Pactiv Evergreen Inc.

Good day and welcome to the PACTIV Evergreen third quarter 2024 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Kurt Worthington, Vice President, Strategy, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone.

Welcome to our third 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.pactofepergreen.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 31, June 30, and September 30, 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. 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. Lastly, throughout the remainder of our remarks, we'll refer to Pine Bluff, Waynesville, and the associated operations we divested on October 1st collectively as Pine Bluff for ease of reference. With that, let me turn the call over to Pact of Evergreen's president and CEO, Michael King.

Mike? Thanks, Kurt. Good morning, everyone, and thank you for joining our call this morning. I'll start today off with an overview for the key themes for the third quarter and provide an update on the market. I'll also discuss the progress we've made against our strategy, including how we're positioning ourselves for growth in 2025 and beyond. Then I'll turn the call over to John to provide an update on our key financial metrics and discuss our outlook for the rest of the year. At the end of the call, we'll open the line for Q&A. Turning to slide five. In the third quarter, revenues were $1.3 billion and adjusted EBITDA was $214 million, a solid 16% margin. We delivered adjusted earnings per share of $0.36 and free cash flow of $190 million. Our team maintained a high level of execution in our core operations during the quarter and navigated a dynamic consumer demand backdrop. We also overcame operational challenges at Pine Bluff during our final quarter of owning the mill. As previously announced, on October 1st we completed the sale of our remaining mill operations. The closing of the transaction marks an important milestone as we focus on our core North American converting operations and progress on our transition to a more capital light business model that we expect will reduce our CapEx requirements and provide more flexibility to invest for growth. Now that we have executed on our strategy to exit paper mill operations, We expect to improve our future profitability while also reducing the volatility in our earnings. We are now positioned to advance to the next phase of our transformational journey, which envisions us aligning with core customers through the cycle, repositioning our product portfolio to increase our presence in select customer channels, investing in growth initiatives, focusing on innovation, sustainability, and new product development, and improving operational efficiency and lowering our cost to serve. We'll continue to leverage our distinct capabilities to serve our core customers, most of whom are large scale, nationally recognized brands and industry leaders that are well positioned in their markets. It's because of our longstanding relationships that we have been able to navigate external challenges and outpace our end markets. Building on that strategy, we continue to focus on innovation and developing new sustainable products. We've also identified new opportunities with attractive growth prospects, which we believe will generate momentum into 2025 and 2026. From a continuous improvement standpoint, we continue to take actions to flex our cost structure with industry demand. Our footprint optimization, as well as the cost actions we outlined in our last earnings call, continue to build momentum. We remain on track to generate $15 million of cost savings in discretionary spend and SG&A by the end of this year. In September and October, our communities faced the challenges brought by Hurricanes Helene and Milton. We're grateful our employees are safe, and we're impressed by how quickly our dedicated teams restore operations in just a matter of days. The determination and resilience shown during this time has been inspiring, and it highlights the strength and spirit of our organization. We are fortunate to also share our business was largely unaffected by the storms. John will touch on this later. From an industry perspective, foot traffic at restaurants and volumes at grocery stores have continued to show the effects of lingering high prices as consumers continue to reduce their spending to fit within their budgets. Food at home price inflation has moderated more than food away from home prices over the last few years, and consumers have responded by shifting their spend from restaurants to the grocery store, especially in recent quarters. Within food service, industry volumes in the third quarter were lower than the second quarter, Foot traffic was down over 3% in our end markets. Within the grocery store, consumers continue to prioritize staples like protein and produce. We've continued to execute our value over volume framework and embrace a data-centric approach to focus on customers, products, and channels aligned with our long-term strategy. On the food service side of the business, this approach has helped us outpace the market over the last several quarters. This is also a testament to our customer mix. which is weighted towards blue chip companies that have the ability to grow share through the cycle. On the food and beverage merchandising side of the business, we're in the middle innings of our value over volume playbook. And in recent quarters, we've begun repositioning our portfolio in our go-to-market strategy. Our objective is to concentrate on areas where we're currently underrepresented but are well positioned to succeed and grow share. We expect these actions to translate into volume improvement through 2025 and into 2026. as the composition of the portfolio shifts to attractive new channels and end markets. Turning to slide six. Over the last several quarters, an area of focus has been lowering our cost to serve, including managing our fixed costs and discretionary spends. Our team has done an outstanding job this year, executing on several initiatives that position PACT of Evergreen for success. We're continuing to manage our costs to align with our longer term strategy and also offset lingering consumer pressures in the near term. For example, last quarter we initiated a cost reduction plan, which is focused on discretionary spend and SG&A, which is expected to generate roughly $15 million of savings in this year. Our footprint optimization program, which we announced earlier in the year, is expected to reduce our overall footprint by approximately 10% over the next two years. We anticipate full run rate cost savings of approximately $35 million by 2026. And finally, operational excellence remains core to the culture we've established at Pactive Evergreen. Our continuous improvement mindset is reflected in our Pactive Evergreen production system, which has helped our plants identify new solutions to unlock productivity and reduce waste. For example, we continue to refine the harmonization of production plans across our network by consolidating certain SKUs at the lowest cost plants and organizing production schedules to optimize our manufacturing costs. Another example is streamlining equipment changeovers on our lines to reduce downtime in between production runs. We've been steadily building momentum on these initiatives throughout the year, and we expect them to translate into efficiency gains in Q4 and into next year. As PEPS matures, we continue to identify new ways to improve our operations and we're confident the program will continue to yield benefits as it becomes a standard across the entire organization. We look forward to providing more detail, including the benefits, in quarters to come. Turning to slide seven. Innovation is at the center of everything we do, whether it's developing advanced substrates, creating new products, or identifying new ways to serve our customers. Innovation is also a critical driver for long-term sustainable growth. In September, we announced a new line of reduced-density polypropylene protein trays under our Recycle Wear brand. Our RDPP products are the perfect solution for packer processors looking for sustainable alternatives to foam polystyrene. The new meat trays are vertically integrating, meaning they're extruded, thermoformed, and padded at our facilities. These products also run well on existing overwrap equipment, meaning the switching cost for our customers is minimal. Customers have already cited the product's reduced consumption of raw materials versus other sustainable offerings as a key differentiator. We're in the early days, but we're really excited about the future prospects of our meat trays, and we're pleased with the progress so far. We expect the contribution from that product to grow as we ramp up capacity. In addition to our DPP trays, we'll continue to collaborate with our customers and have some exciting value-add projects in the pipeline that we expect will generate momentum through the course of 2025. Some of our new products concentrate on areas we're currently underrepresented but well positioned to grow our presence, which is part of our broader effort to reposition the food and beverage merchandising portfolio and gain more exposure to attractive new end markets. For example, we're collaborating with our CPG customers to identify opportunities to develop offerings that help them differentiate their products. In October, we introduced SmartPour, pourable containers. The patented SmartPour packaging solution streamlines the pouring process, effectively eliminating the issue of messy bag and box spillage. The closure design facilitates pouring and sealing, while the barrier board incorporated into the package extends product freshness. We're enthusiastic about this line of innovative technology and believe it will expand our reach into markets such as premium cereals, baking ingredients, pet food, powdered laundry detergents, and dishwashing liquids. Branded consumer products represent an under-penetrated end market for us, and we believe we're well positioned in the market to generate momentum into 2025 and 2026 from this initiative. Another initiative for our food and beverage merchandising segment is reducing our reliance on third-party distributors and leveraging our long-standing customer relationships to bolster our go-to-market approach. We believe our broad product portfolio, strategically located distribution network, and ability to innovate on behalf of our customers puts us in a great position to succeed in these categories. We're in the early stages with these initiatives, but we've already seen strong interest from our customers, and we're excited for our future. Overall, we're encouraged by the progress we've made in the third quarter. Our operational execution, commitment to driving efficiencies, and commitment to innovation are building solid momentum. Looking ahead, consumers are still absorbing the multi-year impact of elevated inflation, and we expect that dynamic will continue in the near term. That said, over the past quarter, customers have increased their promotional activity in an effort to deliver more value to the consumer and spur demand. Time will tell if the promotions translate into lasting volume growth, but we do believe they've been helpful in stemming the tide in the near term. For now, we're encouraged that restaurants food companies, and food retailers are taking action to provide some relief to their customers. Overall, we are cautiously optimistic and will continue to focus on the things we can control to position us to emerge stronger operationally and competitively. We remain confident in the resilience of our business model and believe the structural improvements we have made to date provide us a solid foundation to build momentum in the fourth quarter and position us for growth in 2025. That concludes my initial remarks. I will turn the call over to John. John?

Thanks, Mike. I'll start with our third quarter highlights on slide nine. As Mike outlined, our third quarter results reflect our efforts to right-size our operations and manage resources to align with the broader demand environment. These factors, in conjunction with our focus on cost discipline, supported an improvement in adjusted EBITDA margins compared to Q2. We recorded net revenues of $1.3 billion for the quarter, a decrease of about 3% compared to last year. This change was primarily driven by lower sales volume, but was partially offset by favorable pricing due to higher material costs. The volume trend was mostly a combination of the broader demand environment and our own portfolio actions, particularly in food and beverage merchandising. However, in food service, we continue to outperform our industry by aligning with our longstanding blue chip customers that are well positioned to outpace their end markets over the cycle. Overall volumes are down 5% in the quarter. Food service volumes were down 2%. However, we outpaced broader industry foot traffic trends, which were down over 3%. Food and beverage merchandising volumes decreased 8% during the quarter. This reflects consumer spending patterns, as well as the year-over-year impact of our value over volume strategy and portfolio repositioning, which includes the initiatives Mike mentioned earlier. As we execute our plan, we anticipate some near-term impacts to volumes, but we expect that to translate to future growth as well as a more attractive business mix. Price mix was up 2% during the quarter, reflecting favorable pricing in the food service segment, largely due to the pass-through of higher material costs and favorable product mix in the food and beverage merchandising segment. Adjusted EBITDA was $214 million, representing a 6% decrease compared to the prior year. the decrease in adjusted EBITDA is attributable to higher manufacturing costs and lower sales volume. This is partially offset by lower incentive-based compensation costs, favorable product mix in the food and beverage merchandising segment, and favorable pricing, native material cost pass-through, in the food service segment. Higher manufacturing costs primarily reflect the challenges at Pine Bluff during our final quarter owning the mill. Our adjusted EBITDA margin was 16%, flat compared to last year, but 240 basis points higher than Q2. We remain confident in the actions we're taking to adjust our cost structure to position us for long-term growth and enhanced profitability. From a quarter-over-quarter perspective, revenues were effectively flat, with lower sales volume largely offset by favorable pricing in the food and beverage merchandising segment and favorable mix in the food service segment. Adjusted EBITDA increased 17%, primarily due to lower manufacturing costs as a result of a planned mill outage during the second quarter, favorable pricing, net material cost passed through, and favorable product mix, partially offset by lower sales volume. We generated free cash flow of $190 million, which was a significant increase compared to the second quarter. Free cash flow benefited from the timing of cash outflows and higher adjusted EBITDA. Continuing to slide 10, we'll look at results by segment, beginning with food service. Segment net revenues decreased just under 1% to $670 million, primarily due to lower sales volume. This was partially offset by favorable pricing resulting from the pass-through of increased material costs. From a volume perspective, the food away from home space is still experiencing declining industry foot traffic as consumers adjust to higher prices. Overall, industry foot traffic was down over 3% during Q3, which was slightly below the roughly 2.5% decline in Q2, However, we're encouraged by three main factors. First, because our business mix is heavily weighted with longstanding blue-chip customer relationships, our volumes continue to outpace the industry. Second, food away from home inflation, while elevated, continues to decline, falling below 4% on an annual basis in September for the first time since April 2021. And third, our customers are leaning in on promotional activity in an effort to deliver more value to consumers and drive volumes. Importantly, several leading QSR customers have communicated their intent to extend promotional campaigns into the fourth quarter. Thus far, the increased promotions haven't resulted in year-over-year volume growth, although they have helped offset some of the near-term affordability issues for consumers. Adjusted EBITDA increased 3% compared to last year to $120 million, and adjusted EBITDA margins improved by a little over 50 basis points. The increase primarily reflects favorable pricing, net and material cost pass-through, and lower incentive-based compensation costs, partially offset by higher manufacturing costs. Net revenues were flat quarter-over-quarter, primarily due to favorable product mix, largely offset by lower sales volume. Adjusted EBITDA increased by 10%, and adjusted EBITDA margins increased by 160 basis points, driven by favorable product mix, favorable pricing, net of material cost pass-through, and lower incentive-based costs, partially offset by higher manufacturing costs. Turning to slide 11, food and beverage merchandising results reflect the continuation of trends we observed in the second quarter. Industry volumes are closer to break-even as consumers continue to shift from eating out to eating at home in order to save money. Consistent with previous quarters, consumers are prioritizing staples like protein and produce, both of which performed well for us during the quarter. Discretionary items such as bakery continue to be impacted by the same dynamic. Egg carton volumes were impacted by the bird flu that reduced overall egg production during the quarter, although conditions have mostly normalized through early November. Outside of broader industry demand, the other main volume driver during the quarter was the impact of the year-over-year effects of our value over volume strategy. As Mike mentioned, we have several exciting initiatives underway that target innovation and expanding our presence in the new and promising markets. We recognize there may be some short-term impacts on our volumes. However, we view these adjustments as important steps that will ultimately lay the foundation for future growth and a more favorable business mix. We are optimistic about the positive effects on the horizon. Taking all this into account, segment net revenues declined 6% year over year. Lower sales volume was driven by our focus on value over volume and the broader demand environment, partially offset by favorable product mix. Adjusted EBITDA decreased 15% compared to last year, primarily due to higher manufacturing costs, mostly in our mill operations, and lower sales volume. This is partially offset by favorable product mix and lower incentive-based compensation costs. Adjusted EBITDA margins were down 160 basis points versus the prior year due to higher manufacturing costs, including operational challenges at Pine Bluff and lower sales volume. On a sequential basis, Net revenues were down 1% due to lower sales volume, which was attributable to seasonal trends, partially offset by favorable pricing due to pricing actions. Adjusted EBITDA increased 19%, reflecting lower manufacturing costs, mainly a result of a planned millage during the second quarter, favorable pricing, net of material costs passed through, and lower incentive-based costs, partially offset by lower sales volume. On slide 12, we have highlighted balance sheet items and key components of our cash flow. Free cash flow during Q3 was $190 million, benefiting from the timing of corporate cash outflows such as interest and tax payments and higher adjusted EBITDA. Our ability to generate strong cash flow allowed us to reduce our net debt by $170 million during the third quarter and decrease our net leverage to 4.3 times, on track with our year-end goal of reaching approximately four times. The step down relative to the second quarter was consistent with our expectations. Our strong cash flow generation also provides us the opportunity to reinvest in our operations to seed future growth and drive margin expansion. Over the past three years, we've embarked on several strategic initiatives aimed at enhancing productivity, increasing profitability, and achieving significant cost savings. We believe that these concerted efforts will not only improve our ability to meet the diverse needs of our customer base more effectively, but also streamline our operations. Ultimately, we expect these advancements will contribute to enhance returns for our stakeholders, reinforcing our commitment to sustainable growth and excellence. Turning to slide 13. Before I turn to our guidance for the remainder of 2024, I want to briefly touch on pro forma impacts of the divestiture of our Pine Bluff Mill, which we sold on October 1st. The transaction is an important milestone for multiple reasons. First, it allows us to focus on our core North American converting operations. Next, as you can see, our LTM adjusted EBITDA and margin profile improved materially on a pro forma basis. With the net cash proceeds and the removal of the negative adjusted EBITDA attributable to the divested operations, reduce our net leverage ratio from 4.3 times to 4.1 times as of September 30th. Turning to slide 14. On the next two slides, I'll cover our guidance for 2024 and also highlight the building blocks for 2025. We are updating our guidance range for full-year adjusted EBITDA to be between $800 and $810 million. This is partially due to operating challenges at Pine Bluff during our final quarter owning the mill, which resulted in an adjusted EBITDA that was approximately $17 million lower than our previous forecast. It also reflects a sequential uplift in Q4 as industry promotions provide some volume support along with the continued ramp up of efficiency gains. Our guidance also assumes that we realize the expected benefits from our footprint optimization and cost saving initiatives consistent with what we shared last quarter. The expected benefit of $15 million from cost-saving initiatives, combined with our commitment to continuous improvement, positions us to effectively adjust our cost structure in response to industry demand. We've lowered our full-year 2024 capital spend guidance to a range of $240 to $250 million, compared to our previous expectations of $260 million, due to a shift in timing of project spend. Our free cash flow guidance of $180 to $200 million is unchanged. Lastly, we reiterate our expectation to reduce our net leverage ratio to approximately four times by year end. Turning to slide 15, it's important to note that despite the uneven market environment, we have responded and have made significant progress against our strategic objectives, while also emphasizing the significant milestone of closing the sale of our Pine Bluff Mill. Looking back to our original 2024 adjusted EBITDA guidance range, excluding Pine Bluff, We anticipated $843 to $863 million from our core operations. At that time, the expected contribution from Pine Bluff for full year 2024 was approximately $7 million for a total adjusted EBITDA range of $850 to $870 million. Over the course of the year, we experienced reliability challenges at the mill, some of which were related to our planned outage in Q2. Based on the timing of the sale on October 1st, we removed the expected Q4 adjusted EBITDA contribution from Pine Bluff from our full year guidance. The end result is that Pine Bluff generated negative $38 million of adjusted EBITDA for the nine months ended September 30th, which is effectively a $45 million swing, which is factored into our updated guidance range. Excluding Pine Bluff, we expect to generate 838 to $848 million of pro forma adjusted EBITDA for 2024, which is comparable to our original guidance range. There are puts and takes compared to our initial guidance as the broader macro environment has been challenging. However, we responded by scaling our operations and managing costs to deliver against our strategic priorities. Looking ahead to 2025, using the $838 to $848 million range as our pro forma run rate, All else equal, we'd expect to achieve an incremental $15 million in cost savings from our footprint optimization plan. Overall, we think this provides solid earnings momentum and a tailwind heading into next year. Before I turn the call back over to Mike, I'd like to end by addressing the challenges posed by recent weather events, specifically Hurricane Helene, which occurred in late September, followed by Hurricane Milton in early October, which resulted in unforeseen difficulties. These challenges included significant power outages and flooding, which adversely affected our supply chains. While we encountered marginal repair and cleanup costs and some production loss, our facilities were able to operate on backup power. As you might expect, there was some residual impact that the storms had on broader consumer purchasing patterns and overall restaurant foot traffic in the affected regions we operate. However, we do not expect any significant impact from these events, and any financial impact has been included in our updated guidance range again speaking to the resilience and durability of our operating model. Importantly, to echo Mike, our employees' safety and well-being are our top priorities. We truly appreciate their dedication and resilience in navigating these tough times together. With that, I'll turn the call back over to Mike.

Thanks, John. Before we open the line to Q&A, I want to reiterate that we are confident in our robust platform and believe that we are positioned to deliver profitable growth and sustainable returns in the future. Going forward, we remain committed to leveraging the solid foundation we've established, including our diverse portfolio of sustainable products, to win new business. We've taken decisive action to strengthen our foundation throughout 2024. We expect the actions we are taking today will drive continued improvement into 2025 as we strive to become a more efficient business partner to those who benefit from the broad range of sustainable product offerings we bring to market. We are confident that the actions we are taking today will position Pact of Evergreen to be a fundamentally stronger and more profitable company in the future. I want to thank our employees for their unwavering support and dedication. You all are the reason this journey has been possible. That concludes our prepared remarks. With that, let us open it up to questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Anthony Pederary with Citi. Please go ahead.

Good morning. Good morning. Hey, with food and beverage merchandising, I think you talked about value over volume maybe in kind of the middle innings. And you also talked about maybe kind of earnings momentum in 25 or a good setup for earnings growth in 25. Is it possible to put any kind of finer point on when value over volume comps become much easier or maybe the program runs its course or you expect to see kind of positive contribution from these growth initiatives. Just wondering if you could put any more detail on that.

Yeah, I would say at a high level, I would say it's more beverage than the food side, just being in the middle innings. And I would tell you that, you know, as we – is we have looked at that footprint in the beverage business, and we've done things to improve it.

We've also unpacked that business to know where we have room to move on prices. We have customer contracts that are eclipsing, and that largely happens in 2025, so we expect to see improvements largely in that business, and that's why we're in the middle innings there. In terms of the food business, I think we're much more matured in that value over volume than the beverage.

Anthony, I think the only piece I would add is just around the Pine Bluff piece with the divestiture. As we talked about, at a company level, we've got some momentum going into next year in terms of the negative EBITDA contribution, which is clearly to the food and beverage merchandising segment. you know, roughly $38 million year to date that going into next year, you know, that's going to be a more favorable comp without that negative EBITDA contribution.

Got it. Got it. That's helpful. And then in terms of the growth investments, is there any way to quantify the you know, in terms of, you know, product vitality index or percentage of sales from new products, you know, kind of where you are now, you know, where you think you can get in 25 or, you know, how much growth, you know, new products could add. Just from a big picture perspective, you know, is there a way that we can kind of track that from the outside or metrics that you use?

Yeah, we're still –

wrestling internally with the right KPI for that, quantifying what's new, what's not, and we look to be more open about that, but we're not in a good position to share anything today.

Yeah, Anthony, I think that just the broader way to think about us going into the future, we tend, and this was, I think you should look to our general guidance around, we tend to track GDP and GDP growth, and going into next year, we're looking at that type of as Mike mentioned in his prepared remarks, would be incremental. We're excited about some of these new growth initiatives that we have going, and so we would look to those to be in addition to any type of GDP growth for our base business.

Yeah, and I guess the other thing, just to give the point the obvious, is having paper mills, we've constrained the business in terms of our ability to invest now that we've somewhat freed ourselves up

With the divestiture of the mills, our geography of the SPED is definitely much more geared toward growth linked to innovation and R&D work. So I'd expect to be in a better position in future calls to speak to that.

Okay, that's helpful. I'll turn it over.

And the next question comes from George Staffos with Bank of America. Please go ahead.

Hi, thank you. Hi, guys. Good morning. Thank you for the details. How are you? So, look, I have three questions, some piggybacking on what Anthony was getting at, and I had a separate question. So we have a starting point, ex-Pine Bluff, this year of between 838 and 848, correct, for EBITDA? And that is going to grow GDP plus, let's call it 3%-ish. There's some new products that are layering onto that. So, I don't know, 860, 870. Then I've got savings of whatever, $15 million, I think he said sequentially. Am I thinking about this the right way in terms of where you can go and or what are the offsets? Certainly, you've got volume still negative, which is a little bit remarkable, but help me think about 25 versus 24 in that bridge. That's question one. Question two, distribution, right? I mean, this has always been... what Paktiv was supposed to do very well, given its hub and spoke capability. How much did you see your products and SKUs and customers move to third party distribution? What will we see in terms of the swing going back and what does it mean in terms of the outlook for 25? And then lastly, if we didn't have the, I guess as we look out to 25 again back to the bridge, How much was the benefit this year from lower incentive comp, and what do we have to sort of add back or take out of earnings for next year for that component?

So really back to the bridge on 25. Thank you. Yeah, I'll start, George, and just give you some bridge-level information.

So I think you are thinking about it generally the right way. It's – You know, we do have the 838 to 848 as a starting point as we pointed out. The 15 million, I'll just deconstruct that a little bit. You know, we talked about when we launched the footprint optimization dollars of footprint benefit into 2025 and then 35 million into 26 and so we're still looking at that is the right ramp going into next year it will be it will scale throughout the year so it'll be more back-end weighted but 20 million is the right way to look at that and then we subtracted 5 off of that so that got you to the 15 which was the 15 million dollars of SG&A benefit we're expected to incur this year 5 million of that won't be repeating into next year and I mentioned in the prepared remarks. So your third question was on the incentive comp piece. So the incentive comp benefit this year is $7 million. So that's apples to apples. If we were incentive compensation at target, it would be a $7 million deduct to that level for next year. Now GDP is the right way to think about growth in volume for next year. So we're still looking at that as the general guidance. Now, the other thing to keep in mind is we're still in an inflationary environment, and inflationary environment, there are some headwinds from that from a cost standpoint. How much of that translates to EBITDA, we still have to give you some proper guidance on that, which we'll do at the next quarterly call. We do have efficiencies and operations that will offset that inflation, which will also help offset going into next year. So there are some puts and takes as we build out our detailed budgeting plan for next year and also factor in our capital plan growth initiatives to give you a proper guide that those are the right pieces to construct your 25 model.

I mean, should we land at north of 860 for next year given your preliminary budgeting for EBITDA? Or is that too difficult to call at this juncture?

I don't think it's an unreasonable number to think about.

Okay.

And on distribution? Yeah, so I think your question was around the $25 outlook.

Yeah, and no, really more the distribution point you were making earlier, Mike, in terms of I think you're moving some product back into, you know, owned in-house distribution versus third-party. And, you know, having covered PACTA for a long time, you know, the distribution – of the company, the hub and spoke model, the regional mixing centers, this was all strength of the company. So I was just curious how much move, if I'm, if I'm correct with my premise, how much had moved sort of third party and, and what are you bringing back? What's that look like? And what does it mean for earnings?

Yeah. So, you know, I just want to clarify. So when we, when we talk about redistributors, not, not like three PLs or third party distributors,

we're talking about really more of our core value over volume strategy. And so to say it plainly, instead of selling to businesses that would compete against us, we're going to go direct. And so we've had some customers that sell more broad line products that also sell directly against our products with other other vendor products. So we've elected to stop that and go direct. And so we'd expect that while there was a near-term volume dip, and you've seen that, that we've rebound and we've seen that come back. We forecast that in 25 and beyond. That's really what that was. So you had it right. Our hub-and-spoke model is the strength of the business and certainly something we wish to leverage

continue to leverage with a direct sale instead of a redistributor sale. Okay, thank you. I'll turn it over.

And the next question comes from Josh Spector with UBS. Please go ahead.

Hi, good morning. I apologize if I missed this, but did you guys talk about what your volume expectations are that underpin your 4Q guidance? And I guess relative to that, as you look at how 3Q played out on the volume front, Was that in line with your expectations or meaningfully different?

Sure. You know, starting off with our guidance for Q4 for volume, we didn't really touch on it on the call. I would say that just give you some broader views on volumes for the year. For the full company, we're still guiding to kind of low single digits for the whole year as you look at the full year versus last year. For Q4 specifically, we're going to be down low single digits in food service and up low single digits in food and beverage merchandising is our expectation.

I would say for Q3 we were fairly in line with what we anticipated. It was a positive result looking at prior quarters and what the trending was.

Okay. Yeah, that's helpful. I guess just for context, obviously the food and merchandise volume seemed meaningfully below what consensus was expecting. So I guess we had it wrong in terms of timing there. I guess I'll maybe leave it if there's any follow-up to that. But what I wanted to ask separately was just time bluff specifically when you talked about a negative $17 million versus expectations, was that all in 3Q or is that a comment for the year? And I don't know if now since you've divested it, can you give us the contributions and the negative impacts each quarter so we can make sure we're sequencing 2025 correctly at this point? Thanks.

Sure. The $17 million comment was for the Q3 in terms of some of the operational inefficiencies that we had in the quarters. That was versus our guidance from last quarter's call. $17 million also happens to be what our expected Q4 contribution would have been, and so if you deconstruct that portion of it, since we closed that sale before the end of the year, that was the Q4 expectation. The year to date is $38 million. I don't have the quarterly breakdown here in front of me. We can follow up with you to give you the quarterly breakdown of the negative $38 million. It was distributed It was a little bit more heavily distributed in Q2 with the cold mill outage. In Q1, we had some weather events that also impacted the quarter. Q3 for the mill for Pine Bluff was negative 3.3, so the rest was the first two quarters of the year.

Okay, I appreciate that. If I could squeeze in one more. Last quarter call, you talked about some more competitive intensity, I think, within some of the grocery channels and some of the less differentiated products. Has that stabilized? Anything changed there? And I assume this is obviously directly related with some of your value over volume. So just wondering how we should think about that trend this quarter versus last quarter and what that might mean for the outlook.

We missed the front end of your question.

I apologize.

Oh, sorry. I was asking if there's been any change in the competitive comments prior on competitive intensity. So... basically some of the pricing pressure in the grocery channels for some of the non-differentiated products, if that's changed at all, better, worse, unchanged versus prior quarter?

No, it's really unchanged for us. We're not seeing any sporadic pricing competition or anybody being irresponsible or anything like that.

And Josh, I pulled your Pine Bluff answers by quarter, so Q1 was negative 11, Q2 was negative 24.

And then Q3 was the negative three I mentioned.

Got it. Thank you.

And the next question comes from Phil Ng with Jefferies. Please go ahead.

Hey, guys. If I look at your implied fourth quarter EBITDA guidance, it assumes a noticeable step up sequentially, typically when it's down seasonally, and then it's certainly above consensus. So, John, I guess to kind of help us bridge the fourth quarter numbers, what are some of the puts and takes? Maybe it's just pint and buff being really bad in 3Q and that goes away. But if I heard you correctly, John, I think you were pointing to perhaps volumes being up in the fourth quarter, low single digits in food. So that's a big improvement. And how much of that is contract wins that you kind of have in the bag, right?

Yeah. No, thanks, Bill. I can walk you through that and give you a bit of a bridge. So let's just start on the sequential view because you're right, seasonally Q4 is a bit lower, but this year we do have some benefits we're expecting to get in Q4 and get some good momentum going into next year. I would say if you look at it from a sequential basis, about a third of it is coming from volume price mix. If you look outside of Pine Bluff, we are expecting some growth in volumes in food and beverage merchandising. We do have some seasonal declines in food service, as you might expect, but it's partially offset by customer wins. And so it should be lower than we might have seen in the past. And we've been talking about in food service some customer wins that we'd see ramping into the end of the year. And to note also, we're still expecting to outpace the industry as it relates to food service, even though there is a slight decline there for seasonal reasons. I think the other piece to... think about in terms of the price mix standpoint outside of volumes, is we are getting a benefit from raw material costs in the fourth quarter. And some of our COLA ramp-ups, as you think about those, they'll continue to build into the end of the year. And so we will see some favorability there. And then there is some favorable seasonal mix as it relates to some of the food and beverage pieces. So that's helping those volumes. I think the other side, about two-thirds of it, is just manufacturing costs and SG&A gains. So we do have some efficiency gains that we're expecting to see as some of our initiatives around manufacturing also ramp up into the end of the year. And some of those cost efficiency savings that we mentioned on the last call, we'll have a full quarter benefit of those in Q4. So on the cost side, about two-thirds of that uplift.

Okay. And the volume uptick in food and bed, I mean, you're down 8% in 3Q, and I think if I heard you correctly earlier, John, you're expecting low single-digit crowds. Give us a little perspective on what's driving that strength because that's a pretty sharp rebound.

Sure. Yeah, a lot of it is around our food segment and food and beverage segment within food. There's a bit of a delay to ag season this year, so some of that was pushed off into Q4 versus our normal seasonal dynamics in Q3. We're also expecting to see a bit of strength in Mexico. And then the bakery season tends to be more Q4-focused. And the bird flu impact on the egg business in Q3 going into Q4 should be a benefit.

Okay. That's helpful. And I guess, Mike, you may have teased this earlier, but when I think about your volume over volume approach in food service years past, we see the hit on volumes, but pricing actually surprises the upside, and it tends to be a good guy. When we think about your food and beverage value over volume approach, at least early in 3Q, we saw the hit in volumes and documentals were pretty heavy. But I think you kind of teased that when you go out to 25, you have some contracts that are resetting. That could be opportunity and perhaps even on the volume side with wins, with the right mix. So kind of help us think through the opportunity 2025. Should we expect you know, a nice bump in profitability EBITDA with perhaps some of these contracts resetting and then potentially some wins with a more favorable mix?

Yeah, I think generally you got it right. You know, in terms of squaring the numbers, you know, we're not there yet. We want to get through some of that. But you've characterized it absolutely correctly in that, you know, we've had to shrink with some to grow. And we've also, in terms of just better price mix with the current customer base, we will absolutely see a better quality of earnings.

And Mike, would we see that out of the gate to start next year? No, it's going to largely back half.

Okay. All right. Appreciate the call. Thank you.

And the next question comes from Arun Vaswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. I guess I just wanted to get back to a couple of comments you mentioned earlier. So as far as some of those trends that you saw with food service still underperforming and maybe food and some of those other exposures outperforming, could you just provide some more detail there? Where in your portfolio are you seeing strength And maybe if you could quantify that, maybe is it a third of your portfolio and maybe two-thirds in food services seeing some weakness? And, you know, last quarter you spoke heavily about the value meal initiatives at some of your customers. Have you seen any positive impact from that, and do you expect a positive impact in the future? Thanks.

Yeah, so, you know, if you look at,

The way we kind of characterize it is, you know, on the food service side, foot traffic, it would definitely be worse had the promotional activity didn't, you know, if that wasn't initiated. And I think the fact that many of our customers have, you know, made announcements that they're going to continue that into Q4, you know, we kind of view that as a positive. In terms of, you know, how that manifests itself in volume, we're not seeing, you know, a big rebound or anything, but we do think it would be worse. So it is starting to have an impact on the consumer. I think as prices continue to come down in more time, more time with lower prices, it's going to be a good thing for the consumer. As far as the food and beverage side of our business, this is where the consumers spend their dollars to get their calories today, largely, we're seeing that that manifests itself in all of our fresh channels. So protein, produce, those are still staples that we're seeing strength in. Eggs, as John mentioned, I would say that those are very good for us right now.

And we expect that to continue into Q4. And when you talk about food service underperforming, I just Just to clarify some of the comments we made in our prepared remarks, the foot traffic is down 3%, over 3% in the quarter and for the year across our client base there. And we're actually trending better than that. And so we do feel like the strength of our relationships with Blue Chip customers that we align with and some of our competitive strength there are helping us outperform the marketplace. It is a challenging environment, and as it relates to the promotional activity, there was some benefits there that we saw, but it's still a bit muted given the foot traffic dynamic, and we're hoping to see some momentum there into Q4 as some of those promotions have been extended. And we have seen some shift there to more food and beverage merchandising, but again, just to reiterate, we have been taking a value over volume approach, and some of the repositionings Mike talked about earlier is what's driving some of those volume declines, which we feel are going to be transient in nature.

Got it. Okay, that's helpful. And then just to put a final point on that, So is it maybe a third of your food service business that's really tracking with that down 3% foot traffic, and maybe more of your food service business is above that, or is it half? And then similarly with FoodBev merchandising, are you kind of in line with the market or above?

Yeah, I don't know if we really think about it that way.

More from a portfolio standpoint, there's a lot of elements that are driving the overall outperformance of the industry. It's, again, aligning with some customers that are winning in the marketplace is probably the biggest factor, and we do index pretty well to those customers that are doing well in the marketplace. I'd say there's a good portion of our portfolio, but it's not like we bifurcate it and there's some that's materially overperforming and some that's materially underperforming that it blends out to better than the market. I would say generally our customers tend to track better than the marketplace would be the way I think about it.

And then this last quarter you mentioned maybe some customers trading down away from Earth Choice and maybe some of the higher mix-driven items. Do you still see that continuing? And then if I could just squeeze in one more, do you feel that your leverage is tracking in line with your expectations and you still expect to be in the low fours at the end of this year and maybe below four at the end of next year? Thanks.

Yeah, on the trade down, I don't remember disclosing anything like that. But what I can tell you is I think, and maybe what you're referencing is, you know, on the value menu trade down where, you know, instead of the customer getting a 32-ounce drink, they're going to get a 16-ounce drink. So there's certainly, you know, on the value meal and burger war front, you know, there's definitely a trade down happening. And so that's coming through in some of our mix. But outside of that, we don't have customers on the distribution side or any of our branded side trading down our brands for other products.

We don't see that. And then John, I'll let you talk to the leverage.

Yeah, on the leverage front, I think you're thinking about it the right way. So we're on track with our expectations. We said that we want to be around four by the end of the year, and we still expect to be around four by the end of the year. That's not the destination. By next year, we will continue to deliver and anticipate being in the threes. And so to your point on where will we be at the end of the year, we haven't put out official guidance there, but I'd expect to have a three in front of it.

Thanks. This concludes our question and answer session. I would like to turn the conference back over to Mike King for any closing remarks.

Thank you. As we close today, I want to thank the entire Packet of Evergreen team for their hard work during the third quarter. We are executing on our strategy and are confident we will continue to progress on our transformational journey in 2024.

We look forward to updating you during the fourth quarter conference call next year. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.