Pactiv Evergreen Inc.

Good day, and thank you for standing by. Welcome to the Pact of Evergreen second quarter 2024 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, and you will then hear an automated message advising 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, Vice President of Strategy Investor Relations. Kurt?

Thank you, Operator, and good morning, everyone. Welcome to our second quarter 2024 earnings call. With me on the call today, we have Michael King, President and CEO, and John Box, CFO. please visit the events section of our investor relations website at www.pactiveevergreen.com and access our supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I want to remind everyone that our discussions today will include forward-looking statements, including those regarding our guidance for 2024. These forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by our forward-looking statements. Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our annual report on Form 10-K for the year ended December 31, 2023, and our quarterly reports on Form 10-Q for the quarters ended March 31st and June 30th, 2024 for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures which we believe can be useful in evaluating our performance. Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, let me turn the call over to Pact of Evergreen's President and CEO, Michael Cang. Thanks, Kurt.

Good morning, everyone. Thanks for joining us today. Before we dive into our second quarter results, let me first begin by saying the PACT of Evergreen accomplished a significant milestone in our transformational journey over the last few weeks. In mid-July, we announced a definitive agreement to sell our Pine Glove paper mill and our Waynesville extrusion facility to Susano, a global paper and pulp producer with deep mill expertise. Upon closing of the transaction, we will exit our final remaining paper mill, allowing us to focus on our core North American converting operations. Overall, we view the pending sale as a testament to our disciplined focus on value creation and believe it will be a win for all stakeholders. We plan to provide more details on the strategic benefits and rationale for this transaction later in our presentation. Turning to our results. the second quarter fell short of our expectations. From a customer and in-market perspective and in response to the still weak consumer demand profile, we've seen our customers become more price sensitive and begin pulling additional levers to preserve their margin profiles. Some have been willing to trade high service levels and product quality for lower price. We've taken a long-term approach in responding to those situations and upheld our unique value proposition. In some instances, we've made the decision exit certain business. From an operations standpoint, we experienced temporary operational disruptions at our Pine Bluff paper mill during the quarter, which accounted for the majority of the variance. As we will cover in detail through the call today, we are taking decisive actions to address the year-to-date performance and expected end-market headwinds to position the business for future success. These actions are consistent with the stated objectives of our transformational journey. and we believe they will position us to emerge from what continues to be a period of economic uncertainty as a stronger and more resilient company. Turning to slide four, I'll begin with an overview of the key themes for the second quarter. Then I'll provide an update on the actions we're taking to advance our transformational journey and address the current environment, including how those are expected to help position a business for long-term success. I'll close my initial remarks with an update on what we're observing from customers in the marketplace. John will then provide updates on our key financial metrics and discuss our outlook for 2024. At the end of the call, we'll open up the line for Q&A. Turning to slide five. We took a big step on our transformational journey by announcing the sale of our Pine Bluff Mill to Susano on July 12th. We launched our strategic alternatives review for Pine Bluff over a year ago. During this time, we evaluated all viable options and identified a partner with deep mill expertise. We are enthusiastic to be entering into this long-term partnership, and we have confidence in Susana's ability to continue improving the performance at Pine Bluff into the future. We expect the transaction to close in the fourth quarter of this year. Throughout the remainder of our remarks, we'll refer to Pine Bluff Waynesville and the associated assets being divested collectively as Pine Bluff, for ease of reference. Transitioning to our second quarter results. We entered the quarter cautiously optimistic that end market demand would begin to show signs of improvement in the quarter. However, Q2 was negatively impacted by increased pressure on demand and volumes and the impact of strategically exiting certain business. In addition, our Pine Wolf Mill experienced temporary operational disruptions following its planned annual outage. While these have been addressed, they contributed to the lower performance. While our results during the quarter fell below our expectations, we remain committed to our long-term strategy in creating value for all stakeholders. We believe we are well-positioned to drive profitable growth into the future. Adjusted EBITDA was $183 million during the second quarter. which was meaningfully below our internal forecast and our year ago adjusted EBITDA of $217 million. The negative variance compared to our expectations reflects our customers taking material cost actions in response to the consumer being more price conscious following multiple years of above average inflation, which we highlighted during the first quarter. It also reflects temporary operational disruptions at our Pine Bluff mill following the completion the planned annual mill outage in April, which accounted for the majority of the variance. While we expect the cumulative impact from multiple years of food price inflation to persist through the back half of this year, our focus remains on building volume momentum, reducing costs, and taking strategic actions to align with our transformational journey. As we said in May, we've entered into agreements with new and existing customers across our business. While we remain on track to deliver on our customer wins, we expect some of the volumes associated with those contracts to slip into early 2025. This is largely a function of the end market related risks we mentioned during our first quarter earnings call. We are taking actions to scale the business as we navigate the current market environment and expect to reduce our operating costs by approximately $15 million through the remainder of 2024. The planned cost actions will focus on overhead expense including targeted headcount reduction and lower spend. These savings, which are unrelated to our footprint optimization announced in the first quarter, reflect our continued focus on operational excellence. In light of the ongoing uncertainty about the timing and extent of near-term volume growth, as well as the increase in pricing pressure in our end markets, we believe these actions are necessary to maintain our competitive cost structure. Similarly, as John will cover in more detail, we took annual interest expense during the quarter. Transitioning to our full year outlook. We've adjusted our expectations for the remainder of the year. John will provide greater detail around our specific assumptions, however I want to provide some context. Our updated guidance assumes a delayed recovery and in-market fundamentals with a modest sequential improvement in the second half of the year. Following the annual mill outage in April, more consistent performance from Pine Bluff through closing of the transaction. And lastly, we realized the savings from cost reductions announced today during our second half of 2024. Overall, we continue to monitor and navigate our end markets, and we will look to offset the operational disruptions at Pine Bluff and deliver against our long-term strategy. Turning your attention to slide six, I wanted to briefly touch on the announced sale of the Pine Bluff Mill and the Waynesville Extrusion Facility to Suzano. I want to revisit the steps we've taken in our transformational journey to enhance our position as a leader in food and beverage packaging in North America. In March of 2023, we completed an extensive review of our portfolio and concluded that being vertically integrated into our paper mills would not yield sustainable value creation and was not in line with our strategic ambitions. As a result, we initiated our beverage merchandising restructuring plan with the goal of transitioning the company to a more capital light business model focused on our distinctive core strengths in converting. In conjunction with the announced restructuring, we closed our Canton Paper Mill and Olmstead Falls converting facility. We also launched a strategic alternatives process for the Pine Bluff Paper Mill and Waynesville Extrusion Facility. We diligently reviewed all viable alternatives ensure Pine Bluff and Waynesville were adequately positioned for the future. The recent announcement to sell both facilities to Susano ensures Pine Bluff and Waynesville will be successfully managed by an operator with deep mill expertise. The transaction represents a win for all stakeholders. On closing, this transaction will represent the successful completion of our strategic alternatives review. Importantly, It will also mark a significant milestone impact of Evergreen's transformational journey. We could not have completed the transaction without the tireless efforts of everyone at the mill. Without their dedication and commitment, this outcome would not have been possible. Before I turn the call to John, I'll address other key drivers influencing our performance through the rest of 2024. Please turn to slide seven. The most important thing to note is that after almost three years of elevated inflation, the average consumer is financially stretched and has become more price conscious. Not only do they continue to trade down where possible, they've also reduced their spending in certain categories. First, overall disposable income growth has slowed materially since last year and is currently below the average monthly rates going back to 2000. This has been coupled with a corresponding drop in household savings and an increase in credit card delinquencies. as consumers have taken on more debt in recent years to fund their spending. The consumer continues to adjust discretionary spending to account for this environment. This can be seen in monthly restaurant foot traffic, which throughout 2024 has been slower than the exit velocity of last year. In fact, industry foot traffic has declined from Q1 to Q2, consistent with these dynamics. While the first half of the year proved to be challenging, we are taking decisive action to navigate near-term headwinds and reduce costs in response to the current market environment. We believe we are well-positioned to capitalize on the number of cost savings actions through the balance of the year. These actions are expected to partially offset the impact of the market challenges and operational disruptions at Pine Bluff we experienced during the first half of the year. Pricing in Q2 generally reflected higher raw material cost pass-throughs compared to last year. As we've talked about on previous calls, we have reduced our raw material pass-through lag to reduce volatility in our earnings. Partially offsetting the higher raw material pass-throughs, pricing pressure was more acute during Q2. This dynamic was the result of our customers looking for ways to contain costs in light of increasing price competition across both segments, impacting several of our customer categories. This has also impacted MIPS as customers opt for lower-priced products within our portfolio or move downmarket and adopt a just-in-time approach to managing their supply chains rather than a just-in-case approach. As I previewed earlier, we've responded strategically with the goal of preserving the value proposition of our service model. From an operating standpoint and in response to a higher-cost environment, we are focused on controlling what we can. Our commitment to positioning the business for more balanced and profitable growth is further emphasized by the actions we introduced today to reduce overhead costs through targeted headcount reductions and to curtail spending. In addition, we continue to leverage our Pactive Evergreen Production System, or PEPS, to increase productivity and drive future cost savings. While we are still in the early stages of PEPS, we are building momentum and expect to see material improvements in our operating efficiency in the future. Before concluding my initial remarks, I want to reiterate, while the quarter did not meet our expectations, our team continued to execute at a high level. We took actions to scale the business as we navigate the current market environment, and we made significant progress on our transformational journey, evidenced by the expected sale of our Pine Bluff Mill. As our business continues to evolve, so too does our approach to innovating and delivering the highest quality sustainable products. We continue to focus on the controllables, improving the operations of our company, and executing against the evolving needs of our customers. With that, I would now like to turn the call over to John.