall, we were pleased with the strong demand and lender support for the transaction, which ultimately extended our debt maturities, reduced our annual interest expense and enhanced our financial flexibility.

Our net leverage for the quarter was 4.5 times, which was a slight increase compared to last quarter and largely reflects lower LTM adjusted EBITDA. In terms of free cash flow, we generated $37 million, largely due to lower earnings compared to last year.

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 14. As Mike highlighted earlier, we remain committed to our growth strategies and sustaining operational excellence. On our first quarter earnings call, we highlighted the end market-related risks to our full year results, which were predicated on an improvement in consumer demand.

As we close the challenging first half of the year, we revised our full year 2024 guidance to account for the following drivers: Q2 adjusted EBITDA variance relative to our expectations, delayed recovery in end market fundamentals and other cost headwinds, which were partially offset by the actions we were taking to reduce overhead costs, new headcount reductions and curtailing spend. We are also removing the contribution from Pine Bluff post transaction close, which could accrue as early as October 1.

The timing is dependent on receiving foreign regulatory approval, so changes in the expecting close of date could impact our guidance. Our revised guidance is as follows: adjusted EBITDA range of $800 million and $820 million. This compares to the previous range of $850 million to $870 million.

With respect to the quarterly progression of our second half adjusted EBITDA, we expect it to be roughly evenly distributed between Q3 and Q4 before excluding the contribution from (inaudible) post transaction close in Q4. Capital expenditures of approximately $260 million.

This is a decrease to our original assumption of $300 million and reflects deferred capacity expansion as well as a decrease in other internal initiatives. Consistent with the revised range for adjusted EBITDA, free cash flow is expected to be within a range of $180 million to $200 million. This compares to our previous guidance of $200 million plus.

Lastly, we anticipate ending 2024 with a net leverage ratio of approximately 4 times. With respect to our footprint optimization plan, the anticipated cash restructuring charges remain at $50 million to $65 million, and total noncash restructuring charges remained at $20 million to $40 million. These costs are expected to occur in 2024 and 2025.

Turning to slide 15. We have the bridge of our 2024 adjusted EBITDA guidance to break out the key changes from our previous guidance to our revised guidance. First, we list the Q2 adjusted EBITDA variance relative to our expectations. This reflects the drivers we highlighted earlier, the majority of which were related to temporary operational disruptions at our Pine Bluff mill.

These dynamics are included in our year-to-date results. The next four items relate to drivers that we expect to impact our second half performance. We have lowered our expectations for end-market fundamentals across both of our reporting segments.

We now anticipate full year volumes will be down low single digits compared to our previous expectation for full year volume growth of low single digits. This assumes low single-digit volume declines in Q3, followed by slightly positive volume growth in Q4.

As Mike mentioned earlier, we remain on track to deliver our customer wins. However, we expect some of the volumes associated with those contracts to slip into early 2025. We anticipate pricing to face increased pressure in the second half as our customers and end markets adjust to increase price sensitivity from consumers.

As our customers have turned to selective price discounting for demand, it has heightened the need to reduce their cost to preserve their margins. The updated volume expectations are primarily a function of a delayed recovery in consumer demand, the resulting impact on customer price sensitivity as well as the carryover of some of the customer actions taken during Q2.

We continue to find ways to leverage our value proposition to preserve our price points where possible and seek to balance value and volume. As a result, the volume, price and mix component of the bridge assumes additional actions during the second half. We expect to partially offset these segments by taking actions to reduce costs, included targeted head count reduction and lower spend.

Overall, we expect the actions we take to manage the business will contribute approximately $15 million in 2024. Next, we expect our full year results to be negatively impacted by lower fixed cost absorption relative to lower production levels, partially offset by reduced incentive compensation accounting for approximately $10 million of the revision to our full year adjusted EBITDA guidance.

Lastly, we expect the announced sale of Pine Bluff to close during Q4. As a result, we have removed the expected adjusted EBITDA contribution from Pine Bluff post transaction, which is approximately $16 million. For the purposes of the updated guidance, this assumes a closing date of October 1, 2024.

It's important to note that the results for Pine Bluff are significantly weighted to the second half due to the impact of severe weather that influenced Q1, along with the planned outage and operational disruptions that weighed on Q2. As a result, we expect Pine Bluff to be closer to breakeven adjusted EBITDA for the full year 2024 and the transaction to be a deleveraging event for Pactiv Evergreen on an annualized run rate basis.

While we expect near-term end market weakness to persist through the remainder of the year, we remain optimistic about the actions we are taking to mitigate costs, drive operational improvements and increased volumes during the second half of the year. We believe that the actions we have taken to build momentum in the second half of the year position us to achieve adjusted EBITDA within our new full year guidance range.

With that, I'll turn the call back over to Mike.

Thanks, Jon. Before we open the line to Q&A, I want to reiterate that we are confident in our robust platform that enables profitable growth and sustainable returns long term. We're an industry leader in food service and food and beverage merchandising and remain focused on generating sustainable returns.

Our management team has demonstrated our willingness to optimize the portfolio and respond to market weakness. We continue to leverage our long-standing 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 the actions we're taking today to make Pactiv Evergreen an even more efficient and productive company will yield solid adjusted EBITDA and free cash flow generation as industry volumes recover.

In closing, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitments to our mutual success.

That concludes our prepared remarks. With that, let us open up the line to questions. Operator?

Thank you. At this time, we will conduct the question-and-answer session. (Operator Instructions) Philip Ng, Jefferies.

Appreciate all the great color and the bridge for your full year guidance, how you get from what you had early in the year to the updated outlook. The $19 million you guys called out for volume/price-mix. Jon, it looks like based on your volume guide in the back half, it looks like it's maybe one-third volume and maybe two-thirds price cost. Is that how we should interpret that?

Yes. Thanks, Philip. It's a mix on the volume and price. In terms of breaking out the components that's volume, there is a component of the volume. I guess I'll give you the volume impact for the back part of the year.

If you look at the general dynamic, we're looking at for Q3 and Q4, we're going to be up high-- or sorry, we're going to be up low single digits for the back part of the year. And really, both business units, we're seeing some volume pickups in both business units, we should see low single-digit volume growth. We don't really break out how much of the $19 million is volume related.

Okay. So when we think about some of the pricing pressure you called out with your consumers kind of adjusting to consumer inflation and protecting your margins. Do you have a pretty good view on how that's going to be for this year based on how you're set up contractually and what you negotiated? Or is that still a very fluid situation at this point?

I think at this point, we have a pretty good view. And we've largely worked through a lot of the chat there on the back end of Q2 and starting the Q3. So based on a current environment, I think we have a pretty good handle.

Okay. That's helpful, Mike. And then when I look at your foodservice business, volumes were relatively flat, but your EBITDA is down about, call it, 15% and price/mix was net positive off of material.

So it seems like the miss was largely manufacturing costs and perhaps mix. Can you expand on that a little bit? And does that kind of linger in the back half as well? It just seems like a big number.

No, it's a bit of both, Phil. There is a mixed component to it. But as we talked about in the prepared remarks, higher manufacturing costs are part of it.

We are facing the impacts of inflation. And there is-- that is impacting our results as the biggest components of inflation are largely going to be around labor, some utilities that we're feeling that pressure and our customers are also being very cost conscious that their consumers are being more price sensitive. So I think that's the piece that you're seeing some of that margin compression.

Okay. And just one last quick one for me. The back half, you're calling call it $10 million of other cost drag and good guy from incentive comp. Does any of that have to do with curtailing your inventory just because demand is a little softer, that perhaps gets relieved as we kind of look at next year? Or give us a little more color on the back half drag on that front?

Yes. If you look at that $10 million, there's two big drivers. Part of it is lower absorption. So as you called out, there's going to be an increased broader cost to the lower volumes that we're seeing on the second half basis. And then that is offset by some of that incentive comp benefit.

Okay. But nothing like your inventory is generally fine. It doesn't sound like you need cryptal your inventory at this point in the back half?

Well, we are going to bring down inventories in the back half of the year. If you look at our free cash flow, part of the free cash flow benefit, we're looking towards the back part of the year is a working capital benefit, including bringing down inventories to levels more similar to where we were at the end of last year.

And if you look at the first half free cash flow levels, one is one of the reasons, if you look at the broader results, we would have liked to have seen a bit more free cash flow in the first half. But given some of the volume dynamics we touched on, we probably exited the first half of the year with a bit more inventory than we would have liked, but we expect to work that down to more normalized levels by the back part of the year.

Adam Samuelson, Goldman Sachs.

So maybe if you could-- love to get more color on some of the demand trends as you laid them out. I think especially on the Foodservice side, you alluded to some of the promotional activity kind of helping to mitigate volume declines. But more broadly, you kind of talked about expecting some-- I thought I heard low single-digit volume growth for both segments in the back half?

And can you just help us kind of unpack that a little bit in terms of where the improvements have been more visible in the order pattern or what you're kind of counting on? And especially if there's any delineation in terms of product categories, especially for you guys on the food and beverage merchandising, which are a bit more distinct between the different type of customers and parts of the story you touch?

Yes. I don't think there's any secret to the QSR segment is clearly reacting and has started reacting at the end of Q2 to menu pricing and try to do things to promote. And so, we're here early Q3 starting to see that flattening to trending of those volumes come back. I would say we're a bit less optimistic of an inflection there just given the speed at which this is changing. Distribution, foot traffic remains strain.

So while we continue to outpace foot traffic on the food away from home space, non-QSR food away-from home space, we're kind of seeing a slight improvement or flattening of that, but not what we'd call an inflection.

And then on the food and beverage merchandising side, that remains to be strained. I think we're less strained in that space. But as people buy down, how they buy down and our categories specifically, we just expect that the back half and more line towards Q4, we'll see a low single-digit improvement.

Okay. That's helpful. And then just on the footprint optimization, which I presumably would consider distinct from Pine Bluff and kind of wrapping up the restructuring of the Beverage Merchandising business. Still, it doesn't seem like you've heard a lot of those costs up to this point, if I'm looking at kind of the disclosures in the queue.

Could you help us think about how much how far along you think you'll be before -- by the end of the year? And as we start to consider potential tailwinds from a fixed cost or overhead perspective and carrying into '25 when those benefits from a P&L perspective would become more evident.

Yes, sure. In terms of the footprint optimization and the program we announced, as we talked about when we announced this last quarter, those expenses are largely going to be back half driven and really the benefits won't be recognized until next year.

And our guidance in that regard hasn't really changed in terms of some of the overall implementation CapEx and OpEx costs associated with that. In terms of the-- baked into our free cash flow capital program, we saw our budgeting somewhere in the range of $15 million to $20 million this year, largely back half weighted, as you point out, as part of that initiative.

Ghansham Panjabi, Baird.

I guess, obviously, the consumer has been struggling with affordability for several quarters, and it's broadening into Foodservice as you already know at this point. What is the most surprising to you as it relates to the operating environment for or specific businesses?

It sounds like there's a shift in terms of how customers are prioritizing the value proposition that you bring versus just flat-out price? Or is it just pricing pressure in the industry, what is surprising to you?

I don't know if I'd call it as much as surprising as to maybe the speed of the reaction of some of our markets. But I would say I think as we see people buy down and they kind of run out of space. And so how fast that happened and then the reaction of our multiple category customer base. I would say that surprised us.

We expected a faster reaction by our customers. And so, the prolongation of some of the promotional activity and I would say the delayed response there, I think we're all much more optimistic on seeing that half the quarter.

Okay. And then in terms of what the-- your views in terms of the catalyst to get volumes moving again. I mean clearly, affordability is going to be an issue and yes, there are some promotions, et cetera, but affordability seems to be much more pervasive. What are your thoughts on that?

And then just separately, just so I understand it, with the absence of Pine Bluff assuming it closes October 1 and your EBITDA is $800 million to $820 million, what would be the delta '25 versus '24 given that Pine Bluff won't be part of your results next year?

So I'll speak to the-- what needs to happen to start to see us get to an alternate growth outlook. And so certainly, affordability is the room that the consumers pre-beat up, and so we need to see a consumer confidence improvement.

And so how that happens, there's a host of ways that will go into that. But we're not waiting for that. And so, as we look to do things to lightweight to make things more affordable for our customers, I think there's still a fair bit of inflation happening within our customer base.

So as they alter their products being the ready fast provider of those and capturing those opportunities where we see success and growth. So we're addressing not just our cost structure, but our product portfolio to adapt to what our customers need to solve their problem.

So we're doing that. And then in line with that, we're partnering with Bluechip and folks that value how we go to market. And so we're leveraging those relationships and we're playing long ball with these customers that value what we do.

And so where we have the right portfolio and are willing to adjust and spend our resources and capital to help these customers were rewarded with their business and their growth. So we're also leaning in hard on long-term success and long-term successful customers.

And as it relates to the second part of your question, Ghansham, around Pine Bluff and kind of impacts going into next year, I think I'll expand on some of the financials around Pine Bluff to give you some perspective.

As I mentioned in the prepared remarks, if we were to have Pine Bluff in our portfolio for the full year, it would still have been just slightly negative EBITDA for us. Even with that $16 million we'd expect in Q4, the thing to keep in mind at the mills is they do have their cycles and as we go through maintenance cycles, we have periods of negative EBITDA and then positive EBITDA.

So it's not a straight-line performer. And so even looking into our first half versus second half results, I mentioned this last quarter and just to reiterate this quarter, one of the drivers between the growth between EBITDA first half of the year to second half of the year is Pine Bluff.

It contributes around 50% of the EBITDA growth first half versus second half, given that we won't have an outage in the second half of the year, any planned outage, I should say. And then if you look at just other periods, LTM EBITDA as of Q2 for Pine Bluff and Waynesville is around negative $14 million.

And then the other thing to keep in mind around some of the strategic benefits for us going highlighting what Mike mentioned in his prepared remarks and our strategic direction is going to capital light. LTM, we've incurred around $35 million of CapEx along with that negative EBITDA.

(technical difficulty) One moment, while we have technical difficulties shortly Again, thank you for your patience. Please remain on the line. Your conference will resume shortly.

Where did we get cut off?

You're talking about CapEx of $35 million.

Okay. For LTM, Okay. So I mean you heard most of my response. No, just to pick that back up to give you see the financial profile for the mill. So just LTM EBITDA was about negative $14 million, and then CapEx for the same period was $35 million.

So give you a perspective of the cash generation and as we talked about in terms of moving to a capital-light business model, I think some of the benefits for us moving into next year are going to be that reduction of the capital and given the EBITDA contribution, which has been on the lighter side, we expect to have some benefits going into next year.

Thank you. Anthony Pettinari, Citi.

You talked about trade down and customers going down market, and I'm wondering if there's any implications for substrates and maybe your sustainability offerings. I guess with the focus on cost, do you see more customers going to plastics? Or is that not the case? Just wondering if you could talk about kind of substrate mix and maybe any kind of impact on margin, if any?

Yes. I can, as I said here, I don't have anything that says that it's more of a trade to a lesser or more sustainable substrate. I think it's more about lower cost or maybe lesser quality or maybe less reliability. And so, trading off what we call just-in-case supply for more just-in-time supply. And so, what we are referencing particularly is our at will customers or noncontract customers that have the ability to move volume around and cherry-pick things.

We're seeing some of that activity kind of pick up as they go downstream or alternative, lesser reliable supply as they become more price sensitive. Also, they're just, I think, in a lot of cases, taking inventories and doing things that more cost conscious. So we're seeing the result of that.

And on the sustainability in the only thing I'd add is we have seen a bit of an increase on the margin and some of the bio resins that our customers are using. And from a margin perspective, we're really agnostic in terms of the substrates from a mix standpoint.

Yes. Got it. And then on the CapEx profile, I think you made a reference to deferred capacity expansion. And I don't know if it's possible to say, I mean, is that deferred from '24 to '25 or postponed indefinitely or if it's possible to kind of talk about the scope of those projects?

Yes. I would say the right way to think about it is we have agreements with customers, and so we're going to had those agreements and make those investments. We have had to defer some of those investments into '25. Other things are we've gotten more efficiency on capital. And then I would tell you, you can't be site of the fact that we're not planning to have a Pine mill in the future.

The other cost that just to bridge for you is we mentioned that we're moving some of our volumes from '24 to '25 as part of the updated guidance. And so I'd also think about that capacity expansion really tied to the volume. And so we're seeing some of the volume in the next year and the capital along with it.

Josh Spector, UBS.

This is Sean speaking on behalf of Josh. So my first question is any color on the volume performance by substrate in this year.

Yes, we don't really give by substrate volume. I mean, we kind of, as Jon said, are pretty agnostic on the substrate. So something that we don't really track to.

Okay. Got it. So well, in terms of I mean, the next year the volume, so do you think for us to see that next year, the volume growth will be similar with the second half?

We're not providing 2025 outlook just yet. We'll do that later. But I think the way to think about generally is that as we've talked about some of the volumes picking up in the next year, maybe just give a bit of reiteration of some of the drivers between first half and second half volume growth, as we mentioned, we are expecting to see some seasonality.

We also do have some customer wins that we're expecting to pick up in the back half of this year. We are ramping up some capacity, a little bit less than we thought originally, but there is some capacity that we're ramping up.

And so as those elements flow into the second half of next year, we have-- we don't see any reason why that wouldn't extend into 2025 as you look-- as you start looking at the first half of next year.

Thank you. Arun Viswanathan, RBC Capital Markets.

Obviously, we've been going through some challenging dynamics on the Foodservice side with consumers continuing to be impacted by inflation and potentially trading down and just not going out as much. I guess how do you see that playing out?

I guess, there have been obviously the introduction of value deals, and maybe there has been some resumption of activity there. But is it just kind of more promotional activity and maybe more deflation and pressure coming off the consumer that will help the Foodservice segment?

Or what are some of the dynamics that you guys are watching and hoping for better trends? And what should we be looking out for?

Yes, I think, Arun, you hit a lot of it is we need the consumer to feel better about things. So as we highlighted on the call in our prepared remarks, no secret as you outlined it, the consumers pretty beat up and has been for some time.

I think where we're at now is the consumers kind of run out of places to go get calories at a lower cost and we've seen what we see is the reaction by our different categories and our different customers to that. So I think we're starting to see some of what needs to happen. But I think largely, it's multipronged.

It's got to be-- the products need to be addressed. So translation, all the things we're doing product-wise, portion control, lightweighting of the products. There's a big cycle happening right now to address a lot of that. And so, as we navigate cost structure, and when I say we, I mean the broader industry, customers and supply chain, I think that has to come along. I don't think all this inflation ever comes out.

And so, we're going to have to address that and get smarter. And so that's happening. And then obviously, as the macro-outlook improves, that also will help foot traffic and consumer sentiment and all the things you're going to see our customers return to dining out of the home.

Okay. And then just as a follow-up, looking at the bridge for your revised EBITDA guidance, you noted like a $19 million impact from reduced volume and price mix. but you do have the $15 million cost actions, I guess, should we be modeling growth from the new revised range in '25?

The reason I'm asking is because, obviously, we have the pine Bluff mill sale, which would kind of lower the first half of '25 year-on-year. But do the cost actions kind of offset that? And maybe just help us kind of understand if you are expecting growth in EBITDA in '25.

No, broadly, I don't think we need to hide from the fact that we are expecting growth into next year. So as I mentioned, I think it was Sean asking around some of the growth we're going to see in the second half of this year moving into next year. So we do expect to see some growth.

The cost actions are to help us mitigate some of the pressure that we're seeing right now as you highlighted right now. And we can-- and some of that is-- some of those actions are savings that we will be able to carry into next year.

I don't-- not all of that, but there is probably two-thirds of those cost actions are, I would say, more transferable into next year, and some of that will come back in as volume growth picks up, and we scale back to meet that additional growth.

Thank you. Cashen Keller, Bank of America.

Apologies if we missed this. We're having furnishers on our end as well. But is it possible to frame for us what the Pine Bluff of sale will mean in terms of CapEx moving forward and where you might expect aggregate CapEx to settle on a normalized basis?

And then given that this will presumably reduce your capital intensity going forward, I guess where will you look to reinvest in the business or deploy capital moving forward?

Sure. Yes. And I'll go through some of the capital numbers for Pine Bluff again. But generally speaking, we've been in the $35 million to $40 million range for Pine Bluff and Waynesville depending on whether you look at LTM in '24 but it's-- that obviously will be falling away as we close that mill transaction and move to more capital light business model.

As it relates to thinking about capital for next year, we did mention that some of the capital that we had in the plan for this year, we are deferring. And so that is some additional growth that will-- growth for the business that we'll be looking to run next year.

And we haven't provided broadly what the capital plan for next year would be, but generally speaking, it's coming from the start of this year being around $300 million, including the mills, we're certainly going to be falling off of those levels and getting into something that is more representative of the capital-light business model that we're going to be looking like.

I think the overall message there, we're certainly looking to shift to a more -- the geography of our spend to a growth focus for sure.

Got it. Okay. And I guess, looking forward, given the actions you're taking today, how do you expect SG&A to sales to trend over time? And then maybe what the aggregate amount of cost take out of the business you'd expect on a structural basis over time from some of these actions?

Yes, sure. So if you look at that bridge, we have on slide 15, the cost actions of $15 million, just to give you a sense of SG&A geography there. So about two-thirds of that is SG&A or roughly $10 million. And with that piece, we likely would see that extend in next year depending on our growth trajectory as we work through our 2025 plan.

And just to give you a sense of the cost actions we're taking and specifically around SG&A, we're currently eliminating approximately 80% of corporate positions as part of this program. And those illuminations will carry over for the most part.

Okay. Got it. And then from an EPS perspective, in terms of this year, should we more or less expect that to move in tandem with the change in guidance for EBITDA? Or is there anything else kind of below the line there that we should be mindful of?

Yes. The only other thing I'd say is we certainly have several onetime charges recently as related to the beverage merchandising restructuring, the sale of Pine Bluff that will be charged if you look at adjusted EPS and taking those to decide, as I mentioned, we've worked on the balance sheet, and we've reduced our interest expense.

And so, $14 million of savings there will be a benefit to EPS. We continue to work on the tax line of the income statement as well. But it's hard to give you some guidance into the future on how the tax environment will look.

There's lots of factors that go into that. But broadly speaking, we're focused on EPS as well. And there's no reason to think that the EPS should track to the EBITDA.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Michael King, CEO, for final remarks.

Thank you. So as we wrap up today, I just want to again thank the entire pack of Evergreen team for their hard work during the second quarter. We're executing on our strategy and are confident we will continue to progress on our transformational journey in 2024. We look forward to updating you on the third quarter conference call. Thanks again for joining us.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.