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spk03: Good day and welcome to the Pactive Evergreen Inc. First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To answer your question, please press Start Then 2. Please note this event is being recorded. I would like to turn the conference over to Deval Patel, Head of IR and Strategy. Please go ahead.
spk12: Thank you, operator, and good morning, everyone. Thank you for your interest in Factor of Evergreen, and welcome to our first quarter 2022 earnings call. With me on the call today, we have Michael King, Chief Executive Officer, and Michael Reagan, 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 informal remarks, I would like to remind everyone that our discussions today will include forward-looking statements and including statements regarding our guidance for 2022. 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 most recent annual report on Form 10-K and our upcoming quarterly report on Form 10-Q for more detailed discussion on these 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 a reconciliation to the most directly comparable GAAP measures is 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 Pact of Evergreen CEO, Michael King. Mike?
spk10: Thanks, Davil. Good morning, everyone, and welcome. Yesterday, after the market closed, Pact of Evergreen released its first quarter 2022 results. I'm pleased to report that we have started the year building off the momentum we saw late last year and realized strong year-over-year performance in the quarter. Revenues were up due to strong pricing, while adjusted EBITDA benefited from the strong pricing net of higher cost, as well as the benefit from the Fabrikal acquisition and the benefit from Winter Storm URI and the scheduled cold mill outage, which did not reoccur this year. In general, we are seeing more stability in our mill and converting operations and improved profitability in the business, which is helping us start the year well. It is also helping us to demonstrate our ability to deleverage the business as our LTM net debt to adjusted EBITDA ratio improved from 7.6 times at the end of 2021 to 6.2 at the end of the first quarter and remains on track to be in the low fives by year end, as we stated in the last quarter. Let me now turn it over to Mike Reagan to walk us through some more detailed financials for our first quarter. Mike?
spk14: Thanks, Mike. Moving to slide six and touching on our Q1 2022 highlights, we are encouraged by what we see in our Q1 results. This following a strong Q4 2021. Net revenue was $1.495 billion up 28% on prior year. Net income was $43 million with diluted EPS 24 cents An adjusted EBITDA was $182 million, up 136% on prior year. Moving to slide eight and a deeper discussion of our Q1 2022 performance, net revenue was $1.495 billion versus $1.164 billion in the same period last year, an increase of 28%. The increase primarily related to higher material costs passed through to customers and pricing actions. plus the acquisition of Fabrikal. Volume was down 5%, primarily due to labor challenges and our exit of the coated groundwood paper business. Adjusted EBITDA was $182 million versus $77 million in the same period last year, an increase of 136%. The increase was primarily due to favorable pricing the benefit from winter storm URI and scheduled coal mill outage costs in Q1 2021 that did not recur, and the impact of the Fabrikal acquisition, partially offset by higher material, logistics, and manufacturing costs. Free cash flow defined as net cash flow provided by operating activities less capex was $70 million versus negative $51 million in the same period last year. Please note that we have updated how we define and discuss free cash flow. We now define it as net cash flow provided by operating activities less capex versus previously defining it as adjusted EBITDA less capex. We believe the new definition is a more accurate proxy for our cash generation activities and is a definition that more closely aligns with our peers. Moving to slide nine, This slide helps to bridge Q1 year-on-year revenue and adjusted EBITDA. Looking at revenue, when comparing to Q1 last year, the key drivers of our revenue growth were price mix of $304 million and $93 million from the acquisition of Fabrikal, net of a disposition, offset by lower volume. For adjusted EBITDA, price mix favorability more than offset higher costs, whilst the benefit of the Fabrikal acquisition added $22 million. Moving to slide 10 and our results by segment for Q1. Our food service segment saw net revenues up 54% driven by higher pricing to recover COGS increases, as well as the impact from the acquisition of Fabrikau. Adjusted EBITDA for the segment was up 90% versus the same period last year, primarily due to favorable pricing and the impact from the acquisition of Fabrikau, partially offset by higher material, manufacturing, and logistics costs. Our food merchandising segment saw net revenues up 18%, driven by favorable pricing, primarily due to higher material costs passed through to customers and pricing actions, partially offset by lower sales volume, primarily due to labor shortages. Adjusted EBITDA for the segment was up 9% versus the same period last year, due primarily to favorable pricing, partially offset by higher material and manufacturing costs, lower sales volume and logistics costs. Our beverage merchandising segment saw net revenues up 13%, driven by favorable pricing, primarily due to pricing actions and higher material cost pass-through to customers, and favorable product mix, partially offset by lower sales volume due to our exit from the Kota Groundwood business. Adjusted EBITDA for the segment was $24 million versus negative $32 million in 2021, The key drivers were higher pricing, the benefit related to $34 million of winter storm URI costs, and $16 million of scheduled cold mill outage costs in Q1 2021 that did not recur, partially offset by higher material, manufacturing, and logistics costs. I'll now pass it back to Mike King for further comments.
spk10: Thanks, Mike. If I could have you please turn to slide 12. I'll provide a brief update on our ESG progress before my closing remarks. When it comes to environmental, social, and governance initiatives, we continue to make progress on our journey. A highlight from the first quarter was our participation in the launch of McDonald's new circular clear cup sourced from equal parts of post-consumer recycled and bio-based materials. What's particularly exciting is that the bio-based material is crafted in part from McDonald's used cooking oil. These cups currently being trialed in 28 McDonald's stores in Georgia can also be recycled along with other polypropylene items. In addition, an important highlight to mention is that we undertook an analysis of our climate-related risks and opportunities, as well as examined scenarios to test our resilience in the face of physical and transitional risks. We expect this work will form the basis of future climate-related reports and other disclosures that we make. To learn more, we invite shareholders to view our disclosures and other reports found at investors.pactiveevergreen.com in the ESG section. Now, please turn to slide 13. While we're off to a good start for 2022, we are maintaining our adjusted EBITDA guidance of $705 million at this time. We are seeing conditions in the labor market start to improve and believe we remain on track to see those challenges moderate in the second half of 2022. At the height of our labor challenge, we had an over 10% vacancy rate across our enterprise, but believe we are seeing the light at the end of the tunnel. The next challenge we are working on is training up all of our new staff. And again, we are making good progress and believe we are on track to see the labor no longer be a drag on the business, again, all by the second half of 2022. We are also seeing continued progress on our mill operations and reliability in general for our operations across the enterprise. but there also remains broad challenges and uncertainty in the market. Global energy prices have been significantly volatile due to the conflict in Europe. While we have no direct operational impact from the conflict, the volatility in the global energy markets can impact our raw materials, energy, and logistics costs. The general inflationary pressures also remain elevated, so we believe it is more prudent to maintain our guidance at $705 million for the full year. At this time, I'd like to thank all of the Pactive Evergreen workforce for their commitment and continued hard work to serve our customers and enhance the value of the company for all of our stakeholders. We remain focused on continuing to improve our production capabilities and service our customers to the best of our ability. With that, let us take your questions.
spk04: Operator?
spk03: We will now begin the question and answer session. To ask a question, you may press 7-1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. To answer your question, please press 7-2. The first question is from Gresham Panchavi with Baird. Please go ahead.
spk08: Thank you. Good morning, everybody. Michael, as you sort of zoom out, you know, in the food service segment the last couple of quarters, you know, Q4 up 4% and then down a little bit in the first quarter. Was there any impact from, you know, pre-buys as customers try to sort of adjust to resident variability during the quarter? I guess I'm just trying to understand why that segment declined with relatively easy comps from a year ago in the first quarter.
spk10: Yeah, good question. So I think we were open as we, you know, actually Q4 and earlier as well that Our goal is to also reestablish service levels and inventory. I wouldn't say that we've seen any demand changes. So to answer your question, our customers would buy just about every unit we make still. So the decline you see in our food service segment specifically was really around our strategy to reestablish inventories on our C, D, and E items. As well as, you know, we kind of had a slow start to Q1 with Omicron. So, you know, our ability to service, you know, kind of that January and up until late February was slowed by our own ability to deliver.
spk08: Gotcha. And then for my second question, you know, in terms of your embedded resin assumptions for the rest of the year, I mean, obviously there's a big spike in energy costs. Natural gas is starting to blow out to the upside in the U.S. as well. And that's, you know, clearly a raw material for resin. Both of them are. Just curious as to what your specific guidance is embedding at this point.
spk14: Yeah, good morning, Gansham. It's Mike Reagan here. So, you know, we've assumed, you know, continued increases in resin, you know, as forecast in the curves. And also, you know, at the moment, there are a number of force majeure events that we're seeing as well. And this is, one of the reasons why our guidance is, you know, we haven't raised guidance, you know, given the uncertainty around the resin markets, just to give you a feel for, you know, through the end of the year, what we're expecting to see in overall COGS, you know, our year on year COGS increase, just pure inflation will be over. You know, we, last year's COGS was, around $4.95 billion, we'll be up over 10%, 12% in aggregate COGS. And that's changed since we did our plan substantially. So it's gone up by a couple of hundred million dollars, which is why we're very cautious about the back end of the year and that forecast. our assumptions are to continue to trail up as per all of the various forecasts that are out there, but we're also a little bit more pessimistic than what the forecast would say.
spk08: Very clear.
spk14: Thank you.
spk03: The next question is from Chris Parkinson with Mizuho. Please go ahead.
spk16: Great, thank you so much. You've made a very conscientious effort to improve the operations of various assets throughout your portfolio, including the mills, and I feel as though that effort has really kind of taken hold, especially over the last six to nine months, including some new managers. Can you just give us a quick update on your, let's say, near, intermediate, and perhaps even longer-term thoughts of those efforts and how do you assess your current performance? Thank you.
spk10: Yeah, so... would completely agree that, you know, I'd say that the horizon you gave with the last six to nine months, we have started to see a shift and, and a few things are all of our operations, not just our mills have, have seen the benefit of, you know, us being able to fill more of our hourly workforce. And so, you know, I think I had mentioned that, you know, during the height of the labor challenges we were, you know, seeing near a 10%, if not just a little over 10% vacancy rate. Taking new approaches to get those seats filled has been a big help. I think year on year across our enterprise, our OE, our throughput rates have seen double-digit improvement, and that's allowed us to start to reestablish inventories and service levels. The strong demand helped pull through some of that, but at the same time, you know, we've been able to be in a position for the first time in a long time To moderate You know how we want to do it. We're not shipping everything we make anymore. We're reestablishing health and I expect that to continue. We've seen that the Q1 has been a indicative of the same kind of results, both in our mills and in our, our converting operations. And that fitness is benefiting our warehouse and distribution networks as well. And so That part, the controllable part, so to speak, of our operations is on track, and that plan's coming together. And some of the results, while we're going to talk a lot about our price-cost dynamic, that's also enabled by just what you mentioned there and our ability to get after it in our operations.
spk16: It's very helpful. And just as a quick follow-up, Can you just give us a quick update on the Fabrica acquisition, you know, how that's going versus the original plan? And just given all the moving parts, you know, since the deal is closed, you know, what the rough EBIT contribution would be for this year versus, let's say, your initial assessment? Just any broad color would be greatly appreciated. Thank you very much.
spk10: I'll give a couple comments, and then I'll let Mike give you the numbers. You know, we're very – we continue to be very pleased with with our ability to get after synergies and that integration of that Fabri-Cal business, I would say we're ahead of plan and continue to find new ways to create values in both our historic Pactive Evergreen businesses as well as in the Fabri-Cal business. So I would say generally we're very pleased. I'll let Mike speak to the numbers.
spk14: Yeah. Hi, Chris. It's Mike here. Um, so the, yeah, we, I would just reiterate what Mike said, you know, we're going a lot faster, you know, we'd expected the, um, synergies to sort of run over three to four years. Um, and you know, we're, we're hoping to have most of them done within two, um, you know, in terms of what the contribution this year will be, um, we would expect somewhere between $60 to $70 million for the full year. So we are really getting after the original synergies, and we're looking to build on top of those as well. Thank you, as always.
spk03: The next question is from Aruna Viswanathan with RBC Capital Markets. Please go ahead.
spk06: Great. Thanks for taking my question. Yeah, I guess I just wanted to revisit the guidance. So, you know, very nice beat in food service. So congrats on that. And, you know, looks like the pricing is really, you know, taking hold there. I understand that Bev merch may be, you know, still kind of a work in progress, but is it possible that, you know, your guidance is conservative? I mean, I understand that the resident prices are still somewhat uncertain. We do, we do see some increases for Q2, but, um, you know, does it also assume that you kind of give back some pricing as, as you move through the year or, or, you know, I guess, are you building in some conservatism when you think about the full year outlook and could it actually be better than what you're thinking?
spk10: You know, I would say, um, We certainly are optimistic that it could be a little better. I would tell you that when we look at the uncertainty around oil and resin, history is our teacher. Mike had mentioned the other several force majeures already created some choppiness, if you will, in the supply chain of our major raw materials. I would say it's us being realistic, not conservative. Secondly, the global supply chain currently is very choppy, whether it's capital projects or machine purchases or imports on materials, both from an inflationary and cost and timing perspective. It's certainly something that we've got to keep our eye on. Rich Kedzior, So inspecting more, I would say more, you know, back half related for us is just Q2, I would say, you know, Rich Kedzior, We feel with pretty good visibility and and I would say are very optimistic, similar to this queue, but it's the back half of this year where the things I just mentioned are are why we're we're maintaining our guidance.
spk06: you know, we've settled on Bev merch. I mean, is there a possibility that Bev merch gets into the $30 million plus range, I guess, you know, with your work that you're, you're, you're, you've completed in the mills and, um, maybe some, some recovery on, on reopening. Well, I missed the front end of your question.
spk10: I'm sorry.
spk06: I was just saying, is, do you think that Bev merch could, could get into the $30 million plus range on EBITDA, um, per quarter? given a lot of the work that you've completed and, you know, some of the progress within the mills.
spk10: Yeah. I don't think that, I mean, I'll let Mike Reagan speak to the quarterly run rate, but I 30 million a queue, I think is, uh, within reach for sure.
spk14: Yeah. I, you know, Aaron, I think that 30 million a quarter absolutely is within reach for beverage merchandising. Um, and, um, you know, we, we obviously there, there can be large costs with mill outages that swing that around quarter on quarter, but on average, you know, 30 million is, you know, we would in the future be hoping for a lot more than that. But, you know, this year that's a reasonable run rate. I think, you know, just talking to, you know, and following on to what Mike said, you know, I'd said to the earlier question from Gancham that, you know, between when we did our budget or plan for this year, you know, our COGS have increased a couple of hundred million dollars in terms of the full year forecast. So, you know, you talk about pricing coming down. We don't, you know, we don't expect that. You know, obviously the market will do what it's going to do, but, you know, we've got to go and get another couple of hundred million dollars in pricing to cover that. So, yeah, you know, we sort of see it the other way that, you know, with costs going up, we've got to go and get after, you know, price even more so than what we have. We saw the good results in the quarter. And, you know, we are doing that. But, you know, as inflation keeps ticking up, we, you know, we have to keep chasing this. So, you know, that's where a lot of the risk is. Over and above that, you know, with, you know, interest rates going up and all of these other different things going on in markets, you know, demand may soften. So, you know, we're just looking at, you know, the full year in a pragmatic way. We don't want to get ahead of ourselves, even though we had a good Q1.
spk04: Thanks.
spk03: The next question is from George Tafos with Bank of America. Please go ahead.
spk11: Hi, guys. Thanks for taking my question, and congratulations on the quarter. And a couple of things, too. One, to Busy Earnings, they really appreciate you keeping the remarks short, putting the release out last night helps the analysts, and congratulations on changing the FCF format as well to be in line with everybody else. My questions, guys, one, can you give us a bit more on the McDonald's Cup, number one? Number two, as you are restricting to some degree your shipments to rebuild inventories, which is what you said last course, that's not a change. Is that helping you at all in terms of being able to get more pricing, which you need, obviously, given the inflation? And then lastly, you know, as we look at the 2Q, you know, I'm not trying to go too much quarter by quarter, but I guess I am to some degree. You're up against some tougher comps in food service versus last year, as I recall. What's the outlook for volume growth for the food service segment in 2Q? Thanks a thousand. Good luck in the quarter.
spk10: I'll jump on the McDonald's Cup here. It's one of many streams we've got going from an innovation standpoint where we're partnering with our customers. Certainly as we look for new ways to be sustainable, to be a leader in the space of social responsibility, it's just one of the many things we've got going. Specific to that, it was a collaboration really between McDonald's and our technical teams to bring something forward that no one had done really before using a circular approach. We're excited to do it. We're optimistic that the 28 locations that are currently selling those cups expands to something bigger and I think it's indicative of what you should expect from us in the future in terms of bringing interesting, new, and innovative, sustainable approaches to the market.
spk14: Okay. And with regard to your other two questions there, George, in terms of restricting shipments and helping price, that's certainly not our intent at all. For us, it's all around you know, getting service back to the levels, the historical levels that, you know, our key customers expect of us and, you know, continuing to maintain those. And, you know, we are seeing good progress in that regard. In terms of the tougher comps for Q2, in terms of food service, we would say that we will be up. year-on-year in Q2 when backing out the effect of fabric out 1% or 2%. Essentially, we have restored the inventory levels to where we want them to be for food service. We would expect a normal flow of inventory out in food service. We don't We don't see any issues with Q2 year-on-year comps in terms of expected growth.
spk04: Thanks, Mike. I'll turn it over. Of course.
spk03: The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
spk02: Yes, thank you. Good morning, everyone. I guess the first question is around the food merchandising outlook and just trying to get a sense of volumes in the period and the outlook going forward and maybe disaggregating the impact you've had around lower inventories and some of the conscious decisions you've made around rebuilding your own stocks versus lower end market demands, and then how do we think about those volume trends moving forward, and any specific categories or parts of the store that you would call out as being particularly maybe stronger or weaker would be helpful. Thank you.
spk10: Yeah, so our food merchandising business is... You know, from the segmentation standpoint, you know, it includes our ag business, our egg business, our protein business, as well as some of our consumer business. So it's several channels, and it's, you know, there's not a one-size-fits-all answer, but what I can tell you is, you know, similar to what we've commented on food service, our approach is the same in terms of inventories. What we've noticed is between seasonality and some events like the avian influenza that we've seen with the poultry, it does have an impact on product availability, which does impact demand. So we have seen some softening, but we do believe it's seasonal on products like egg. Conversely, we see demand rapidly increasing given seasonality and demand on areas like our agriculture or our produce business. So, you know, it's a moving target in some of the channels. So, you know, we're adapting. But the goal to reestablish inventories and allow us to improve service levels is where we continue to see ourselves be strong. And that's what our plan is, is to win despite those one-off challenges in each of our segments. We're watching our consumer channels close for demand. Right now, through Q2, things seem to be fairly stable. But, you know, again, the things we talked about in terms of this back half are something that's specific to our food merch business. We're watching closely.
spk02: Okay. All right. That's helpful. And then maybe following, I think it was Chris's question earlier on Fabrikal. Yeah. It seemed like the EBITDA framing for that business for this year was maybe higher than you would have said at the time of the acquisition. What's that business growing organic volumes, and is that outlook improved? Because that's going to start rolling into your base later in the year. So I'm just trying to think about how that starts to layer in.
spk10: Mike, do you want to take that one?
spk14: Yeah, sure. The business itself, you know, is growing in line with food service volumes in, you know, particularly around the ESG type products. You know, the cups that Fabrikow sells, you know, are very much, you know, they're recycled PET and other ESG considered products. So we're seeing good growth there in terms of those volumes. In terms of the outlook in the latter part of the year, yeah, we do expect as the synergies start to kick in that we will see a lift from Fabrikow through the back half of the year.
spk02: Okay, if I could just take a quick modeling question at the end. The corporate unallocated in the period was up pretty notably year on year and I'm Is there a cadence or anything noisy in there? What should we think about for corporate unallocated for all of 22?
spk14: I'm expecting that it will be reasonably consistent with the in-quarter results, so it will be up a little bit. We have added headcount. We've got higher personnel costs. And then over and above that, we're spending a lot more money on on things like cybersecurity and, and those sorts of things. So it, you know, we do expect it to be up and to continue to trend up.
spk02: Okay. I appreciate all that color. I'll pass it on. Thank you. Okay.
spk03: The next question is from Anthony Pettinati with CD. Please go ahead.
spk13: Hi, this is actually Brian Bergmeier sitting in for Anthony. I understand Paktiv doesn't, provide free cash flow guidance, but is it possible to provide some context around free cash flow conversion for the year? You know, with raw material costs rising, some other producers are setting a working capital headwind despite improved earnings. So I'm just trying to gauge that impact to PACDIV and if that could potentially impact deleveraging.
spk14: So, you know, when we talked last quarter, I said that one of the headwinds in terms of free cash flow would be that we'd be building working capital during the year. And so I estimated a circa $100 million headwind on cash flow conversion because we're building inventories. The good news is that we have been able to offset some of that in terms of improving our receivables and payables. And so what I'd expect to see is that rather than that being $100 million, it will be probably on an annual basis, December to December, probably more like $50 million increase. And what I mean by that is inventory will continue to go up, but based off strong cash collections and other efforts around payables, we'll offset some of that headwind on inventory.
spk13: Got it. Thanks for the color there. And on your full year EBITDA guidance, food service was obviously really strong in one queue. So I'm just trying to think about the Different segments, the level of year-over-year growth for the different segments for the full year. Do you expect food service to see the largest portion of that growth? Obviously, beverage merchandising was up quite a bit as well. I'm just trying to think about the year-over-year EBITDA growth and how that could layer into each segment.
spk14: Yeah, sure. I, you know, it's no doubt food service will, we'll see a lot of growth year on year. Um, you know, that's driven by the, uh, you know, the, the fabric, our acquisition, and then, you know, natural growth as we've come back from, from COVID. And so, you know, uh, I guess in terms of where we're sort of seeing it, we'd expect, you know, food service, um, to, to grow from, you know, last year, you know, slightly below sort of $300 million to more like, you know, 400 ish. Um, and then, you know, food merchant, uh, beverage merchandising, When I think about that segment, you know, last year it had, you know, some big hits in terms of winter storm Uri and the flood in Canton. And so, you know, those are natural tar winds for that segment of, you know, let's call it $50 million round numbers. And then, you know, over and above that, we'll see improvement because of the closure of the Kota Groundwood complex at Pine Bluff. then some other improvement there so you know roughly speaking you know we'd be going from you know the 40 odd million dollar sort of number last year to you know in the in the somewhere between you know 115 and 130 so and then the remainder would be in food merchandising essentially
spk13: Got it. Thanks, Mike. Good luck in the quarter. Thank you.
spk03: The next question is from Anoya Shah with BMO Capital Markets. Please go ahead.
spk01: Hi. Good morning, everyone. I'm just thinking about the fact that consumers have been eating and cooking at home a lot more over the past two years. Do you think some of that behavior is sticky and then you know, medium-term demand, do you think demand for food service might shake out lower than it was pre-pandemic?
spk14: I think, you know, it would be more of a personal view than anything, but, you know, in terms of, you know, people wanting to stay home and cook, I think there's, you know, some people that have, I think what we're seeing is, you know, that People have sort of started doing that, but people really want to get out and spend money and get out and go to restaurants. Having said that, in this economic environment, it's a little difficult to tell. That was certainly what we had been seeing, but what will happen in the future, I'm just not sure.
spk10: You know, the thing I would add to that, Mike, is what we've seen with the home delivery. So where people are home, that's correct. We've seen a significant shift in the consumer's behavior to, you know, the likes of a DoorDash or home delivery model, which is, you know, from a takeout food service container standpoint, additive growth. So, yes, they're home, but they're buying in their food. Right.
spk01: Makes sense. Okay, and then just one follow-up question. We've been hearing quite a bit recently about PFAS chemicals, particularly in food packaging, but particularly in the QSR channel. Do you have any comments or views on that?
spk10: Not particularly. I mean, you know, forever chemicals are something that's a challenge we're all faced with, and You know, we're partnering with our customers to address the challenges we all face. So is there a specific to that? I mean, it's something we're certainly aware of and taking serious.
spk01: Yeah, just if you're seeing any impacts, like significant impacts yet.
spk10: I wouldn't say significant impacts at this time.
spk01: Great. Thank you very much.
spk03: The next question is from Kylie White with Deutsche Bank. Please go ahead.
spk15: Hey, good morning. Thanks for taking the question. Just wondering if you could update us on your labor levels and where you're at relative to where you'd like to be. You know, what's the current vacancy rate? And also on this, do you have a sense of kind of the headwind you're carrying from the, I imagine, the increased training that's going on as well? Thank you.
spk14: Yeah. Um, I'll, I'll, I'll take this one. So, you know, we, um, in terms of where we are versus, uh, you know, where we expect it to be, you know, just as a bit of color, we came into the year, you know, behind, um, in terms of our labor levels as to, you know, what we planned, but now we're, we're on track and actually slightly ahead, uh, in terms of, um, the, uh, the vacancy rate, you know, Mike King had spoken before about being, you know, in the past we'd been over 10% vacancy. And then when you add over and above that COVID related absences, uh you know we we could see up to 15 you know vacancies at any point in time between you know the sickness absence and the actual shortage of labor uh employees so now we're we're down at the circa five percent levels um and you know we're continuing to trend favorably there in terms of the headwind around around training um You know, look, we are spending whatever it takes to get people into our plants and trained up safely and to get them through our system to retain them. We are seeing a lot of turnover still. In terms of aggregate costs around that, our labor inflation in total is up over the 10% levels. but mostly driven by our plants. In terms of the training itself, the costs associated with that are probably somewhere around $30 million per annum. It's a difficult one to actually quantify because a lot of it's internal training. It's just stuff that our our plant leadership does on a day-to-day basis every single day they're out there teaching people but the direct cost would be around 20 to 30 million dollars increase year-on-year got it thank you and then you made a number of you know strategic decisions and divestments over the past year you pruned the portfolio a little bit you have the strategic review
spk15: in the beverage merchandising segment. Are you happy and content with the current portfolio now? Are you happy with the path forward that you see for that segment with the improved mill performance that you've talked about? Or does anything in terms of the return threshold of those mills make you more content to be the owners of that business? Or is it something to where maybe you're not the logical strategic owner of those two mills? Thanks.
spk10: Yeah, so what I'll say is our strategic review, as I've mentioned in prior cues, is an ongoing iterative process. So all of our businesses, as a part of our internal process, we continue to look at the portfolio and what makes sense and what might not. In terms of beverage merch, I would say for where we are, we are pleased with our ability to improve our mill performance and certainly our converting operations continue to deliver and do well. I would say that it would be irresponsible of us not to continue to move forward in the strategic review process. We are looking at ways to further improve and enhance our portfolio. So it's still too early to say you know, to answer the latter part of your question, your line of questions there. But I would just say that our process continues. And as we make decisions, we will be very forthcoming with those decisions.
spk15: Got it. Thank you. And congrats on a strong quarter.
spk04: Thank you.
spk03: The next question is from Ed Barkley. Please go ahead.
spk05: Hi, thanks for taking the question, and congrats on the strong quarter again. I just wanted to get your – or see if you were able to share the use of proceeds for the carton packaging and machinery business in Asia. I think it was $335 million. I just wanted to see what you're planning to do with that.
spk14: Yeah, good morning. At this stage, we'd be planning to pay down debt with that.
spk05: Got it. And then just from a capital allocation perspective and given that commentary, you're looking to pay down debt. You're looking to deleverage. But I just wanted to get your kind of priority list, I guess, for how you view shareholder returns, how you view debt reduction, and then how you view potential M&A in the future as well.
spk14: Yeah, I don't think anything's changed there. Um, for us, you know, we, we do want to deleverage that, you know, first and foremost, um, you know, what, what, you know, what we want to do, uh, in terms of, uh, you know, paying the dividend, we do want to continue to do that. Um, we think it's, it's a good practice for us. Um, in terms of, you know, capital investment, um, you know, we, We still think we're pushing ahead with our capital programs, investing into our business. We talked in the past of being somewhere around $295 million this year in those investments. In terms of acquisitions, Similar to Fabrica, we aren't out hunting. We aren't doing anything like that. But if the right thing comes along, we'd consider it. But, you know, that's nothing new there. So I think our priorities, you know, remain the same.
spk04: Yep.
spk03: The last question is from Andy Sheffer with Onyx Creative Partners. Please go ahead.
spk09: Hi, good morning. Thanks for taking my questions. Regarding your comments on inflation and the back end here, is the hesitancy any concern about the ability to ultimately pass it through and customer pushback, or is it purely a timing issue?
spk10: I would say, yeah, timing for sure.
spk09: Yeah, it's a timing issue. Okay, and then your comments on force majeures. Can you expand a little bit upon that in terms of how, you know, the size of them, how often, and the circumstances surrounding them?
spk10: Yeah, so the last 24 months seems to be a bit of a new normal when it comes to force majeure. And so whether it's chemical facilities, constituent factories, or even some of our – The cracker facilities for for these large resin companies. You know, there's just events that are continue to expose weakness all throughout the tiered supply chain and You know, whether it's aluminum or it's, you know, styrene monomer like seems to be a new weather event or, you know, a breakdown. You know, equipment reliability concerns further in the supply chain or even What's happening across the world have all led to just, you know, choppiness, I would call it, more than, you know, significant. And it's put pressure and allocations on several of the constituent parts of our supply chain. And that's something we've been faced with for, you know, the better part of the last 36 months and hasn't really slowed down.
spk09: Are you seeing the timing to work through those issues decline?
spk10: I would say we're seeing, and as soon as I say this, I'll regret it, but the severity of some of these things has gotten better. The ability of our supply chain, frankly, to address them, yes, is improving, albeit there's new and interesting ways that continue to pop up to have a force mature.
spk04: Thank you.
spk03: Yeah, one more question from James Finnerty with Seating Group. Please go ahead.
spk07: Thanks for taking my question. Hopped on late. I apologize if this has been answered already. Just on the leverage side, what is the leverage goals of the longer term and what debt should we expect you to be paying down as you look to deliver the balance sheet?
spk14: I think, you know, we've nothing's really changed in terms of, you know, where we want to be, you know, around, you know, three to four times, uh, would be a good target. And then, you know, in terms of what debt, um, you know, we have a 2025 maturity, we have, um, you know, we have term loans, you know, whatever makes sense at the time is, is really the answer I can give them in terms of what we'll pay down.
spk07: Great, thank you. And then on the reiterated EBITDA guidance for the full year, just given post-first quarter, would you say you're more confident in that number today than you were when you reported fourth quarter results?
spk14: I think we were confident in the number before and we're confident in it now. When we talked last quarter, We discussed that we want to absolutely put a number out there that we can hit, and that's what we're aiming to do. So we're confident, and we were confident then and are confident now.
spk07: Great. Thank you very much.
spk03: This concludes our Q&A session. I would like to turn the conference back over to Mike King for any closing remarks.
spk10: Thank you. Yeah, I would just like to say thank you for joining us here at the end of Q1. We look forward to another successful quarter and getting back to you guys at the next earnings. Thank you.
spk04: This conference is now concluded.
spk03: Sorry. Excuse me. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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