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Operator
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?
Kurt Worthington
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.
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.
John
John? Thanks, Mike. I'll start with our second quarter highlights on slide nine. As Mike pointed out, our Q2 results were impacted by end market weakness and temporary operational disruptions of Pine Bluff. We reported net revenues of $1.3 billion for the quarter, which represents a decrease of about 6% compared to last year. The decrease is driven mostly by the closure of our Canton North Carolina mill during the second quarter of 2023 and lower sales volume. Excluding the impact of the Canton mill closure, revenue is down 3%. Overall volumes were down 3% in the quarter. Food service volumes are flat, outpacing broader industry foot traffic trends, which were down almost 3% due to consumers cutting spending. Food and beverage merchandising volumes decreased 5% during the quarter. mainly due to the market softening and inflationary pressures and the strategic exit of some business as certain customers shifted their supply chains down market. Price mix was roughly flat, which was mostly a function of higher contractual pass-throughs driven by higher raw material costs compared to the prior year period. This was offset by unfavorable product mix and increasing price competition. Adjusted EBITDA to $183 million representing a 16% decrease compared to the prior year. The decrease in adjusted EBITDA reflects higher manufacturing costs and lower sales volume, partially offset by lower incentive-based compensation costs. Our adjusted EBITDA margin was 14% compared to 15% in the prior year period. While we expect this dynamic to persist in the near term, we are confident in the actions we are taking to adjust our cost structure to position us for long-term growth and enhanced profitability. Our PEPS program continues to underpin our focus on continuous improvement and operational excellence. As more facilities become PEPS certified, we expect this will enhance our ability to mitigate inflationary headwinds and scale the business to meet demand. During the second quarter, free cash flow was $37 million. Free cash flow is lower than last year, largely due to lower earnings. As expected, we drew down our inventory in the second quarter as we entered our seasonally busier months. Moving forward, we remain committed to deleveraging our balance sheet and are focused on maximizing long-term free cash flow generation. From a quarter-over-quarter perspective, revenues increased 7% due mostly to higher sales volume caused by seasonal trends, partially offset by unfavorable product mix. Adjusted EBITDA was up 9%, mostly due to higher sales volume and lower incentive-based compensation costs, partially offset by higher manufacturing and transportation costs, and unfavorable product mix. Continuing to slide 10, we'll look at results by segment, beginning with food service. Net revenues were up 2% year-over-year, mainly due to higher contractual pass-throughs, partially offset by unfavorable product mix. Our food service segment is still coping with challenging consumer dynamics across QSRs and food distributors. Compared to the end of last year, the pace of year-over-year industry foot traffic declined, accelerated in Q1, and continued into Q2, impacting our performance. That said, we believe our food service segment as a whole was more resilient than the broader industry during the second quarter, with segment volumes roughly flat. Some of our food service customers increased promotional activity at the end of second quarter and into third quarter to help mitigate these declines. With that backdrop, we continue to see price sensitivity, which we expect to persist through the rest of the year. Adjusted EBITDA decreased 15% compared to last year to $109 million, and adjusted EBITDA margins decreased by a little over 350 basis points. The margin variance reflects higher manufacturing costs and the unfavorable product mix, partially offset by higher pricing, net of material cost pass-through, and lower incentive-based compensation costs. On a quarter-over-quarter basis, our results reflected higher sales volume, which was attributable to seasonal trends and higher pricing due to the past due of higher material costs. Similar to our year-over-year comparisons, our volumes on a quarter-over-quarter basis outperformed broader industry foot traffic trends. Net revenues were up 12% sequentially, mostly due to seasonal volume dynamics. Adjusted EBITDA increased 21%, driven by improved sales volume and lower incentive-based compensation costs, partially offset by higher manufacturing costs. Turning to slide 11. and beverage merchandising results reflect the scheduled outage at time gloss in april as well as unforeseen operational disruptions at the mill following the planned outage aside from operational disruptions we've seen customers place greater emphasis on their own cost structures to help preserve their margins to accomplish this some customers have opted to choose lower priced products within our portfolio while others have gone down market we've strategically taken a long-term approach across our customer base and in some instances have exited certain business when necessary. In terms of the consumer, we've generally observed a continuation in reallocating food budgets from discretionary items towards staples. On a year-over-year basis, net revenues were down 16%. The decrease was primarily due to the closure of our Canton, North Carolina mill and lower sales volume. Lower sales volume was due to the market softening amid inflationary pressures and the strategic exit of certain business, Excluding the impact of the Canton Mill closure, revenue is down 6%. Adjusted EBITDA decreased 15% compared to last year, primarily due to higher manufacturing costs, lower sales volume, and lower pricing net of material costs passed through. These are partially offset by lower incentive-based compensation costs. Adjusted EBITDA margins were relatively unchanged versus the prior year, benefiting from the Canton Mill closure in 2023. offset by higher manufacturing costs and lower sales volume. On a sequential basis, net revenues were up 2% due to seasonal trends, partially offset by unfavorable product mix. Adjusted EBITDA declined 7%, reflecting higher manufacturing costs, mostly due to the planned annual mill outage and temporary operational disruptions of Pine Bloss, and unfavorable product mix, partially offset by higher sales volume and lower incentive-based compensation costs. Now turning to slide 12, Before I provide an update on our balance sheet and full year guidance, I wanted to briefly touch on the financial impact of the Pine Bluff transaction. With respect to the transaction structure, the gross purchase price of $110 million, which is subject to certain customary adjustments at closing, such as working capital, we expect that the transaction will result in a non-cash impairment charge of $320 million to $340 million in Q3. At the closing of the transaction, We would also enter into a long-term supply agreement with Suzano to use Pine Bluff to supply liquid packaging board to Pactive Evergreen's converting business. As we have disclosed previously, most customer and supplier agreements we enter into are driven by market-based pricing, which will include adjustments based on changes in raw material and other input costs. The agreement we reached with Suzano is in line with our standard approach on pricing. We will continue to include Pine Bluff in our reported results until the transaction closes, which is expected to occur during Q4, subject to regulatory approval. As I'll cover in greater detail during our formal guidance update, we expect that the sale will reduce our full year 2024 reported adjusted EBITDA by approximately $16 million. Hence, it is important to note that due to weather-related issues in Q1 and the planned outage and temporary operational disruptions in Q2, the adjusted EBITDA contribution from Pine Bluff is heavily weighted to the second half of the year. As a result, we expect Pine Bluff to be closer to break-even adjusted EBITDA for the full year 2024, and the transaction would be a deleveraging event for Pact of Evergreen on an annualized run rate basis. Turning to slide 13, we have selected balance sheet items and key components of our cash flow. One of the highlights for Q2 was our successful repricing and upsizing of our senior secured term loans due in 2028 from $990 million to $1.3 billion. Together with the proceeds of a $350 million draw on our recently outsized revolving credit facility, we fully prepaid our $690 million term loans due 2026. We expect the repricing and prepayment to reduce our annualized cash interest expense by approximately $14 million. Overall, we were pleased with the strong demand and lender support for the transaction, which ultimately extended our debt maturities, reduced our annual interest expense, enhanced our financial flexibility. Our net leverage for the quarter was 4.5 times, which was a slight increase compared to last quarter and largely reflects lower LTM adjusted EBITDA. In terms of free cash flow, we generated $37 million, largely due to lower earnings compared to last year. Our strong cash flow generating capabilities provide us with the opportunity to reinvest in our business for growth. And we believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing return to stakeholders. Turning to slide 14, as Mike highlighted earlier, we remain committed to our growth strategies and sustaining operational excellence. On our first quarter earnings call, we highlighted the end market related risks to our full year results. which were predicated on an improvement in consumer demand. As we close the challenging first half of the year, we revised our full-year 2024 guidance to account for the following drivers. Q2 adjusted EBITDA variance relative to our expectations, delayed recovery in end-market fundamentals, and other cost headwinds, which we partially offset by the actions we were taking to reduce overhead costs, new headcount reductions, and curtailing spend. We are also removing the contribution from Pine Bluff post-transaction close, which could occur as early as October 1st. The timing is dependent on receiving foreign regulatory approval, so changes in the expecting close date could impact our guidance. Our revised guidance is as follows. Adjusted EBITDA range of $800 million and $820 million. This compares to the previous range of $850 million to $870 million. With respect to the quarterly progression of our second half adjusted EBITDA, we expect it to be roughly evenly distributed between Q3 and Q4 before excluding the contribution from Pine Bluff post-transaction close in Q4. Capital expenditures of approximately $260 million. This is a decrease to our original assumption of $300 million and reflects deferred capacity expansion as well as a decrease in other internal initiatives. Consistent with the revised range for adjusted EBITDA, free cash flow is expected to be within a range of $180 million to $200 million. This compares to our previous guidance of $200 million plus. Lastly, we anticipate ending 2024 with a net leverage ratio of approximately four times. With respect to our footprint optimization plan, the anticipated cash restructuring charges remain at $50 million to $65 million, and total non-cash restructuring charges remain at $20 million to $40 million. These costs are expected to occur in 2024 and 2025. Turning to slide 15, we have the bridge of our 2024 adjusted EBITDA guidance to break out the key changes from our previous guidance to our revised guidance. First, we list the Q2 adjusted EBITDA variance relative to our expectations. This reflects the drivers we highlighted earlier, the majority of which were related to temporary operational disruptions at our Pine Bluff Mill. These dynamics are included in our year-to-date results. The next four items relate to drivers that we expect to impact our second half performance. We have lowered our expectations for end-market fundamentals across both of our reporting segments. We now anticipate full-year volumes will be down low single digits compared to our previous expectation for full-year volume growth of low single digits. This assumes low single-digit volume declines in Q3, followed by slightly positive volume growth in Q4. As Mike mentioned earlier, we remain on track to deliver our customer wins. However, we expect some of the volumes associated with those contracts to slip into early 2025. We anticipate pricing to face increased pressure in the second half as our customers and end markets adjust to increase price sensitivity from consumers. As our customers have turned to selective price discounting to spur demand, it has heightened the need to reduce their costs to preserve their margins. The updated volume expectations are primarily a function of a delayed recovery in consumer demand, the resulting impact on customer price sensitivity, as well as a carryover of some of the customer actions taken during Q2. We continue to find ways to leverage our value proposition to preserve our price points where possible and seek to balance value and volume. As a result, the volume, price, and mix component of the bridge assumes additional actions during the second half. We expect to partially offset these headwinds by taking actions to reduce costs, including targeted end count reduction and lower spend. Overall, we expect the actions we take to manage the business will contribute approximately $15 million in 2024. Next, we expect our full year results to be negatively impacted by lower fixed cost absorption relative to lower production levels, partially offset by reduced incentive compensation accounting for approximately $10 million of the revision to our full-year adjusted EBITDA guidance. Lastly, we expect the announced sale of Pine Bluff to close during Q4. As a result, we have removed the expected adjusted EBITDA contribution from Pine Bluff post-transaction, which is approximately $16 million. For the purposes of the updated guidance, this assumes a closing date of October 1, 2024. It's important to note that the results for Pine Bluff are significantly weighted to the second half due to the impact of severe weather that influenced Q1, along with a planned outage and operational disruptions that weighed on Q2. As a result, we expect Pine Bluff to be closer to break-even adjusted EBITDA for the full year 2024 and the transaction to be a deleveraging event for Pactive Evergreen on an annualized run rate basis. While we expect near-term end-market weakness to persist through the remainder of the year, We remain optimistic about the actions we are taking to mitigate costs, drive operational improvements, and increase volumes during the second half of the year. We believe that the actions we have taken to build momentum in the second half of the year position us to achieve the justity of the DAW within our new full-year guidance range. With that, I'll turn the call back over to Mike.
Kurt
Thanks, John. Before we open the line to Q&A, I want to reiterate that we are confident in our robust platform that enables profitable growth and sustainable returns long term. We're an industry leader in food service and food and beverage merchandising and remain focused on generating sustainable returns. Our management team has demonstrated our willingness to optimize the portfolio and respond to market weakness. We continue to leverage our longstanding strategic partnerships with our customer base, many of which are blue chip companies, and are constantly working to innovate and develop the highest quality sustainable products. We expect the actions we're taking today to make Pactive Evergreen an even more efficient and productive company. We'll yield solid adjusted EBITDA and free cash flow generation as industry volumes recover. In closing, I would like to thank all of the Pactive Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitment to our mutual success. That concludes our prepared remarks. With that, let us open up the line to 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 the line of Phil Ng from Jefferies. Your line is now open.
Phil Ng
Hey, guys. Appreciate all the great color and the bridge for your full year guidance, how you get from what you had earlier in the year to the updated outlook. The $19 million you guys call out for volume slash price mix. John, it looks like based on your volume guide and back half, it looks like it's maybe a third volume and maybe two-thirds price cost? Is that how we should interpret that?
John
Yeah, no, thanks, Bill. It's a mix on the volume and price. It's, you know, in terms of breaking out the components that's volume, you know, there is a component of the volume. I guess I'll give you the volume impact for the back part of the year. If you look at the general dynamic, we're looking at for Q3 and Q4, we're going to be up low single digits for the back part of the year. And really, both business units, we're seeing some volume pickups. In both business units, we should see low single digit volume growth. We don't really break out how much of the 19 is volume related.
Phil Ng
Okay. So when we think about some of the pricing pressure you called out with your consumers kind of adjusting to consumer inflation and protecting their margins, do you have a pretty good view in how that's going to be for this year based on how you're set up contractually and what you negotiated? Or that's still a very fluid situation at this point?
Kurt
I think at this point we have a pretty good view. You know, we've largely worked through a lot of the CHOP there, you know, in the back end of Q2 and starting Q3. So, you know, based on the current environment, I think we have a pretty good handle.
Phil Ng
Okay. That's helpful, Mike. And then when I look at your food service business, volumes were relatively flat, but your EBITDA was down about, call it 15%, and price mix was net positive off of material. So it seems like the miss was largely manufacturing costs and perhaps mix. Can you expand on that a little bit, and does that kind of linger in the back end as well? It just seems like a big number.
John
Yeah, no, it's a bit of both, Phil. You know, there is a mixed component to it, but, you know, as we talked about in the prepared remarks, higher manufacturing costs are part of it. We are facing the impacts of inflation, and that is impacting our results as are the biggest components of inflation are largely going to be around labor, some utilities that we're feeling that pressure, and our customers are also being very cost-conscious, and their consumers are being more price-sensitive. So I think that's the piece that you're seeing, some of that margin compression.
Phil Ng
Okay. And just one last quick one for me. The back half, you can call it $10 million of other cost drag and good guy from Incentive Comp., Does any of that have to do with curtailing your inventory just because demand is a little softer and that perhaps gets relieved as we kind of look at next year or gives us a little more color and the back out drag on that front?
John
Yeah, if you look at that $10 million, there's two big drivers. Part of it is lower absorption. So as you call out, there's going to be an increased broader cost to the lower volumes that we're seeing on the second half basis. And then that is offset by some of that incentive comp benefits.
Phil Ng
Okay, but nothing like your inventory is generally fine. It doesn't sound like you need to curtail your inventory at this point in the back half?
John
Well, we are going to bring down inventories in the back half of the year. If you look at our free cash flow, part of the free cash flow benefit we're looking towards the back half part of the year is a working capital benefit, including bringing down inventories to levels more similar to where we were at the end of last year. And if you look at the first half free cash flow levels, One of the reasons, if you look at the broader results, we would have liked to have seen a bit more free cash flow in the first half, but given some of the volume dynamics we touched on, we probably exited the first half of the year with a bit more inventory than we would have liked, but we expect to work that down to more normalized levels by the back part of the year.
Phil Ng
Okay. Appreciate all the color, guys. Thank you.
Operator
Thank you. Thank you. Please stand by while we receive our next question. Our next question comes from the line of Adam Samuelson of Goldman Sachs. Your line is now open.
Adam Samuelson
Yes, thank you. Good morning, everyone. Good morning. Good morning. Good morning. So maybe if you could, I'd love to hear you get more color on some of the demand trends as you laid them out. I think especially on the food service side, you alluded to some of the promotional activity kind of helping to mitigate volume declines, but more broadly, you kind of talked about expecting some, I thought I heard low single-digit volume growth for both segments in the back half, and can you just help us kind of unpack that a little bit in terms of where the improvements have been more visible in the order pattern or what you're kind of counting on, and especially if there's any delineation in terms of product categories, especially for you guys on the food and beverage merchandising, which are a bit more distinct between the different type of customers and parts of the store you touch.
Kurt
Yeah, I don't think there's any secret to it, but, you know, the QSR segment's clearly, you know, reacting and has started reacting at the end of Q2 to menu pricing and trying to do things to promote. And so we're here early Q2 starting to see that, you know, flattening to trending of those volumes come back. I would say we're a bit less optimistic on an inflection there, just given the speed at which this is changing. Distribution, foot traffic remains strained. So while we continue to outpace foot traffic on the food away from home space, non-QSR food away from home space, we are We're kind of seeing a slight improvement or flattening of that, but not what we'd call an inflection. And then on the food and beverage merchandising side, that remains to be seen. I think we're less strained in that space, but as people buy down, how they buy down in our categories
Adam Samuelson
specifically you know we just expect that the back half is more more leaning towards q4 we'll see a you know a low single digit improvement okay that's helpful and then just on the on the footprint optimization which I presume we would consider distinct from Pine Bluff and kind of wrapping up the the restructuring of the beverage merchandising business It still doesn't seem like you've incurred a lot of those costs up to this point, if I'm looking at the disclosures in the queue. Can you help us think about how far along you think you'll be by the end of the year as we start to consider potential tailwinds from a fixed cost or overhead perspective and carrying into 2025 when those benefits from a P&L perspective would become more evident?
John
Yeah, sure. In terms of footprint optimization and the program we announced, as we talked about when we announced it last quarter, those expenses are largely going to be back-cast driven, and really the benefits won't be recognized until next year. And our guidance in that regard hasn't really changed in terms of some of the overall implementation, CAPEX and OPEX, In terms of the, you know, baked into our pre-cash on capital program, we still are budgeting somewhere in the range of $15 to $20 million this year, largely back half weighted, as you point out, as part of that initiative.
OPEX
Okay. All right. That's helpful. I'll pass it on. Thank you. Thank you.
Operator
Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
spk05
Arun, your line is now open. I will go to the next question.
Operator
Our next question comes from the line of Gansham, Punjabi from Baird. Your line is now open.
Gansham
Hey guys, good morning. Can you hear me okay? Yeah, morning, Gansham. Morning. You know, I guess, you know, obviously the consumer has been struggling with affordability for several quarters and, you know, it's broadening into food services, as you already know at this point. What is the most surprising to you as it relates to the operating environment for Baird-specific businesses? You know, it sounds like there's a shift in terms of how customers are prioritizing the value proposition that you bring versus just flat-out price, or is it just pricing pressure in the industry? What is surprising to you?
Kurt
I don't know if I'd call this as much as surprising as to maybe the speed of the reaction of some of our markets, but I would say, you know, I think as we see people buy down and they've kind of run out of space. And so how fast that's happened, and then the reaction of our multiple category customer base, I would say that surprised us. We expected a faster reaction by our customers. And so the prolongation of some of the promotional activity, and I would say the delayed response there, I think we're all much more optimistic on seeing that happen quicker.
Gansham
Okay, and then in terms of what the, you know, your view is in terms of the catalyst to get volumes moving again. I mean, clearly affordability is going to be an issue, and yeah, there's some promotions, et cetera, but, you know, affordability seems to be much more pervasive. What are your thoughts on that? And then just separately, just so I understand it, you know, with the absence of Pine Bluff, assuming it closes October 1st, and your EBITDA is, you know, 800 to 820, what would be the – the delta, 25 versus 24, given that Pine Bluff won't be part of your results next year?
Kurt
I'll speak to what needs to happen to start to see us get to an alternate gross outlook. Certainly, affordability is the root of it. The consumer is pretty beat up, and so we need to see a consumer confidence improvement. How that happens, there's a host of ways. I won't go into that, but we're not waiting for that. And so as we look to do things to lightweight, to make things more affordable for our customers, I think there's still a fair bit of shrinkulation happening within our customer base. So as they alter their products, being the ready, fast provider of those and capturing those opportunities where we see success and growth. So we're addressing not just our cost structure, but our product portfolio to adapt to what our customers need to solve their problems. We're doing that. And then in line with that, we're partnering with Blue Chips and folks that value how we go to market. And so we're leveraging those relationships and we're playing long ball with these customers that value what we do. And so where we have the right portfolio and are willing to adjust and spend our resources and capital to help these customers, we're rewarded with their business and their growth. So we're also leaning in hard on long-term success with long-term successful customers.
John
And as it relates to the second part of your question, around Pine Bluff and kind of impacts going into next year, I think I'll expand on some of the financials around Pine Bluff just to give you some perspective. As I mentioned in prepared remarks, if we were to have Pine Blossom in our portfolio for the full year, it would still have been just slightly negative EBITDA for us. Even with that $16 million we'd expect in Q4, the thing to keep in mind at the middle is they do have their cycles. And as we go through maintenance cycles, we have periods of negative EBITDA and then positive EBITDA. So it's not a straight line performer. And so even looking into our first half versus second half results, I mentioned this last quarter, just to reiterate this quarter, one of the drivers between the growth between EBITDA first half of the year to second half of the year is pine bluffs. It contributes around 50% of the EBITDA growth first half versus second half, given that we won't have an outage in the second half of the year, any planned outage, I should say. And then if you look at just other periods, you know, LTM EBITDA as of Q2 for Pine Bluff and Waynesville is around negative $14 million. And then the other thing to keep in mind around some of the strategic benefits for us, you know, highlighting what Mike mentioned in prepared remarks in our strategic direction is going to Capital Light. LTM, we've incurred around $35 million of CapEx along with that negative EBITDA.
Mike
One moment while we have technical difficulties.
spk05
Please remain on the line. Your conference will resume shortly.
Mike
Again, thank you for your patience. Please remain on the line. Your conference will resume shortly.
spk05
Thank you for your patience.
Operator
We are almost there. Please remain on the line. Your conference will resume shortly.
John
Hi, operator. This is the company. Are we back online?
Operator
Yes, you are back online.
John
Where did we get cut off?
Gansham
You were talking about CapEx of $35 million.
John
Okay, for LTM. Okay, so I think you heard most of my response. No, just to pick that back up, to give you a sense of the financial profile for the mill. So just LTM EBITDA was about negative $14 million, and then CapEx for the same period was $35 million. gives you this perspective of the cash generation. And as we've talked about in terms of moving to a capital-like business model, I think some of the benefits for us moving into next year are going to be that reduction of the capital. And given the EBITDA contribution, which has been on the lighter side, we expect to have some benefits going into next year.
Gansham
Okay, very good. Thanks so much.
John
Thank you.
Operator
Thank you. Our next question comes from the line of Anthony Pettinari of Citi. Your line is now open.
Anthony Pettinari
Good morning. You talked about trade down and customers going down market, and I'm wondering if there's any implications for substrates and maybe your sustainability offerings. I guess with the focus on cost, do you see more customers going to plastics, or is that not the case? And just I'm wondering if you talk about kind of substrate mix and maybe any kind of impact on margin, if any.
Kurt
Yeah, I can't. As I sit here, I don't have anything that says that it's more of a trade to a lesser or more sustainable substrate. I think it's more about, you know, lower cost or maybe lesser quality or maybe lower less reliability, and so trading off what we call just-in-case supply for more just-in-time supply. And so what we are referencing particularly is our at-will customers or non-contract customers that have the ability to move volume around and cherry-pick things. We're seeing that activity. as they become more price sensitive. Also, they're just, you know, I think in a lot of cases, taking inventories and doing things that, you know, more cost conscious. So we're seeing the result of that.
John
And on the sustainability side, the only thing I'd add is we have seen a bit of an increase on the margin in some of the bioresins that our customers are using. And from a margin perspective, We're really agnostic in terms of the substrates from a mixed standpoint.
Anthony Pettinari
Got it, got it. And then on the CapEx profile, I think you made a reference to deferred capacity expansion. And I don't know if it's possible to say, I mean, is that deferred from 24 to 25 or postponed indefinitely or if it's possible to kind of talk about the scope of those projects?
Kurt
Yeah, I would say the right way to think about it is we have agreements with customers, and so we're going to honor those agreements and make those investments. We have had to defer some of those investments into 25. Other things are we've gotten more efficiency on capital, and then I would tell you we can't lose sight of the fact that we're
John
The other concept just abridged for you is, you know, we mentioned that we're moving some of our volumes from 24 into 25 as part of the updated guidance. And so I'd also think about that capacity expansion really tied to the volume. And so we're seeing some of the volume moved into next year and the capital along with it.
Anthony Pettinari
Okay. That's very helpful. I'll turn it over.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Josh Spector of UBS. Your line is now open.
Josh Spector
Hi, good morning. Actually, this is Sean speaking on behalf of Josh. Thank you for taking my questions. So my first question is, any color on the volume performance by substrate this year?
Kurt
Yeah, we really, we don't really give by substrate volume. I mean, we kind of, as John said, are pretty agnostic on the substrate, so it'd be something that we don't really track to.
Josh Spector
Okay, got it. So, well, in terms of, I mean, the next year, the volume, so do you think it's safe for us to assume that next year the volume growth will be similar with the second half?
John
In terms of we're not providing 2025 outlook just yet. We'll do that later. But I think the way to think about generally is that as we talk about some of the volumes picking up in the next year, maybe just give a bit of reiteration of some of the drivers between first half and second half. Volume growth, as we mentioned, we are expecting to see some. Now, while some is seasonality, we also do have some customer wins that we're expecting to pick up. In the back half of this year, we are ramping up some capacity, a little bit less than we thought originally, but there is some capacity that we're ramping up. And so as those elements flow into the second half of next year, we don't see any reason why that wouldn't extend into 2025 as you start looking at the first half of next year.
Josh Spector
Okay, I will turn it over.
John
Thanks, Sean.
Mike
Thank you.
Operator
Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
Arun
Great. Thanks for taking my question. Hope you guys are well. Obviously, we've been going through some challenging dynamics on the food service side with consumers continuing to be impacted by inflation and potentially trading down and just not going out as much. you know, how do you see that playing out? I guess, you know, there has been obviously the introduction of value meals and, you know, maybe there has been some, you know, resumption of activity there, but is it just kind of more promotional activity and maybe more deflation and pressure coming off the consumer that'll help the food service segment? Or what are some of the dynamics that you guys are watching and hoping, you know, for better trends and what should we be looking out for? Thanks.
Kurt
Yeah, I think, Arun, you hit a lot of it is we need the consumer to feel better about things. So, you know, as we highlighted on the call in our prepared remarks, no secret as you outlined it, the consumer's pretty beat up and has been for some time. I think where we're at now is the consumer's kind of run out of places to go. What we see is the reaction by our different categories and our different customers to that. I think we're starting to see some of what needs to happen, but I think largely it's multi-pronged. It's got to be the products need to be addressed, so shrink inflation, all the things we're doing product-wise, portion control, lightweighting of the products. There's a big cycle happening right now to address a lot of that. know as we as we navigate cost structure and when I say we I mean the broader industry customers and and supply chain I think that has to come along I don't think all this inflation you know ever comes out and so we're going to have to address that and get smarter and so that's happening and then obviously as you know the macro outlook improves that also will help return to, you know, dining out of the home.
Arun
Okay, thanks for that. And then just as a follow-up, you know, looking at the bridge for your revised EBITDA guidance, you know, you note like a $19 million impact from reduced volume and price mix. But you do have the $15 million cost actions. I guess, should we be modeling growth? from the new revised range in 25? The reason I'm asking is because, you know, obviously we have the Pine Bluff Mill sale, which would kind of lower the first half of 25 year on year. But do the cost actions kind of offset that? And maybe just help us kind of understand if you are expecting growth in EBITDA in 25. Thanks. Yes.
John
No, broadly, I don't. I think it was Sean asking around some of the growth we're going to see in the second half of this year moving into next year. We do expect to see some growth. The cost actions are to help us mitigate some of the pressure that we're seeing right now as you highlighted right now. Some of those actions are savings that we will be able to carry into next year. Not all of that, but there is probably two-thirds of those cost actions are, I would say, more transferable into next year. And some of that will come back in as volume growth picks up and we scale back to meet that additional growth.
OPEX
Okay, thanks. Thank you.
Operator
Thank you. Our next call comes from the line of Kashin Keeler of Bank of America. Your line is now open.
spk02
Yeah. Hi, guys. Thanks for taking my questions. Apologies if we missed this. We're having phone issues on our end as well. But is it possible to frame for us what the time left sale will mean in terms of CapEx moving forward and where you might expect aggregate CapEx to settle on a normalized basis? And then given that this will presumably reduce your capital intensity going forward, I guess where will you look to reinvest in the business or deploy capital moving forward?
John
Sure. Yeah, and I'll go through some of the capital numbers for Pine Bluff again. But, you know, generally speaking, we've been in the $35-$40 million range for Pine Bluff and Waynesville, depending on whether you look at LTM or 24. But it's, you know, that... close that middle transaction and move to a more capital-like business model. As it relates to thinking about capital for next year, we did mention that some of the capital that we had in the plan for this year, we are deferring. And so that is some additional growth for the business that we'll be looking to run next year. And we haven't provided broadly what the capital plan for next year would be, but generally speaking, coming from the start of this year being around 300, including the mills, we're certainly going to be falling off of those levels and getting into something that is more representative of the capital-like business model that we're going to be looking like.
Kurt
I think the overall message there, you know, we're certainly looking to shift to a more, the geography of our spends to a growth focus for sure.
spk02
Got it. Okay. And I guess looking forward, you know, given the actions you're taking today, how would you expect SG&A to sales to trend over time? And then maybe what the aggregate amount of costs take out of the business you'd expect on a structural basis over time from some of these actions?
John
Yeah, sure. So, you know, if you look at that bridge we have on slide 15, the cost actions of $15 million, just to give you a sense of SG&A generally, thirds of that is SG&A, roughly $10 million. And with that piece, we likely would see that extended next year, depending on our growth trajectory as we work through our 2025 plan. And just to give you a sense, the cost actions we're taking, and specifically around SG&A, we're currently eliminating approximately 80% of corporate positions as part of this program. And those Those eliminations will carry over for the most part.
spk02
Okay, got it. And then from an EPS perspective, in terms of this year, should we more or less expect that to move in tandem with the change in guidance for EBITDA? Or is there anything else kind of below the line there that we should be mindful of?
John
Yeah, the only other thing I would say is, you know, we certainly have several one-time charges recently as related to the beverage merchandising restructuring, the sale of Pine Bluff that will be charges. If you look at adjusted EPS and taking those to the side, as I mentioned, we've worked on the balance sheet and we've reduced our interest expense. And so $14 million of savings there will be a benefit to EPS. We continue to work on the tax line of the income statement as well, but it's hard to give you some guidance into the future on how the tax environment will work. There's lots of factors that go into that, but broadly speaking, we're focused on EPS as well, and there's no reason to think that EPS shouldn't track to the EBITDA.
spk05
Got it. Thanks.
Operator
Thank you. This concludes the question and answer session. I would now like to turn it back to Michael King, CEO, for final remarks.
Kurt
Thank you. So as we wrap up today, I just want to again thank the entire PACT of Evergreen team for their hard work during the second quarter. We're executing on our strategy and are confident we will continue to progress on our transformational journey in 2024. We look forward to updating you on the third quarter conference call. Thanks again for joining us.
Operator
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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