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spk01: Good morning and welcome to Pact of Evergreen's second quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference call is being recorded. I would like to turn the conference over to Dabal Patel, Senior Vice President of Investor Relations and Strategy. Please go ahead.
spk11: Thank you, Operator, and good morning, everyone. Thank you for your interest in Pact of Evergreen, and welcome to our second quarter 2021 earnings call. With me on the call today, we have Michael King, Chief Executive Officer, and Michael Reagan, Chief Operating Officer and Chief Financial Officer. Before we begin, please visit the events section of the company's investor relations website at www.pactofevergreen.com and access the company's supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I would like to remind everyone that our discussions today may include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. 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 for a more detailed discussion of the risks that could impact our future operating results and financial condition. Lastly, during today's call, we will discuss non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation to comparable GAAP measures are available in our earnings release. With that, let me turn the call over to Michael King. Mike.
spk12: Thank you, Deval. Good morning, everyone, and welcome. Yesterday, after market closed, PACT of Evergreen released its second quarter 2021 results that were broadly in line with the guidance we had provided in the last quarter. We saw a noticeable improvement in our volumes across our business segments, especially in food service as consumers recover from the COVID-19 pandemic. We expect this trend to continue into the second half of 2021. On the cost side, we saw a similar dynamic as across the industry with inflation and raw material and logistics putting pressure on margins as input prices for resin and paper rose substantially. As you know, these input costs are linked to indexes and the lag in pricing recovery impacted Q2. Assuming the rate of increases in input slow or turnaround, we would expect it to recover raw material costs in the second half. In Q2, we began to make progress in turning around our beverage merchandising business. While we are pleased with the progress, there's still more to be done. As part of that plan, we are pleased to announce a new addition to our team. Byron Racky will be joining us as the president of our beverage merchandising unit, effective August 16th. He brings a wealth of knowledge and experience in the paper industry, including a successful turnaround history, and we look forward to having him join our team. I'm very proud of our teams as they remain focused on maximizing our businesses to service our customers and meet our stakeholders' expectations. Please now turn to slide number four. During this presentation, we will discuss key business takeaways and second quarter 2021 highlights. We'll provide a business update. We'll go through our second quarter financial performance and discuss our full year 2021 outlook. We will conclude with questions and answers. Please now turn to slide six. Our second quarter results saw material improvement to the top line when compared to the peak impact of the pandemic in 2Q 2020. In food service, the segment most acutely impacted by COVID-19 in the second quarter of 2020, we saw a healthy recovery with volumes up 33% year over year and within 1% of the second quarter 2019 levels. In food merchandising, we saw volumes improve by 4%, and they were within 1% of the second quarter of 2019 levels. The beverage merchandising segment saw volume improvement of 13 percent, with volumes now reaching above what we saw in the second quarter of 2019 by 3 percent. As we had indicated on the last earnings call, despite the volume improvement, EBITDA margins were pressured in the quarter due to the impacts of inflation and higher material and logistics costs. We increased prices in Q2 to offset some of these cost increases. We will continue to monitor inflation carefully take further price actions as appropriate. We anticipate margin recovery through the remainder of 2021 and beyond. We are encouraged by the healthy recovery and continued improvement in volumes and are taking appropriate steps to navigate the labor shortages, continued escalations in raw material costs, and a possible uncertainty due to the Delta variant around COVID-19. In the past few weeks, we have also made some important announcements. We have provided our first update and plan of action from our beverage merchandising operational review with the decision to exit the coated groundwood paper business by the end of 2021. It was a difficult decision, but necessary to help us focus more on our core competency. We also announced the execution of an agreement that will reduce our gross pension liabilities by $950 million. We funded this transaction using existing plan assets. We believe these actions are in the best long-term interest of the company. Please now turn your attention to slide seven. Now let's move to Q2 2021 highlights. Net revenue of $1.352 billion was up 22% from Q2 of 2020, as we saw a strong volume recovery from the prior year when we experienced the biggest negative impact from COVID-19. Net income from continuing operations was $8 million, and earnings per share from continuing operations was $0.05 per share. Adjusted EBITDA was $130 million for the quarter, up 2% from Q2 of 2020 due to strong volume recovery and better pricing. The quarter was impacted by $11 million from winter storm Yuri. Free cash flow, defined as adjusted EBITDA, less CapEx, was $59 million. Finally, our strategic investment program is on track and delivered 14 million of additional annualized adjusted EBITDA benefit in the second quarter. If I could turn your attention to slide eight. Turning to our year-to-date highlights, net revenue was up 8% to 2.516 billion due to strong volume recovery and increased pricing. Year-to-date adjusted EBITDA was 207 million which includes a $50 million one-time impact from winter storm URI, an estimated $43 million impact from COVID-19, and a $16 million impact from a planned cold mill outage. Please now turn to slide 10. As we have previously discussed, Pactive Evergreen continues to have many EBITDA growth levers that will deliver benefits in 2021 and beyond. We're starting to see the impact from some of these levers as we see strong year-over-year volumes as the economy recovers. We believe that in addition to the economic recovery, the secular themes around sustainability, shift to more online ordering, delivery, and takeout will also help drive our volume growth. We also remain focused on cost reduction initiatives and optimization, especially in the current environment of higher raw materials and logistics costs. if I could turn your attention to slide 11. We are continuing on our ESG journey and remain focused on initiatives around the planet, products, people, and governance. When it comes to essential metrics like greenhouse gas emissions, energy, water, and waste, we know we can't manage what we don't measure. For that reason, we have identified a best-in-class platform that will allow us to better track these key metrics at all of our 60-plus facilities. After this robust data gathering exercise, we plan to be able to set performance targets at both the facility and corporate levels. Related to our products pillar, we continue to build the broadest offering of sustainable packaging in the industry, which helps us reach our goal that by 2030, 100% of our products will be made with recyclable or renewable materials. Our long-standing commitment to the environment and customer choice continued during the second quarter. We launched 13 new product SKUs, which included first-to-market tamper-evident French fry cartons and tamper-evident takeout containers, both made of paperboard, in support of today's growing delivery market. Additionally, we have expanded our meat tray offering with a new version made from recyclable PET. That brings the total number of new items we've introduced to 97 in the last year and a half. Diversity, equity, and inclusion is top of mind for PACT of Evergreen, as it is for a growing number of companies. We've created a new internal DEI team and are undergoing a diversity spend analysis of our suppliers. This will inform our future policy and help us to understand where we can make improvements. Finally, we recognize the critical role our board plays in overseeing our ESG initiatives. The directors recently formalized their responsibilities as they relate to ESG and will continue to receive quarterly updates from our Chief Sustainability Officer. More details on these and other activities may be found at our investors.pactiveevergreen.com in the ESG section. If I could turn your attention to slide 12. We shared this slide in the last quarter to provide an overview of our strategy to return to a more profitable Pactive Evergreen. As an update, we remain on track to complete our strategic investment program in 2021. We've announced our first steps in the beverage merchandising operational review with the exiting of Dakota Groundwood business. We also remain on track with the planning of our next generation Pact of Evergreen waste elimination program. There'll be more to come on these programs later in the year. With that, I'll turn it over to Mike Reagan for a detailed financial review.
spk03: Thanks, Mike. Moving to slide 14. Looking at our second quarter 2021 financial performance, net revenue was $1.352 billion versus $1.107 billion in the same period last year, an increase of 22%. The increase was primarily due to higher sales volume, largely due to higher demand as the economy recovers from the COVID-19 pandemic, as well as favorable pricing. Adjusted EBITDA was $130 million versus $127 million in the same period last year. The increase was primarily due to higher sales volume and favorable pricing, mostly offset by material costs, net of higher cost pass-through to customers, higher logistics costs, and higher manufacturing costs in our beverage merchandising segment. Pre-cash flow, defined as adjusted EBITDA less capex, was unfavorable to the same period last year due to higher capital expenditures. Moving to slide 15, looking at our year-to-date 2021 financial performance, net revenue was $2.516 billion versus $2.319 billion in the same period last year, an increase of 8%. The increase was primarily due to higher sales volume, largely due to the higher demand as the economy recovers from the COVID-19 pandemic. as well as favorable pricing. Adjusted EBITDA was $207 million versus $272 million in the same period last year. The decrease was primarily due to the impact of winter storm URI, the continued impact from COVID-19, and incremental costs from a cold mill outage. Free cash flow, defined as adjusted EBITDA less capex, was unfavorable to the same period last year due to lower adjusted EBITDA. Moving to slide 16 and our results by segment for Q2. Our food service segment saw net revenues up 41% driven by strong volume recovery and higher pricing to recover raw material cost increases. Food service volumes for the quarter are up 33% on 2020 and within 1% of 2019 volumes. Adjusted EBITDA for the segment was up 88% versus same period last year due to strong sales volumes partially offset by higher logistics costs and higher material costs. Our food merchandising segment saw net revenues up 11%, driven by favorable pricing and volume. Food merchandising volumes for the quarter were up 4% on 2020 and within 1% of 2019 volumes. The slight decrease in adjusted EBITDA was due to high logistics and manufacturing costs, mostly offset by higher sales volume. A beverage merchandising segment saw net revenues up 11% driven by strong volume recovery. Adjusted EBITDA for the segment was down $23 million versus same period last year. The key drivers being higher manufacturing costs, high material and logistics costs, and unfavorable pricing and customer mix, partially offset by higher sales volume. Moving to slide 17. Here we estimate the impact of COVID-19 and Winter Storm URI to our business. The year-to-date adjusted EBITDA impact of COVID-19 was $43 million, mostly driven by volume, price, and higher manufacturing costs, most notably in our food service and beverage merchandising segments. In Q1, Winter Storm URI impacted our business. The impact was concentrated on our facilities in Arkansas and Texas, where we incurred higher energy costs and needed to shut down sites quickly, incurring damage in the process. The year-to-date adjusted EBITDA impact is $50 million. We do not expect any further impact. Moving to slide 19. Looking at our outlook for 2021, the ultimate impact of the COVID-19 pandemic to Pactive Evergreen remains uncertain. In our forecast, we have made certain assumptions regarding a second half recovery of food service and beverage merchandising revenues that are dependent upon increased mobility and may not eventuate. We've been neither conservative nor aggressive in these assumptions. We are maintaining our full year adjusted EBITDA guidance at $630 to $645 million. We expect the volume recovery to continue through the second half of the year with key risks to our forecast being material cost pressures and labor shortages. We continue to push price to recover these cost increases. Thank you for your time. As an appendix to the presentation, we've included Q2 year-to-date highlights by segment, Q2 and Q2 year-to-date revenue and adjusted EBITDA bridges versus same period last year, consolidated statements of income loss, a reconciliation of net income loss to adjusted EBITDA and free cash flow, and a summary of progress in our strategic investment program. I'll now pass it back to Mike King for closing comments.
spk12: Thank you, Mike. In closing, the second quarter came in consistent with our expectations and the guidance we provided at the end of Q1. As consumers return to pre-pandemic activities, We anticipate continued increases in volume in the second half of 2021. If raw material input costs moderate, our contracted pricing actions will catch up and lead to improved margins. Long-term, we remain committed to the plans we have in place to improve our beverage merchandising business. We took an important step by exiting the Koda Groundwood segment and are very pleased to have Byron Racky joining our team. Across the business, we are intensively focused on increasing productivity, reducing costs, and taking steps to maximize our cash balances. We will monitor closely the rate of inflation and price our products appropriately in the marketplace. Finally, I'm confident that the people of Pactive Evergreen will work hard every day to serve our customers and enhance the value of the company to all of our stakeholders. With that, we will now open it up for questions. Operator?
spk09: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. And our first question comes from the line of Ganshan Punjabi with Baird. Please proceed with your question.
spk02: Hey, guys. Good morning. Morning, Ganshan. Morning. On the food service improvement, you know, which is quite significant in 2Q versus the 1Q run rate, you know, do you think there was any, you know, sort of benefit from inventory restocking as mobility increases and channels get sort of – normalized. And then also, was there any pre-buy ahead of pretty significant rising costs and ahead of your own price increases, or was that not the case?
spk03: So, hi again, Chairman. This is Mike Reagan. Good morning. So, what I'll tell you is, you know, I can't be 100% certain on either of those things. Having said that, you know, we have been working hard to service every single customer. We've been very measured in what we've pushed out because labor challenges continue to be a major problem in plants and we're working hard on those. And where we would see that, where we would see any pre-buy prior to price increases or restocks, we would have held back, not because we don't want to fulfill those orders, it's simply because the stress on the whole supply chain, whether it's the inward raw materials all the way through to our own manufacturing, our own inventory levels, et cetera, et cetera, plus the tightness of the logistics market has meant that we've been servicing people to what we think is really you know, they're out the door. And, you know, and I think a lot of that, you know, we see some of our key customers, we see their out-the-door sales and, you know, they're flying as well. So we're not really seeing that. But, you know, I can't say with 100% certainty that there isn't, you know, pockets of it.
spk02: Got it. And then for my second question, I mean, you know, obviously $207 million of EBITDA for the first half and pretty significant step up in the back half. A, can you sort of give us a breakdown between the weighting between 3Q and 4Q? And then second, you know, what was unfavorable price cost, do you think, you know, for 2Q? And then what do you think a realistic number is for 3Q based on what you know at this point?
spk03: Yeah, so the unfavorable price cost in Q2 was – around $52 million. So, you know, it hit us hard. Just taking a step back in terms of the halves, I just want to give a bit of background because I know that this is going to be something that people are going to ask me. So, you know, when we did our last forecast, we would have expected a pretty even balance between the two, you know, the third and the fourth quarter. Okay. So, you know, so, and you guys can infer from, you know, our guidance, you know, what those numbers would be as to our year-to-date numbers. We kind of have come in where we said we'd be. And, you know, we would have expected third and fourth quarter to be, you know, approximately half each of the remainder of the year. What we, you know, when we did our Q1 guidance, we were expecting around year-on-year around $300 million in, raw material cost increases due to rates, that's gone up to $400 million. And as you know, we chase price. We have a circa four and a half month lag. And so what I'll tell you is whilst we've maintained our guidance, Mike highlighted some risks and so did I when I talked to the guidance. There's been a push of the of the EBITDA from Q3 into Q4 to the extent of sort of $40 to $50 million. So where I would have thought that Q3 and Q4 would have been the same or similar sort of EBITDAs, now there's been sort of a push of that out into Q4. Does that answer your question, Ganshin?
spk02: It does. It does. Thank you so much. Thanks.
spk09: And our next question comes from the line of Kyle White with Deutsche Bank. Please proceed with your question.
spk04: Hey, good morning. Thanks for taking the question. I wanted to follow up on the price cost that you just laid out. I guess I'm a little confused if I look at slide 23, the kind of year-over-year bridge that you have. You have a price mix of $50 million and then a material headwind of $70. One, can you break out the parts of the material headwind? How much was driven by kind of lagging the pass-through of resin? And then does that mean Mix was roughly a $32 million benefit based on what you just said price-cost was? Thanks.
spk03: Sorry. So you said that quite quickly. Sorry. So it's slide 23, did you say?
spk04: Yeah, just at the end where you have kind of the bridge on EBITDA year over year.
spk03: Yeah. Got it. Yeah, so what I'll tell you is, you know, the – what I call spread price mix and material. You can see there that that's negative 20. And you can also see that there's high logistics costs of around $17 million and higher manufacturing costs there. Those higher manufacturing and logistics costs are mostly driven by rate. And so when I look at this, that bridge, The price mix, we're pushing price to recover not only the materials, but also higher labor costs and higher logistics costs. And so, you know, the net there is really the number that you should really be looking at, not just the price mix versus material, because we try to cover off the whole, you know, the whole inflation rather than just, you know, materials only. Does that answer your question, Carl?
spk04: Yeah, that does. That makes sense. I see how you get to the 52 now on that. Could I just follow up? How much of the material was driven by the lag in the past year of resin though?
spk03: It's about, in terms of the difference there, it's about $30 million.
spk04: Got it, that's helpful. And then my second question, could you just kind of discuss the rationale for exiting the kind of the coded groundwood market and then what kind of financial implications should we expect from this decision?
spk03: Yeah, okay. So I'll, because I'm answering questions at the moment, I'll answer that and then Mike can come in after me, you know, if it's sort of a high level. So in terms of the coded groundwood market, you know, I don't think anyone, you know, it's no surprise to anyone that, you know, magazines are, you know, have gone down even worse through the pandemic. And so, you know, for us, that's meant, you know, an obvious reduction in volume and reduction in price. Okay. So not to mention that, you know, this is in a, we produce this in a, manufacture a plant where we also produce liquid packaging board which is our most important product which goes into our cartons and that we sell on the open market and in that in that facility we have challenges around labor and you know we're constantly investing so first and foremost you know there's a there's a financial implication here In terms of last year's EBITDA numbers, and obviously with price and volumes changing all the time, I'll just talk to last year. It would be probably a positive EBITDA benefit of around $10-ish million by closing this down. But more importantly, we're going to be avoiding $15 to $20 million of CapEx on our you know, a line of product that is in decline, and that's per annum, 15 to 20 million bucks per annum. It's a dying market. We don't need to be in it. And, oh, by the way, what we can do is we can protect our profitable core business better in the Pine Bluff mill. We can focus on producing liquid packaging board. We can concentrate the expertise and people in that mill on producing our most profitable product. So it's very much cash flow positive and also allows us to concentrate more on our core business. Mike, do you have anything to add?
spk12: No, Mike, I think you said it well. I would say summarizing what you said is it's better financially for us on a lot of fronts, but bigger picture, it declutters our mill and lets us get back to the basics.
spk04: Got it. Sounds good. Appreciate all the details.
spk09: And our next question comes from the line of Anoja Shaw with BMO Capital Markets. Please proceed with your question.
spk00: Hi. Good morning, everyone. I just wanted to go back to the inflation pressure since it's such a big issue. You managed to hold guidance, Clemson, for the full year, as you said, which is quite an achievement given that inflation. What are the offsetting factors? Are you getting help from, I guess, rising paper, rising SPS prices? Can you just walk us through the offsets there?
spk03: So to Anoja, how are you? It's Mike Reagan again. It's a bit of a knife fight at the moment. I'll tell you that much. You know, first of all, we're out getting price. That obviously lags. I think you can obviously see the volume tailwinds that we're getting. We've upped our procurement efforts. Our team is working hard to try and find offsets to hold back on inflation where we can. And we continue to drive our strategic investment program um to realize savings out of that so and and you know in all the other programs we have on the go in every single plant so um there's a lot going on those those are the key things that we're doing um i think you know the price increases are pretty much you know we're just pushing price everywhere that we possibly can
spk00: okay thank you and I just wanted to go back to that pension transfer that you announced does that mean can you just talk to through any financial implications and does it mean you will no longer have an underfunded position in your pension once it's done so the the pension at the moment the pension liability
spk03: Or the net position is and you know this changes on a daily basis, but it's it's circa 99% funded okay, so You know somewhere between 98 99 what we've done is we have effectively Transferred both assets and liabilities to an external insurer There's no detriment to pensioners but it reduces that risk on our balance sheet so you know where we had circa 4.2 billion dollars of liabilities in the past we now have a billion dollars less round numbers and we have a billion dollars less assets round numbers you can see that there was a in the announcement that there was or there will be a a a profit recognized from that which would mean that by a small margin we transferred less assets than liabilities across. The whole idea of this is as the pension gets more and more funded to reduce the risk to our business, to reduce the risk to future cash flows, And we've taken, let's call it 25% of our liabilities out. So it's a really good result for us with no detriment to pensioners.
spk00: Yep, got it. That's clear. Thank you very much.
spk12: The only other add, Mike, I would say is we didn't use any of our cash to do this. This was all done with assets, just to be clear. Yeah, that's correct. Okay.
spk09: And our next question comes from the line of Anthony Pettinari with Citigroup. Please proceed with your question.
spk05: Hi, this is Asher Sonen standing in for Anthony. Around the time of the IPO, I think there was a view that company EBITDA margins could ultimately get back to more historical levels. I think we did around 17% margins in 2016, 2017. You know, and there's obviously a lot of moving pieces with inflation, COVID, and the beverage review, but you know, looking longer term, do you see any structural reason that you can't ultimately get back to those sort of mid- to high-team dividend margins? Maybe anything structurally changed for either of the three businesses?
spk03: I'll answer that, and then, Mike, you can weigh in as you want. Short answer is no. I don't see any – well, I do see hard work ahead of us, absolutely, but I don't – you know, I think we can get there. You know, if I look at our food service business over the last, you know, couple of years, we were hit by, you know, inflation pressures. However, and, you know, we were obviously hit by COVID. However, you know, we're continuing to push price. Our margins, you know, coming back. And we would expect to see improvement through, all of the various programs we have, most notably the strategic investment program. And so I think we can get back to historical levels there. In terms of food merchandising, food merchandising has historically been above that sort of the average of the business. And so similarly, they should see tailwinds on cost as the strategic investment program rolls in. And, you know, I guess then when we look at the beverage merchandising business, it's been suffering. And it's been suffering for a few reasons. COVID has impacted it. We've had, you know, we had winter storm Uri. We've had a lot of investment in our mills and downtime is associated with that. In terms of getting back to those historical margins, well, you know, you heard me talk about Kota Groundwood. Well, you know, negative EBITDA margins. You know, we'll lose sales, but, you know, ordinarily that's going to help, right, in terms of if you've got negative EBITDA margins as a result of a product in your portfolio and you discontinue it, well, you know, that'll be accretive to margins. And then it comes down to, you know, returning the mills to somewhere near to where they've historically run. So... From our perspective, the ongoing business pieces in the beverage merchandising segment, they can absolutely, on a weighted average basis, get back up to historical levels. It's a long-winded way of me going back to my initial point, which is yes, I think we can get back there.
spk05: Thanks. That's very helpful. is it just possible to talk about the performance of the Earth Choice portfolio and your other sustainability products? Are they growing faster than company average? And then just from a broader ESG perspective, are you seeing any particular consumer preferences within substrates, for example, say faster growth in paper versus plastic or metal?
spk12: Okay. I think right now we're in an environment where people will take any substrate they can get So it's tough to answer that. There's no preference per se. And we have shifted customers to our more earth choice and environmentally friendly substrates. But we've actually, if anything, seen an acceptance of any substrate, particularly when you look at our protein tray or meat business or protein businesses where, you know, we saw a large transfer to other substrates that, you know, we've had to, uh, rebirth some of the less earth friendly assets to meet demand. So it's, it's a difficult, uh, way of saying, you know, right now demands outpacing, I think the priority on some of the substrates. So, and I think that'll be, it'll be that way until inventories and the supply chain pressures reduce.
spk05: Okay, thanks. I'll turn it over.
spk09: And our next question comes from the line of George Staphos with Bank of America Securities. Please proceed with your question.
spk06: Hi, this is Captain Keillor sitting in on behalf of George today. Just looking at your strategic investment program, it appears that there was a bit of a shift in spending from automation to combined digital transformation, supply chain, and cost reduction. What was the main driver behind this?
spk03: So in terms of – so your question really goes to, you know, the total spend on the digital transformation integrated supply chain and cost reduction? Is that what you're asking? Sorry.
spk06: Correct. And kind of just, you know, the split between those and kind of why there may have been, you know, a shift from automation to the others.
spk03: Yeah. So I think automation, we've already spent, you know, the full program. However, we're continuing on with that and we'll continue to push automation. Not only because we're doing it more because now we're shifting our focus from pure cost out to we need to service our customers and there's a war for people out there at the moment. We just can't get enough people into plants, so we're going to have to automate positions out. Our automation program continues at pace. In terms of the digital transformation piece and the integrated supply chain piece, other areas where we're sort of doubling down, I think it's fair to say on our integrated supply chain piece, we started the journey on a five-level journey. We were probably a one. I would say we're a four. We're continuing to invest. We're continuing to invest in people, into systems, and we want to get to a five. And so we're continuing to invest there. In terms of digital transformation, we've done a lot, but I would say we can do a lot more. So again, we're continuing to invest there. In terms of that shift, numbers on a page may look like we're shifting, but it's almost like we're doubling down, in my opinion, on all of those categories.
spk12: The thing I would add, Mike, is just you shouldn't think of these things mutually exclusive. Digital enablement enables automation. I mean, there's a lot of cross-pollination. It's hard to draw the line. So we haven't changed the geography of our spend. We may bucket it or label it different, but it is interlinked. Digital enablement does enable some of the automation, and there is some cross-pollination. So I wouldn't take any of the bucketing as us backing off one or the other. And to Mike's point, it's actually us leaning in much smarter with cross-pollinated initiatives
spk06: Great. That's helpful. And then I guess just going back to the reduction of the pension liability, will this impact earnings in any way with regards to, you know, pension income going away?
spk03: Yeah, I think, you know, pension income, you know, it's adjusted out of EBITDA, but it's obvious in a net income, net income benefit at the moment where we're, earning money off the assets. So if we have less assets, arguably we'll earn less off that. But to us, earning money off a pension is not really where we're focused. What we're focused on is reducing risk and making sure that the pensioners are looked after and reducing the risk of having to pay out large amounts in the future And to us, that's far more important than, you know, almost a non-cash profit number that's shown in our P&L for pension income.
spk06: Great. Thanks.
spk03: Thanks.
spk09: And our next question comes from the line of Sam McGovern with Credit Suisse. Please proceed with your question.
spk07: Hey, guys. Good morning. Just with regard to the working capital line, when I look year over year, obviously it's sort of breakeven in the first six months of this year versus the significant use of cash a year ago. How should we look at what that looks like in the back half of this year and what we should expect going forward?
spk03: Yeah, Sam, I think you were a little faint there, but I think what you were talking about was the use of cash in terms of working capital. So let me phrase it up for you. During the first half of this year, we've used cash on working capital because raw materials have run up so much. the dollar value of our inventory has increased substantially due to higher raw material costs. However, our physical inventories are down. And they've been driven down by a couple of things. Number one being the demand and the snapback. And number two, because of our integrated supply chain program, we've been working towards optimizing our inventory levels And so what we would expect to see in the second half of the year is as raw materials stabilize, we wouldn't expect to see the use of cash from that. However, our physical inventory levels will probably increase a bit as we get our feet underneath us in our plants and the snapback. it becomes more normalized.
spk07: Got it. That's helpful, and hopefully my audio is a little better now. Getting back to Gansham's question earlier about pre-buying and sort of the restocking ahead of reopening, I mean, it sounds like you feel like that really hasn't been the case. I mean, in terms of what you guys are seeing week by week or the conversations you're having, you know, with your customer base? I mean, what are they seeing in terms of a return to normal? Are they seeing changed consumer behaviors or is there anything that makes you feel like the business looks different, you know, a year or two from now versus what it was pre-COVID?
spk12: I can take a run at that, Mike, and then you can fill in. But yeah, I mean, there's certainly some shifting in the consumer, obviously, as mobility increases. I think the buy-in of you know, home delivery and takeout, you know, there's going to be a, you know, all signs point to a new normal. And so the shift in categories for us, you know, there's, you know, there's things we're tracking that, you know, you look at people's return to work, you know, largely people aren't coming into the office. So the shift from a hot cup of coffee in the morning, like a Starbucks or something like that, you know, they're getting up in the middle of the day and getting a cold cup. And so shifts from, you know, hot cups to cold cups is something that, you know, it's putting pressure on the cold cup category or the poly cups. We're seeing that on the takeout side with our, you know, our takeout to go containers. You know, we're, you know, I think of the numbers in the mid 40% of the meals now are, you know, in the home, but in a, in a takeout or delivery fashion. And that's a, that's a big shift. And as those things stick and, you know, consumer behavior moderates, who knows what happens two years from now. But what we can say is the pressure it's putting on the supply chain, not just with our customers, but on the manufacturing side, even outside of our business. Um, I'm not, I'm not sure that the capacities until those capacities and those, uh, categories catch up, that that pressure goes away. And so, um, in terms of rebuilds of inventories, I would, I would say it's slim. I don't think anybody's getting out in front of that yet based on our customer discussions and, you know, largely the snapback specific to categories. Um, you know, I think that's a, you know, if somebody had a crystal ball, we'd love to see it, but you know, it's like Mike said, a nice fight in terms of, uh, our ability to address that shift in consumer demand and, and where the categories that will win and lose and, uh, And so, you know, when I said, you know, sustainability, you know, being a focus, you know, the question around where our ESG-friendly products sit, you know, people are taking any product they can get right now still. And so until that moderates, I think this pressure is here to stay a bit. And we're going to see that pressure on the supply chain, and our customers are feeling it just like we are.
spk07: Okay, great. Thank you very much. I'll pass it along.
spk09: And as a reminder, if you'd like to register a question, please press the one followed by the four. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.
spk10: Great, thanks for taking my question. Yeah, I guess congrats on the turnaround in a couple of those businesses there, and especially BevMerch. So I just wanted, I guess, you know, get an update on your thoughts here as you kind of now turn the corner here or at least, you know, kind of look at the operations a little bit more. Would you say that we're all on your way to some of the improvements in BevMerch in the mill operations? And then similarly with food service, I guess, you know, maybe you can just characterize this too if there's any specifics. Are you looking forward to signal that the business is kind of back to a full recovery? What should we be kind of thinking of in that vein? Thanks.
spk12: Yeah, so I'll just say that nobody's declared victory on the beverage merch business within our team here. I think we're still largely in recovery mode and that while we've done a lot to diagnose the business, We still have a lot to do to bring our meals back to what I consider standard and best practice. And, you know, in our food, you know, it's really a tale of two cities. So, you know, controllable elements of the beverage merch, we feel like we've got a handle on. The fundamentals in the business, you know, we've got a handle on, and we've made some decisions around strategic product, as we've shared on the Code of Groundwood. And the teams are focused on the right stuff. So time's our friend and time's our enemy there. On our food businesses, you know, I think it's largely, you know, volumes are recovering nicely. You know, if things continue the way we anticipate and, you know, we're able to see the input costs and the input supplies moderate, you know, we're well positioned to see the, you know, I feel really good about where we are in terms of our ability to perform and our supply chain engine will function and we will, we have every reason to win in that space, uh, controllably. And, you know, certainly the manageable elements are what we're focused on there. So controllable elements of the beverage business, well in tune, uh, uncontrollable elements of the, or the manageable elements of our food service business are understood and we're tracking. So,
spk10: Understood. And just as a follow-up, when you think about price cost, obviously you've taken some action here and you continue to take action to offset the inflation. Do you usually hold on to those price increases, I guess, when raw materials recede? Maybe you can just discuss how we should think about 22, assuming raw materials are stable from here. Thanks.
spk03: So in terms of whether or not we hold on to price increases, look, most of our business is contracted and if price goes up, if raw material goes up, then we follow on price. So essentially if raw materials go down, prices will go down but there'll be a lag to that similarly to when the raw materials go up in terms of where we're not contracted uh we um you know we would aim to you know as as most people do hold on to price if we can ultimately i guess there's going to be pressure on those prices um depending on what happens with raw materials You know it's a competitive market. You know we'd expect competitors to you know as materials go down to to Take prices down, but you know we would Logically try to hold on to price, but you know there's no guarantees there so next year You know we have been lagging in terms of you know cost inflation and getting price back. And, you know, so there might be a little bit of a tailwind next year. But that all depends on what happens with raw materials.
spk10: Great. Thanks.
spk09: And our next question comes from the line of Andy Sheffer with Next Credit Partners. Please proceed with your question.
spk08: Good morning. Thanks for taking my question. In terms of exiting the coated groundwood, can you describe for us what the cash costs might be and then the capex for converting that over to coated carton? And then how does the timing work in terms of you exit by the end of the year? Does that mean that you've fully converted that line by the end of the year or does that go into 2022?
spk12: So I'll just speak to the fact that, you know, there is no planned conversion. I just want to be clear, this isn't a product shift. This is a takeout of capacity. You know, I don't want to misset the table that this is a shift of our resource or our assets. So there's no strategic element to that, no addition of capacities. I'll let you talk to the numbers, Mike.
spk03: In terms of that, The costs, we recognized in the quarter some costs around severance. It was circa $7 million. And then there'll be some capex spend over the next few years that is really around reconfiguring various pieces of the mill. it'll be in the realm of 14, 15 million dollars.
spk08: Okay, thank you. And then if you could give us any insight in terms of what you're seeing currently on the raw material front in terms of, you know, are they leveling off, abating, maddeningly holding steady, not going down, just what you're seeing Because, you know, prices that we as investors may see don't always correlate exactly on the timing front. And any discussion there would be helpful.
spk03: So, at the moment, we're, you know, in terms of raw materials, it's a week-to-week proposition, I'll say. You know, and... Supply chains are tight. It varies by the type of raw material, whether it's polyethylene, polystyrene, polypropylene, PET, board. All of those things have different dynamics in the market. What we are seeing, though, is that material costs are not really abating at the moment. There has been some ups. some downs, but they're not coming off. So without getting into specific substrates, I've sort of got to answer in a very general way like that.
spk08: Thank you.
spk09: And we have no further questions over the phone lines at this time. Please continue with your presentation or closing remarks.
spk11: Great. Thank you, operator. Thank you, everyone, for your time today. And we look forward to catching up with you later. If you have any further questions, please feel free to reach out to me. Thanks.
spk08: Thank you.
spk09: Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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