Pactiv Evergreen Inc.

Good day, and welcome to the PACTIV Evergreen Incorporated fourth quarter 2022 earnings conference call. All participants will be in a 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Kurt Worthington, Vice President, Strategy and Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for your interest in Pact of Evergreen, and welcome to our fourth quarter 2022 earnings call. With me on the call today, we have Michael King, President and CEO, and John Bocht, CFO. Please visit the events section of our investor relations website at www.pactiveverygreen.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 would like to remind everyone that our discussions today will include forward-looking statements, including, but not limited to, statements regarding our guidance for 2023. 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 can 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 31st, 2022 for 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 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's president and CEO, Michael King. Mike?

Thank you, Kurt, and good morning, everyone. I'd like to start by welcoming Kurt to his new role as vice president, strategy, and investor relations. Kurt brings more than 25 years of experience in the industrial and finance sectors, and we're excited to have him on the Pact of Evergreen team. Yesterday, after the market closed, ActiveEvergreen released solid fourth quarter and full year 2022 results, which exceeded the high end of our full year guidance range of $760 to $780 million. Our $785 million of full year adjusted EBITDA highlights the many strengths of our organization as we accomplish numerous goals while managing through the obstacles presented to us over the last couple of years from the onset of the pandemic. Turning to the agenda on slide four. I will start today's call with a strategic update as well as some details of the beverage and merchandising restructuring plan that we announced yesterday as a part of our earnings released and related SEC filings. I will then provide some comments on our 2022 full year highlights. John will then discuss Q4 results and full year financial performance in more detail. Finally, I will cover our ESG update and their 2023 outlook and then we'll move to some Q&A. On slide six, starting with an overview of how we are driving strategic focus at PACT of Evergreen, we know who we are as an organization and what our strengths are. We intend to continue to execute with a high level of focus on these strategic areas. We are focused on food and beverage. We are number one or number two in the majority of our markets, and we have strong relationships with our customers, many of which are large blue chip companies. We are focused on North America. This is where we see our best opportunities for profitable growth. This is where our operations and our customers are and where we are operating at scale. We are focused on converting operations and are decreasing our exposure to high capital intensity, low margin, raw material operations. We will discuss this further as we get into the details of our beverage and merchandising restructuring announcements. We are focused on sustainability, making sure that our products are environmentally friendly and anticipate the sustainability desires of our customers. We are on trend. The packaging space is constantly changing. We are constantly innovating to stay ahead of the latest trends. We are a packaging solutions provider. We don't just sell cups or containers. We provide our customers with complete solutions that address their needs across all types of substrates and applications. And importantly, we generate dependable returns. We have balanced product and in-market exposure. We are focused on driving profitable growth and generating consistent returns for our shareholders. Moving to slide seven, we have consistently emphasized several key themes in our communications. We said many times that we would focus on our core North American high-margin business, that we would streamline our operations, that we would deleverage, and that we would put a high level of focus on ESG. As we stand in early 2023 and look back, we can be proud of what we have done in each of these areas. We've already made great progress in reshaping our portfolio to focus on our core in North America. We've executed multiple divestitures of non-core businesses, including the sale of our Asia beverage merchandising business, which realized proceeds of over $330 million. We acquired Fabrikal, expanding and strengthening our position in the food service and consumer packaged goods businesses and integrating great brands such as greenware and recycleware. We have centralized our organization, reduced our net leverage ratio, both by paying down debt and by increasing adjusted EBITDA. And we are continuing our strong focus on ESG. Today, we will discuss what is next. The beverage merchandising restructuring plan we announced yesterday is the next big step in our evolution to become a stronger, more competitive business. This will be a significant multi-year effort designed to further advance all priorities that we have established. Moving to slide eight, we previously announced that we would undertake a long-term strategic review of our beverage merchandising segment to identify options to optimize its footprint, implement manufacturing improvements, and identify operational efficiencies to help us meet our customers' changing needs and strengthen our leadership position in food and beverage packaging here in North America. This evaluation process has led to a number of significant changes in this segment, including the sale of several international locations. We have progressed our internal strategic review further, and our board has approved further actions which include simplifying our production strategy to more effectively align with our strategic focus. Additionally, we will be reorganizing our management structure and combining our food merchandising and our beverage merchandising businesses. These strategic actions are expected to reduce our ongoing capital intensity and fixed overhead costs. We intend to maintain supply continuity and take measures to ensure that we can continue to support our customers. We believe that these proactive steps will position us to remain competitive in position for sustained profitable growth and returns in the liquid packaging market by increasing our overall productivity and optimizing our manufacturing footprint. Moreover, as part of these actions, we expect to ultimately exit the uncoated free sheet paper market, which is our lowest margin operation. Flight 8 shows a high-level view of what our beverage and merchandising business looked like at the time of our IPO in 2020 and what we project that it will look like in the future. In 2020, this business had a large global footprint and was a low-margin, high-capx business with vertically integrated manufacturing, including our mills. Since our IPO, the integration of the beverage merchandising business, Evergreen, into the legacy pack of business has been a strategic priority. The business included operations in Asia, Central America, and the Middle East, with 14 facilities and 5 million square feet of manufacturing space. We've already executed a number of actions to reshape our portfolio. We've exited the coded ground with paper business, as well as operations in Asia, Central America, and the Middle East. The additional restructuring actions we've just announced envision an evolution in our business profile to one that is focused on carton converting and filling machinery and is combined with our food merchandising business, reducing the number of facilities by approximately 40% and the associated square footage by almost 50%. These changes will drive significant cost benefits with a lower CapEx requirement and increased cash generation. Moving to slide nine. The key steps we plan to take as a part of our beverage merchandising restructuring over the coming months include, we expect to close our mill in Canton, North Carolina during the second quarter of 2023. We expect to close our converting facility in Olmstead Falls, Ohio during the second quarter of 2023 and concurrently reallocate its production to our remaining converting facilities. The plan will result in a workforce reduction of approximately 1300 positions We remain committed to doing what's right, treating everyone with respect and delivering on all our commitments. And we will provide outplacement assistance and severance to impacted employees consistent with the company's policy and labor union agreements. I also want to take this opportunity here to express my gratitude to our dedicated employees at the affected locations for their years of service. We are investing approximately $60 million in state-of-the-art equipment which supports our converting strategy for our beverage business. We expect this investment will significantly lower our cost and will position us for growth in 2024. We will combine our food merchandising and beverage merchandising businesses into a single business starting in Q2 of 2023. As a result of the restructuring, we expect to incur non-cash charges in the range of $310 million to $330 million primarily during 2023 related to the acceleration of depreciation of plant and equipment. We also expect to incur and pay cash charges in the range of $130 million to $185 million during 2023 and 2024 related to severance and associated benefits and exit and disposal and other transition costs. Once these actions are complete, We believe our beverage and merchandising business will be better equipped to deliver more reliable and sustainable results. While we plan to incur one-time non-cash charges and cash outlies primarily during 2023 and 2024 to implement these plans, we expect to begin realizing the benefits to our operating results as we close out 2023 and move into 2024. We are targeting an annualized reduction in our cost of approximately $30 million and approximately $50 million in reduction of CapEx, with full annualized run rate of these benefits expected to be realized beginning in 2024. We also intend to continue exploring strategic alternatives for our mill in Pine Bluff, Arkansas, and our facility in Waynesville, North Carolina, while we continue to operate them. The company has not yet set a timetable for completion of this review. Overall, we believe our restructuring plans will enhance our ability to deliver shareholder value through reduced operating risk and earnings volatility and will reduce the capital and overhead required to sustain the business, all while maintaining high service levels for our core customer base. Moving to our full year 2022 highlights on slide 11. 2022 was another productive year for us. This great organization executed very well on many fronts, We reported full-year net revenues of $6.2 billion, a 14% increase over the prior year on strong pricing and cost pass-throughs combined with the benefit from the acquisition of Fabrik Health. Our sales volumes declined 8% largely due to the outsized impact of the reopening of the U.S. economy post-COVID lockdowns in the prior year and softening sales volumes into year-end. Additionally, the sale of our beverage merchandising Asia business in Q3 of 2022 contributed a further 2% decline in volume year over year. Our year over year revenue performance highlights our successful efforts to manage price while restoring the business to target customer service levels. We stabilized our workforce, invested in inventory to return to target levels, improved equipment effectiveness and production throughput, and effectively managed our pricing amidst a challenging inflationary environment. We ended the year with strong operating results Our full year adjusted EBITDA of $785 million, which exceeded our most recent guidance, is a testament to the company's resilience in the face of challenging market conditions brought on by elevated inflation and interest rates, a tight labor market, and the resulting market volatility. During the year, we were able to further divest non-core businesses for aggregate cash proceeds of $383 million. We reduced our net leverage ratio to 4.6 times as of year end, down from 7.6 times at the end of 2021. In addition, we transferred an aggregate $1.9 billion of gross pension liabilities off of our balance sheet. I would also note that the Legacy Pact of Evergreen Pension Plan is fully funded. We published our updated ESG report in August 2022, and we remain focused on our ambitious goals, one of which is having 100% of our net revenues in 2030 come from products made from recycled, recyclable, or renewable materials compared to 66% in 2022. I want to thank everyone at Pact of Evergreen for the diligent efforts and focus that helped us achieve these accomplishments. Looking at 2023, we are, of course, well into the year, and we have more work ahead of us to continue delivering on our commitment to streamline our business and enhance shareholder value. Our areas of focus during 2023 will include the efficient management and execution of our restructuring plans, delivering for our customers, proactive workforce trading, productivity, and our commitments to sustainability that I will touch on in my concluding remarks. I will now turn it over to John to discuss our fourth quarter highlights, business drivers, and fourth quarter segment performance before my discussion on ESG, outlook, and closing remarks.