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Operator
Good day, and thank you for standing by. Welcome to the Pactive Evergreen conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kurt Worthington. Kurt, you have the floor.
Kurt Worthington
Thank you, operator. Good morning, everyone. Thank you for your interest and back of everybody, and welcome to our third quarter 2023 earnings call. With me on the call today, we have Michael King, President and CEO, and John Vox, CFO. Please visit the events section of our investor relations website and www.tactiveevergreen.com and access our supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I want to remind everyone that our discussions today will include forward-looking statements, including those regarding our guidance for 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 could cause actual results to differ materially from what we expected. We refer all of you to our recent FTC filings, including our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly reports on Form 10-Q for the course ended March 31, June 30th and September 30th, 2023, for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures which we believe can be useful in evaluating our performance. Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to the most directly comparable GAAP measures are available in our earnings relief 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 FACTS of Evergreen's President and CEO, Michael Kay. Mike?
Michael King
Thank you, Kurt, and good morning, everyone. Thank you for joining us today. Turning to slide four, we'll begin with an overview of the progress we've made against our strategic priorities, discuss our performance during the quarter, and then provide updates on our key financial metrics. At the end of the call, we'll open the line for Q&A. Turning your attention to slide five, I'm proud of the steady progress we've made toward our targets for 2023. Our solid performance during the third quarter would not have been possible without our dedicated team. We delivered 21% adjusted EBITDA growth during the quarter, with adjusted EBITDA margin increasing to 16.5%. In addition, we've generated $176 million in free cash flow and made further progress reducing our net leverage. Our teams continue to execute at a high level, navigating challenging market dynamics. Our solid third quarter results reflect the resilience of our business and the company's ability to deliver sustainable returns. As a result, we are revising our guidance upwards, which John will discuss in greater detail. We continue to leverage our broad range of product offerings, channel coverage, and distribution network to generate improved margins and free cash flow. We remain focused on our strategy of value over volume and continue to make progress emphasizing our higher margin product. focusing on operational excellence, and improving our balance sheet. We are confident that focusing on these strategic priorities will allow us to enhance shareholder value. Next, recall that last quarter we introduced the implementation of the Pactative Evergreen Production System, also known as PEPS, which promotes best practices and continuous improvement. During the second quarter, we shared that we anticipate eight plants to reach brown status by year end. I'm pleased to share that we are ahead of that target and during the third quarter, three of our facilities became PEP certified, increasing the number of our plants carrying brown status from six to nine. Longer term, we expect three to five of our plants to achieve silver status next year with our goal of having our first site become gold certified before 2025. While we are still early in the PEP's journey, the progress we have made since the second quarter is meaningful. We are enthusiastic about the impact this will have throughout the organization and waste elimination, and improving our operations saleability. We continue to win with our key strategic customers. As we highlighted during our second quarter earnings call, our business is outperforming its end markets, partially by aligning with customers that are well-positioned for long-term growth. We benefit when our customers succeed, and our strong partnerships provide better insight into their needs. In addition, our team has been able to adapt to broader changes in demand, enabling us to better align with our customers. Although our end markets are moderating, here at Pact of Evergreen we are seeing positive momentum as we continue to strategically align with our key customers. Meanwhile, we remain committed to effectively balancing production costs with demand levels. And we are pleased with the progress we've made to control costs and improve efficiencies. Foot traffic in QSRs and full-service restaurants was down slightly compared to last year. However, our alignment with key strategic customers allowed our food service segment to outperform the market. Over the past year, as consumers transitioned to lower cost calories, they have continued to shift their spending from restaurants to the grocery store. And within the store, they've allocated their budgets to product categories that benefit Pack the Better Grant. Outside of those elements, we've also been disciplined in our value over volume approach, which has supported our price realizations during the quarter. In addition, We've been successful in reducing our manufacturing costs to drive higher profits and improve our margin profile. We've made considerable progress on the beverage merchandising restructuring during the year, including the closure of our Canton Mill and our Olmstead Falls converting facility. Reorganization of our management structure and the related combination of our legacy food merchandising and beverage merchandising businesses into a single segment We remain confident these actions will reduce our capital intensity and overhead costs and position us to remain competitive in the liquid packaging market. Moving to slide seven. This past year has demonstrated the resilience of our business model and our ability to grow adjusted EBITDA and free cash flow through the economic cycle. Last quarter I highlighted the operational excellence aspect of our transformational journey. This quarter I will highlight our diversified in-market exposure, our broad product offering, and our nationwide distribution footprint, as these are critical areas that support our value proposition and provide the foundation that our transformational journey is built upon. Today, we are uniquely positioned to provide sustainable product solutions to our customers with scale and reach unlike any other food service or beverage packaging provider, starting with our diversified in-market exposure. We sell across full-service restaurants, QSRs, convenience stores, broadband distributors, food processors, grocery stores, and beverage companies. This means that no matter where consumers spend, whether it be inside or outside the home, we have the scale to meet their needs. This partially insulates us against macroeconomic headlines as consumers shift the behavior to favor one channel over another. This is especially important in the current environment as consumers have altered their buying patterns to adapt to the impact of inflation. As mentioned previously, higher menu prices have caused consumers to trade down from higher end restaurants to QSRs, to lower tier fast food restaurants. Our food service business serves the full spectrum within the restaurant channel, so it is a shift from one outlet to another which gives us the opportunity to capture that foot traffic. Higher menu prices have also forced consumers to shift their spend from the drive-through window to the grocery store. With our presence throughout the grocery store, from the fresh food and beverage options at the perimeter of the store to other options in the center aisle, our food and beverage merchandising segment is able to capitalize on this shift and secure those volumes as they migrate over from food service. In this dynamic economic environment with ever-changing consumer trends, we expect that our diverse end market exposure will allow us to continue to realize profitable growth, even with shifts in consumer behavior. Turning your attention to slide 8, we believe that we offer the broadest array of products and substrates within the food and beverage packaging industry, and we're constantly working to innovate and develop the highest quality, environmentally friendly products. This is a sustainable competitive advantage for us, and it offers convenience and peace of mind for our customers. The breadth of our product offering enables us to respond quickly to changing customer needs. We can pivot to where the demand is and insulate ourselves from any singular trend at the product or customer level. We are considered a solutions provider with a host of technical and supply chain services, which has afforded us the ability to build strong strategic partnerships with our customers and become a critical component of their supply chains and future strategies. In many cases, we are the supplier of choice to help our customers meet their packaging-related sustainability goals. Because we play such a vital role in our customer supply chains and cover such a wide spectrum of their packaging needs, our customers have a strong incentive to work with us to develop next generation products and substrates. We have the expertise and the know-how to engineer sustainable solutions. Impact of Evergreen minimizes disruption for our customers with the convenience of a turnkey solutions provider. Turning to slide nine, Our strategically located distribution footprint is another key differentiator that allows us to offer best-in-class service to our customers. It also gives us an exclusive vantage point into the value chain from upstream packaging production to downstream packaging consumption and all the stages in between. Not only do we have a broad national manufacturing footprint, we also have a strategically located hub-and-spoke network of distribution centers that allow us to deliver products quickly and efficiently while meeting the precise needs of our customers. Many of our distribution centers are also close to our largest, most strategically important customers, ensuring we deliver products in a timely manner. As a result, while a lot of other packaging companies rely on just-in-time delivery, our customers can count on us for just-in-case inventory management. Our distribution centers carry stock across all categories to enable us to adapt quickly to changing customer needs. We work closely with our customers on demand forecasting, which allows us to better anticipate changes and adjust our production and inventory levels accordingly. Our manufacturing operations benefit from reducing variability caused by changing demand levels, and our sales teams benefit from the competitive advantage of playing a critical role in our customer supply chain. We remain committed to further optimizing and improving our distribution network to operate more efficiently and meet the evolving needs of our customers, while also supporting the long-term sustainable value creation. Turning to slide 10, the market backdrop remains challenging as elevated inflation continues to impact consumers' purchasing decisions. More recently, we are beginning to see encouraging signs of moderating volumes. on both a sequential and year-over-year basis. In general, consumers continue to allocate spending to adjust for higher food prices and prioritize channels and product categories that we participate in. We continue to position ourselves so that we are strategically aligned with customers that are industry leaders. We believe they are winning in their respective markets, so we benefit when they succeed. On that front, we have seen limited promotional activity by some of our customers, which contributed to our third quarter volume. Although we have not seen large-scale promotional pricing yet, to the extent that overall customer promotional activity picks up, that would be a net positive for the sector as well as PACT of Evergreen. Regarding the raw material cost environment, the trend in 2023 has been lower cost than 2022. We've made a concentrated effort to reduce our lag and our contractual pass-through mechanisms, and we don't expect the recent commodity price volatility to have a material impact on the results for the rest of the year. Finally, we continue to manage our controllable costs by improving efficiency and productivity across the organization. As a result of our operational efficiencies, we are seeing significant benefits to our adjusted EBITDA and free cash flow. And as a result, we've been able to strategically allocate cash to pay down debt, reducing our interest expense and improving our overall net leverage. Our beverage merchandising restructuring continues to progress on schedule, and we remain on pace to achieve our operational milestones that we communicated from the onset. As a reminder, this is an effort to streamline our physical footprint to focus on converting operations, resulting in lower operational costs and a more capital-light operating structure, both of which support increased cash flow generation overall has taken a tremendous effort from all of our employees, particularly at the impact of facilities, to help us continue to execute according to this plan. And I'm also very proud of the dedication and commitment and hard work along the way. With that, I would now like to turn the call over to John to discuss our third quarter results in more detail. John?
Kurt
Thanks, Mike. I'll start with our third quarter highlights on July 12th. We reported net revenues of $1.4 billion for the quarter, While this represents a decrease of $230 million compared to last quarter, most of the decline reflects the restructuring and portfolio optimization we have carried out. This includes the shutdown of the Canton Mill in May of this year and the sale of our Asia operations last August. Excluding those actions, our revenue was down approximately $87 million, which is mostly due to the lower raw material cost environment compared to last year, as well as strategic value over volume decisions. Third quarter adjusted EBITDA was $227 million compared to $187 million in the year-ago period. The increase reflects our success with improving our mix while maintaining cost discipline across the organization. Our efforts delivered adjusted EBITDA margin expansion of 120 basis points compared to the last quarter and 480 basis points compared to the year-ago period to 16.5%. As we've discussed in prior quarters, We remain focused on managing our control over costs to maximize profitability and free cash flow. We increased free cash flow to $176 million in the quarter, despite $34 million in restructuring-related cash outflows. We continue to make progress, better aligning inventories with our customers, and have been successful in maintaining more normalized inventory levels, which in turn frees up cash. Our ability to generate strong cash flow continues to help us pay down debt. and during the quarter, we reduced our net debt by $160 million. Due to our improved adjusted EBITDA performance and debt reduction, our net leverage has improved to 4.2 times, which is ahead of our goal to be in the low fours by year end. We effectively achieved that goal during the third quarter. Continuing on slide 13, I'll cover our third quarter year-over-year results. As a backdrop, last year benefited from historically favorable spreads driven by attractive supply-demand dynamics and the timing of our contractual passers. Those spreads began to normalize this year as raw material costs moderated while volumes remained under pressure due to elevated inflation levels. Starting with net revenue, we saw a decline of 14%, mainly due to the closure of the cannon mill within our food and beverage merchandising segment. Excluding the Canton closure and the divestiture of our beverage merchandising Asia business, revenue declined by 5%. Bindings are down 4% in the third quarter, primarily driven by strategic value over buying decisions in food and beverage merchandising. Price mix was down 2%, mainly due to lower contractual pass-throughs, as the overall raw material cost environment is lower than last year. As I'll cover in greater detail with the segment results, we continued to outperform relative to our end markets and our financial performance in the quarter reflects this. We delivered an adjusted EBITDA increase of 21% to $227 million. We benefited from lower material costs and we were able to offset lower overall volumes and pricing by managing our manufacturing and transportation costs. We are also seeing the benefits of our productivity initiatives and restructuring efforts. Free cash flow increased mostly due to improved operating results and a net working capital benefit, including the impact of working down the prior year strategic inventory bill, partially offset by restructuring related cash outflows and higher capital expenditures and interest pay. Moving to slide 14 for a sequential quarter comparison. Net revenues were $1.4 billion, down 3% from the prior quarter. The slight decrease was mostly due to the volume impact from the Canton Mill closure and value over volume decisions in our food and beverage merchandising segment. We also experienced slightly lower price mix driven by the contractual pass-throughs of lower material costs. Adjusted EBITDA was $227 million to the quarter, a $10 million increase from the second quarter. We benefited from lower manufacturing costs, which are partially offset by higher material costs, net of cost pass-throughs, an unfavorable product mix. Free cash flow increased compared to the second quarter, mainly due to improved operating results, the timing of interest payments, and continued optimization in inventory levels, partially offset by higher capital expenditures. Turning to slide 15, we'll look at our results by segments. Our food service segment continues to perform well against the challenging market backdrop. Lines were essentially flat versus last year, which is constructive given that our end markets were down low single digits. Our customers have implemented targeted promotions, but these have been somewhat limited. At the same time, some of our key customers have gained share, and we have benefited from that dynamic. As in previous quarters, we continue to emphasize value over volume. On a year-over-year basis, price mix was down 5%. The decrease primarily reflects lower raw material costs, most of which were due to contractual pass-throughs and mix as we've been successful in balancing profitability and volumes. Our adjusted EBITDA increased 9% due to lower transportation and material costs, net of costs past year. On a quarter-over-quarter basis, volumes reflected similar seasonal factors as observed in the second quarter, with cold cups and back-to-school products increasing sequentially. Net revenues increased $19 million, or 3%, primarily due to higher volume and favorable price mix. Adjusted EBITDA was down $11 million, or 9%, due to higher material costs, net of cost faster, and higher manufacturing costs. Turning to slide 16, food and beverage merchandising experienced similar trends as in the second quarter, with customers responding to elevated inflation by reallocating their budget to categories like protein and eggs. In addition, The severe weather in California that delayed the fruit harvest in the first half of the year reduced overall fresh fruit quality in the third quarter. This resulted in reduced fresh fruit availability for packaging as a larger portion of the harvest was used for frozen fruits and other uses. On a year-over-year basis, revenue was down 23%. However, most of that was due to the Canton mill closure and the divestiture of beverage merchandising Asia. Apart from those factors, wine was down 6%. which included our strategic decision to exit select low-margin customer relationships as we re-evaluated our overall book of business following the closure of the Canton Mill. Excluding those factors, underlying volumes were down in the lowest single digits. Adjusted EBITDA increased by 27%, mainly due to lower material costs, net of costs passed through, and lower transportation costs, partially offset by the closure of the Canton Mill and lower sales volume. On a sequential basis, Net revenue was down by 12%, 8% of which was due to the Canton shutdown. Volume was down 2% due to value over volume decisions. Price mix was down 2%, mostly due to contractual pastures. Adjusted EBITDA increased by 19%, primarily due to lower manufacturing costs, including the impact from a cold mill mileage in the prior quarter, partially offset by unfavorable product mix. Our margins for the segment increased 470 basis points sequentially, demonstrating the benefits of the restructuring. Turning to slide 17, we continue to make progress on reducing our leverage profile and maximizing our free cash flow. Our net leverage ratio declined to 4.2 times in the third quarter, driven by a reduction in net debt and a sequential improvement in adjusted EBITDA over the last 12 months. we expect to make further improvements to our net leverage ratio by year end and our confidence that we'll be in the threes in 2024. In terms of free cash flow, we generated $176 million in the third quarter and $275 million year to date, which is ahead of our previous guidance. Our cash flow generation has allowed us to reduce debt by $523 million year to date, including $229 million of debt reduction during the third quarter. Based on current interest rates, this quarter's repayments would reduce our annual interest expense by approximately $20 million, a key contributor to future free cash flow growth. Factoring in the $1 billion of interest rate swaps we entered into during the fourth quarter of 2022, we now have 81% of our debt fixed with a total average interest rate of 6.35% as of quarter end. Regarding our capital allocation priorities, our approach aligns well with our long-term strategy and underlying consumer trends. We remain confident in our position as a market leader and our long-standing customer relationships support future growth. We are committed to delivering profitable growth, which in turn will allow us to meet our aggressive goals to deliver the balance sheet and preserve liquidity. As we make further progress on the beverage merchandising restructuring, we expect our business profile to benefit from lower capital intensity and reduced earnings volatility. Importantly, we have demonstrated our willingness to optimize our portfolio, by exiting non-core businesses to help us focus resources on growing our core markets. As we continue our transformational journey, we expect the next stages to be less transformational as the best beverage merchandising restructuring and more incremental, including some cost structure optimization and rightsizing. We expect that this may require incremental investments in the near term, generating cost benefits in the future and making our business model more adaptable. As we consider additional cost reduction initiatives Our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth. We believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing returns to stakeholders. Then in slide 18 in our updated outlook, we are pleased with our solid performance this quarter and year to date. Our company continues to execute at an elevated level across both business units, and we remain well positioned to capitalize on future growth opportunities. As we have highlighted, the outlook for the U.S. economy remains uncertain, as higher interest rates and still elevated inflation weigh on consumer spending, which may also impact our customers' purchasing decisions and order patterns in the near term. Despite these headwinds, our third quarter results demonstrate the resilience of our business and the company's ability to deliver sustainable results. To account for our strong performance year-to-date, we are updating our full-year fiscal 2023 guidance to the following. Adjusted EBITDA is now expected to be between $825 million and $835 million, compared to the range of $775 million to $800 million we provided earlier this year. Similarly, our free cash flow is now expected to exceed $250 million, which primarily reflects the increased guidance for full-year adjusted EBITDA. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate this will help us further reduce our net leverage ratio. Our full year guidance for capital spending remains $280 million, and we have tightened the range for total cash restructuring costs by bringing the low end of the range up to $150 million as we further refine our estimates. I'll also point out that that range does not include the benefits of any cash proceeds from the possible sale of any property and equipment from the facilities impacted by the beverage merchandising restructuring. As we have highlighted previously, We anticipate approximately $120 million of cash restructuring costs will occur in 2023. I'll now turn it back to Mike for closing comments.
Michael King
Thanks, John. Effective Evergreen, we are committed to sustainability across our product portfolio, our manufacturing and supply chain, and our communities. We take immense pride in what we do, and we continue to invest in our ESG strategy to hold ourselves accountable in all areas of our business and operations. We know firsthand that delivering innovative, sustainable products at the scale we envision can't happen without innovative, sustainable operations. Innovation is key to our goal of increasing sustainable materials in our products. This quarter, we announced a partnership with ExxonMobil to offer customers certified circular polypropylene packaging products made with ExxonMobil's Xtend, advanced recycling technology. This collaboration allows us to offer our customers even more innovative packaging options, expanding our portfolio of circular packaging. We are also excited to announce the upcoming release of our new ESG report, our first based on internationally recognized GRI sustainability reporting standards. The report will provide detailed updates on our initiatives across our ESG focus areas of planet, product, people, and governance, as well as a comprehensive set of ESG metrics. Also, the report will include the results of our first materiality assessment and the third party assurance report for our scope one and two greenhouse gas emissions and energy consumption. Our teams across the enterprise are eager to share the stories of their work to fulfill our purpose of packaging a better future. While we are early in our sustainability journey, we are proud of the progress we have made to date and our progress in other ESG initiatives. Lastly, I again want to highlight our team's execution and thank each of them for their continued dedication and hard work. We remain committed to leveraging the solid foundation we have established over the years with the ongoing objective of delivering sustainable long-term value of our stockholders. That concludes our prepared remarks. With that, let's open it up for questions. Operator?
Operator
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Gancham Punjabi with Baird. Gancham, please go ahead with your question.
Gancham
Yes, good morning. Thank you, operator. Hey, guys. Good morning. You know, I guess first off, as we kind of think about 3Q and, you know, the upgraded outlook for the fourth quarter, can you give us some specific parameters as to exactly what's driving that upside? You know, is it just progress on restructuring savings? Maybe the end markets were a little bit better than you thought. What's driving that?
Michael King
Yeah, I think you got it right, Yancho. You know, we're seeing better flow through of our cost of initiatives and our operations as we – we work on waste elimination so that's flowing through and then I do think you know stronger you know stronger performance both on the value over volume side as well as just our key strategic initiatives flowing through as I mentioned before okay and then just related to that maybe you could just quantify so that 40 million increase in EBITDA year-over-year during the third quarter how much of that was from
Gancham
cost savings, and at this point, are you able to share any sort of flow-through effect into 2024?
Kurt
Yeah, so if you look at the various cost-saving initiatives, you know, it's hard to disaggregate exactly what do we get from things like PEPS and all the operational improvements, some of the different initiatives around streamlining our supply chain, and then the restructuring itself. But what I would say in terms of quantifying going into next year and just reiterating prior guidance that we've given, you know, as it relates to the restructuring itself, we got it to $30 million of benefits on a run rate basis going into 24. So we are on track to deliver those going into next year. And you are seeing some of those benefits hit in Q3 and some of the Q4 guidance that we're providing.
Gancham
Okay, terrific. Thanks so much.
Operator
Please stand by for our next question. Our next question comes from George Staffos with Bank of America. George, please go ahead with your question.
George Staffos
My first question would be this. You know, you've done a wonderful job in terms of leveraging what PACT has always had, you know, the distribution network, the diversified manufacturing. and pushing value over volume. Could you quantify for us, if possible, what you think your ASP has moved up in your segments, say this quarter versus last year's quarter or year to date this year versus last year, adjusted for inflation? So if we try to figure out how the value or volume is coming through, is there a way for us to map that progress in that way? Second question I had, if we go to slide 21 and look at your, in the index, the appendix, your cost performance, is there a way to break out how the 94 million of COGS year on year in the quarter split out between raw manufacturing productivity and the like? Thank you, guys.
Kurt
Sure, George. This is John. And just to check, can you hear me okay?
George Staffos
I can hear you guys now. And it's funny, my associate, Cashin, was hearing you on the webcast, but you were not coming through on the phone lines. I don't know if I was the only one, but just wanted to mention it just in case.
Kurt
Okay. No, we can check into that while we do the call. I think Gonshin was able to hear us. So let me start. I think you asked a lot of questions, so let me try and unpack it all and let me know if I'm hitting your topic. So You know, the first one, I think you were getting to, you know, our average sales price. What are we seeing in the market? How is that? You know, we don't get into pricing on these calls for obvious reasons. I think what I would tell you is there's an element of the value over volume approach where on a blended basis, we're certainly looking at that. And we're really focused on margins and the spread of And as we are getting better at really assessing which products, which customers, categories are more profitable, we are focusing our efforts on really supporting those customers that drive that better profitability for us. And I think you're seeing that come through in our margins as we really focus on building building our overall margins and spread across the business. But within that, there's obviously puts and takes. And in some cases, we have seen more normalization on pricing in this market. But the big picture, as I highlighted in the opening remarks, our margins overall are improving.
George Staffos
Yeah, John, no doubt on that. And again, congratulations on the margin performance. I was just thinking if there was a way that you could somehow, not by product line, but somehow maybe index how either, again, your revenue per unit on average or maybe your spread per unit or per pound has moved up because of what you're doing, that would also be helpful along with the margin. But, yeah, clearly you're getting the progress there. I'm sorry. Keep going ahead.
Kurt
Yeah, and, again, we're not going to break out exactly our average sales price, but I would say that just to reiterate our – You know, what you're seeing a bit, too, in pricing is the commodity price environment has been coming down. And so there's been a corresponding bring down in price. But, again, we've got past uses, as you know. So we're seeing some of that get more normalized.
George Staffos
And on the 94 million of COGS, if you can parse that in terms of raws, you know, process, productivity, PEPs, That would be great. Thank you, Mike. Thank you, John.
Kurt
Yeah, so, and if you're looking at the slide you referenced on our investor presentation, you know, there is, if you break that out, looking at kind of the, and I think you were focused on the sequential, the bridge year over year. Is that the right one?
George Staffos
It's the year over year 3Q versus 3Q. Right. And COGS in particular.
Kurt
Yeah, so the vast majority of the COGS that you're seeing there is going to be on raw material pricing. So as we go year over year, a lot of the resins have come down. So that's a big percentage of that. But embedded in that is also improvements in manufacturing and logistics. So if you were to kind of disaggregate that a bit, I would say more than half of that is raw materials, which we have past dues for. And then probably a bit more than 50% is raw materials. And then the remainder is manufacturing logistics and just overall kind of savings from the restructuring.
George Staffos
Okay, thank you. I'll turn it over.
Operator
Stand by for our next question. Our next question comes from Aaron Vixwanathan. Aaron, go ahead with your question.
Aaron Vixwanathan
Great. Thanks for taking my question. I had that same issue that George had on the first question. Hopefully, we continue to hear everyone. So I guess, yeah, just congrats on the great results. You know, I guess I just wanted to dive into kind of the outlook here. So you are guiding to, you know, a year-on-year improvement in Q4. obviously sequentially lower due to seasonality and some other issues. But as you kind of look out, you're posting about 6% EBITDA growth for this year. Is that kind of within your targeted range? I mean, should we continue to see Pactive kind of, you know, post that kind of mid-single-digit EBITDA growth? And is that mainly because of low single-digit volume growth, or is there maybe some upside to that from restructuring and some of the other actions you're taking? Thanks.
Kurt
Yeah, so from an annualized basis, I think those are all quite fair characterizations. I think the benefits of the restructuring, we're starting to see those in Q3. We expect this to come on a bit further in Q4 as we get more to our normalized run rate. And then some of the other dynamics that you saw from a Q3 to Q4 basis are going to be uh, consistent in terms of just the, the, the operational savings, the efficiencies that, uh, we've built into the business. We, we expect those to, uh, continue into, to Q4. Um, as I mentioned to, to George, you know, one of the factors leading in was, was, uh, uh, some material prices have come down. And so from a pass through basis, um, we're seeing some of, some of that come through and, and then just back to the value of the volume. We are, we are, um, really focused on our business mix and customer mix and really getting that to a better place. And you'll see that in the fourth quarter as well.
Aaron Vixwanathan
Okay. And then just as a follow-up, you did increase your free cash flow guidance to 250 plus. So as you look out into 2024, would you expect maybe, you know, similar kind of growth in free cash flow that would dovetail, you know, the EBITDA growth? Or could maybe the free cash flow growth exceed EBITDA because of lower working capital or any other discrete items? I mean, do you expect to kind of be below four turns of leverage next year?
Michael King
So we're thinking controllable and manageable. We're not really talking about 2024 at this point. What I would tell you is we're keenly focused on free cash. and deeply committed to our reducing our net leverage. So I think that's right. I think as we said in our prepared remarks, getting into the threes is certainly a top priority for us. But I wouldn't guess a free cash for next year at this point.
Operator
Stand by for our next question. Our next question comes from Anthony Petranari of Citi. Anthony, go ahead with your question.
Anthony Petranari
Hey, good morning. Hey, the range for cash costs from restructuring, I think, picked up with the revised guide, I think, from 130, 160 to 150 to 160. Does that mean 24 maybe has less than the I guess, $30 million to $40 million cash costs that were previously expected, or is that unchanged? And then is working capital still looking like, I think, $150 million to $170 million source of cash?
Kurt
So on the first one, yes. So just to confirm, that is the revised guidance. So we took up the bottom end of the range, $20 million. But what we did not change was our guide for – 2023 cash impact. And so effectively, I would think, and we haven't provided overall guidance for 2024, as Mike highlighted. But the way you think about that, incremental cash as relating to the Canton closure and restructuring, that's going to be a 24 item. So our 23 guide does not change as it relates to the cash cost there. And just to confirm, you can hear me okay, Anthony?
Anthony Petranari
Yeah, I can hear you. Okay, great. That's helpful. And then on working capital in terms of a source of cash?
Kurt
Yeah, so in terms of our cash outlook for this year, that's right. The change in working capital, we have a bridge in our investor deck on slide 23, so that range of $140 to $150 remains the same in the earnings presentation, yes.
Anthony Petranari
Got it, got it. And then, you know, in food service, and I guess in food and beverage merchandising as well, is there, like, when would you expect kind of the value over volume, you know, decisions can kind of run their course? Or maybe a related question, like, as you just kind of look at the comps, you know, when would you expect, you know, volumes to inflect positively? And then, you know, was there anything in October that, you know, made you feel... maybe better or worse or the same about sort of 4Q demand?
Michael King
Yeah, I think if you look at food service specifically, you know, there's a lot of things that look promising. So, you know, we are specifically looking at both year-over-year and sequentially. You know, we're starting to see that things are moderating from a normal seasonality, you know, things feel like we're getting back to pre-19 seasonality if you look into Q4, as we kind of noted previously. And so, you know, when do we get to that inflection point? I think it comes down to when does the consumer start to change their behaviors just a little more. And high menu pricing, you know, we're watching that close, I think, looking at, you know, that foot traffic. metric that we continue to use to measure our food service success and gains and losses. All those things, I think, are starting to moderate. Is it a quarter? Is it two quarters away? We'd be guessing to say, but I can tell you Q3 feels better. Q4 seasonality will tell us a lot more. Merch, I think that's we're largely seeing that the fresh trend, people getting their calories, you know, both in the center and perimeter of the stores is very real. That trend, you know, I hate to call it a buy down because all calories are expensive right now, but it is, you know, people are spending less discretionarily, so baked goods and some of the more less healthy alternatives aren't as priority. People are focused on, consumers are more focused on, obviously, the core proteins and basics. And, you know, that would lead us to believe that until we start to see more discretionary spending hit the big dial and some of the more discretionary food items, that we're not there yet on food and beverage merch either. So I think we're probably, you know, we're waiting to see, but things are looking positive for us.
Anthony Petranari
Oh, okay. That's super helpful. I'll turn it over.
Operator
Stand by for our next question. The next question comes from Adam Samuelson of Goldman Sachs. Adam, go ahead with your question.
Adam Samuelson
Yes, thank you. Good morning, everyone. Morning. Morning. So maybe continuing on the questioning on the value over volume. Wondering if there's any distinction or color you could provide by product category where maybe that is you're seeing a particular emphasis or you're emphasizing kind of a portion of the portfolio to a greater extent than others. And conversely, is there any distinction or thing notable to lean there by substrate? Are you seeing kind of more of your volumes in some of the higher –
Michael King
more sustainable solutions um or vice versa or conversely the opposite that has margin implications yeah i would say it's there's not any one segment customer product type that value over volumes you know prevalent versus others for us it's really more of an overall view that we're taking as it relates to working with our our partners, our customer partners to drive volume growth and making sure that, you know, where we, where we can kind of extract the kind of value we see and that we provide as a, not just a packaging producer, but as a supply chain partner. You know, that's where we're, that's where we're seeing it. It's not just a product or a category phase. We are seeing, you know, to your question, When you think about our sustainable offerings, we are seeing that as our customers continue to evolve their strategies, we are winning in those spaces. I would say it is a driver of value for us and it's a focus for us, so I don't want to undervalue that comment. There is an ability to take advantage of better margins and a better product growth profile there, and we're doing that, but separate from our value over volume strategy.
Adam Samuelson
Okay, that's helpful. And then maybe one for John, just as we think about cash flow and deleveraging into 2024. Can we think about working capital next year continuing to be an incremental source of cash, or do you think the working capital levels are
Kurt
now kind of where they then the turns where where they will they will settle out that your cash flow will more closely track kind of the ebitda trends yeah it's a great question so we and thanks for asking that from a from a free cash flow standpoint going into next year while we're not providing guidance per se you know clearly you know by uh by by targeting to get into the threes on that leverage by next year would certainly imply that we're going to be generating some free cash flow into next year, which we intend to do. As you look at the components that drove a lot of that free cash flow this year, if you look at just on an LTM basis, our inventory reduction was $241 million or $183 million this year to date. Certainly, we don't anticipate that repeating into next year. There were some inventory dynamics as we built up that incremental inventory last year to help really drive service levels during that environment. We've gotten more efficient with that inventory this year as evidenced by our ability to really work down our inventory, working more closely with our customers. Frankly, I think we're even moving into next quarter. I think we're getting to the point where we're getting to probably more normalized inventory levels. And our ability to uphold that level for incremental free cash flow is not going to be the driver going into next year or even into next quarter. What I would say is that the EBITDA trajectory we're on, the margin trajectory that we're on, margin growth that we've shown, I think those are going to be really some of the key drivers going into next year and really extrapolating some cash from the business.
Adam Samuelson
Appreciate that, Collar. I'll pass it on. Thanks.
Kurt
Thank you.
Operator
I am showing no further questions at this time. I would now like to turn the call back over to Mike King for closing remarks.
Michael King
Thank you, Stacey. As we close today, PACT Evergreen is a strong, differentiated, and socially responsible business. We are an industry leader in food service and food and beverage merchandising, and we are confident that our markets are largely recession resilient. We are focused on generating sustainable returns, and our experienced leadership team has demonstrated our willingness to transform the portfolio to put us in the best-in-class position to deliver on our commitments. We offer a broad array of products and substrates, and we have long-standing strategic partnerships with our customer base, many of which are blue-chip companies. We are constantly working to innovate and develop the highest-quality sustainable products. We set a goal of having 100% of our net revenues in 2030 come from products made from recyclable or renewable materials. We continue to deliver strong adjusted EBITDA and free cash flow generation, which we are carefully managing to drive deleveraging and further growth through disciplined capital allocation process. We look forward to updating you again next quarter. Thank you for your time.
Operator
This concludes today's presentation. You may now disconnect.
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