KB Home Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Day, and welcome to the Packet Evergreen First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Curt Worthington, Vice President, Strategy and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, Welcome to our Q1 2023 earnings call. With me on the call today, we have Michael King, President and CEO and Jon Bakst, 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.

Speaker 1

Before we begin our formal remarks, I would like to remind everyone that our discussions today will include forward looking statements, including, but not limited to, Statements regarding our guidance for 2023. These forward looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by our forward looking statements. Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that 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 ks for the year ended December 31, 2022 and our quarterly report on Form 10 Q for the quarter ended March 31, 2023, for a more detailed discussion of those risks.

Speaker 1

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.

Speaker 1

With that, Let me turn the call over to Pactiv Evergreen's President and CEO, Michael Kang. Mike?

Speaker 2

Thank you, Curt, and good morning, everyone. Yesterday after the market closed, Active Evergreen released strong first quarter results, including adjusted EBITDA of $189,000,000 exceeding our guidance and establishing solid momentum heading into the Q2. Our performance in the quarter is a testament to the resilience of our platform, The diversity of our product portfolio and the tremendous efforts of our dedicated employees. As we will continue to outline During sections of this presentation this morning, this is an uncertain macro environment for many sectors of the economy. However, our results underscore the inherent strength of the Packet Evergreen business model and reinforce our confidence in executing the next phase of our strategic journey.

Speaker 2

Turning to the agenda on Slide 4. I will start today's call with the highlights from the quarter along with an update on our previously announced beverage John will then discuss Q1 results in more detail along with an update on our 2023 outlook. Finally, I will close with an update on our strategic journey. We will then move to a question and answer session. Moving to our Q1 highlights on Slide number 6.

Speaker 2

We reported net revenues of $1,400,000,000 a solid performance that reflects the many strengths of our platform and our unique ability to service our customers. While the Q1 net revenues represented a 4% decrease Compared to the Q1 of 2022, excluding the impacts of divestitures, primarily beverage merchandising Asia in 2022, We were essentially flat to last year. Sales volumes declined due to a focus on value over volume in the foodservice and food merchandising segments And the market softening amid inflationary pressures in the beverage and merchandising and food merchandising segments. Pricing levels were slightly higher than last year As a result of the actions we took to manage price over the course of 2022, our input costs have largely stabilized as compared to recent periods And our pricing strategy reflects our contractual pass through mechanisms and our competitive value proposition. 1st Quarter adjusted EBITDA was $189,000,000 which is ahead of our guidance.

Speaker 2

The outperformance compared to our guidance was primarily driven by favorable mix And lower SG and A, we also benefited from an extension of key business that was previously expected to occur in the Q2. During the quarter, we generated $25,000,000 of free cash flow and reduced our net leverage ratio to 4.5 times. As we will cover in more detail later in the presentation, we remain committed to deleveraging our balance sheet and we are focused maximizing long term free cash flow generation. We do not expect our beverage merchandising restructuring plan to prevent us from Driving solid free cash flow in 2023 and we expect our net leverage ratio to improve by year end. Further, We expect the beverage merchandising restructuring plan will put us in an even better position to generate free cash flow and accelerate our deleveraging path in 2024 and beyond.

Speaker 2

Turning to Slide 7. 2023 is an important year for Pactiv Evergreen as we execute on a number of strategic actions designed to help us focus on our core converting operations for food and beverage packaging to position us for profitable growth in the future. First, we have already made significant progress in our beverage and merchandising restructuring plan, and we are confident that we will cease operations at the Canton Mill and Olmsted Falls facilities by June. We have also taken steps to support a smooth transition of our paperboard supply to avoid disruption to our customers And our remaining operations. As we outlined in March, the beverage merchandising and restructuring plan is expected to result in non cash and cash charges.

Speaker 2

We have since refined those estimates as follows. Non cash charges are expected to be $320,000,000 to $330,000,000 which reflects updated non cash costs associated with accelerated depreciation of property, plant and equipment and other non cash charges. Cash charges are expected to be $130,000,000 to $160,000,000 We have reduced the high end of the range to reflect lower Severance and other expenses at the impact of facilities. Finally, as we outlined previously, we have implemented a new management and operating structure for our food merchandising and beverage merchandising business as of April 1. This is a major step toward achieving the run rate cost benefit that we highlighted in March.

Speaker 2

By combining the converting operations of our food and beverage merchandising businesses And exiting the Cant Mill, we intend to leverage our collective effort on Pecutive Evergreen's core food and beverage merchandising end markets and allow for a more profitable liquid packaging operation in the future. Not only does this align with our strategy to focus on our Consistently growing higher margin businesses, it also yields meaningful savings in annual operating cost and CapEx. We will begin reporting the financial results for the new food and beverage merchandising segment with our 2nd quarter earnings release and 10 Q. Lastly, we have progressed the review of strategic alternatives for the Pine Bluff Mill and Waynesville facility. We do not have a definitive timetable for this process.

Speaker 2

We intend to provide additional updates on the status of the review throughout the year. Turning to Slide 8. As our results indicate, we exited the Q1 on a solid trajectory and are taking the steps to improve our future EBITDA and free cash flow profile. As a result of the strong start to the year, we are now expecting our 2023 adjusted EBITDA to be in the 775,000,000 to $800,000,000 range. Of course, none of these accomplishments would be possible without the tremendous efforts of the great team at Pactiv Evergreen.

Speaker 2

I want to take this opportunity to thank everyone for their outstanding performance. I will now turn it over to John to discuss our Q1 results in more detail, including our segment performance before I provide an update on our strategic direction and closing remarks. John?

Speaker 3

Thanks, Mike. Turning to Slide 9. As noted in our Q4 2022 earnings call, our operating backdrop We have seen a slight moderation in broader inflation measures. They remain elevated relative to historical levels, and we expect interest rates, input costs And consumer spending turned into pressure through 2023. Starting with volumes and demand, the destocking that impacted our 4th quarter volumes Was largely completed during the Q1, so we expect that particular headwind to subside for the remainder of 2023.

Speaker 3

The primary impact on consumer demand continues to be inflation. In foodservice, foot traffic in the quick service restaurant and full service restaurant market segments Has trended down compared to 2022 and consumers are also shifting their spend from higher end full service restaurants to mid to lower tier Full service restaurants and QSRs. In food merchandising, consumers have been balancing their food spending to deprioritize certain items such as bakery products. For beverage merchandising, board sales were impacted by scheduled cold mill outage, while uncoated freesheet continues to face Secular headwinds in consumption. With respect to pricing and mix, overall pricing levels are higher compared to the Q1 of last year as a result of our efforts to balance price versus volume throughout the course of 2022.

Speaker 3

Relative to Q4 The 2022, material costs have improved slightly with more recent moderation in the current quarter. This dynamic has also benefited other aspects of our cost structure Transportation costs, natural gas, energy and chemicals are all lower compared to last year. Lastly, we continue to monitor interest rate outlook and capital markets volatility in the wake of the recent shocks to the banking sector to assess what, if any impact, that may have on the broader economy and the health of the consumer. Continuing on Slide 10, Q1 year over year results. Net revenues were down 4%.

Speaker 3

Volume was down 6%, largely due to a focus on value over volume in the foodservice and food merchandising segments and the market softening amid inflationary pressures in the beverage merchandising and food merchandising segments. Price mix Was up 6% due to the contractual pass through of higher material costs and pricing actions in all segments. Revenue for the Q1 of 2022 also included the results of divested businesses, notably Beverage and Merchandising Asia. Adjusting for these impacts, revenue is essentially flat. Adjusted EBITDA also benefited from year over year price favorability and lower transportation costs.

Speaker 3

The decrease in cash flow was impacted by lower operating cash flow due to higher incentive compensation payments and interest expense, partially offset by our strategic inventory investment in the prior year period. Moving to Slide 11 for a sequential quarter comparison. 1st quarter net revenues were $1,400,000,000 down 3% versus the prior quarter. Volumes were down 2% versus the 4th quarter, while price and mix were down 1%, partially due to declining resin prices. Adjusted EBITDA was $189,000,000 for the quarter, a $22,000,000 increase from Q4 2022 levels.

Speaker 3

Despite the slight decline in revenue, we benefited from lower material costs and lower employee related costs, partially offset by higher manufacturing costs compared to the Q4. 1st quarter free cash flow of $25,000,000 Was lower than Q4 due to lower operating cash flow caused by the timing of our annual incentive compensation payments, which occur in the Q1. Continuing on Slide 12 and our results by segment. In our Foodservice segment, year over year, net revenues were down 6%. Volume is down 5%, primarily due to a continued focus on value over volume.

Speaker 3

Price mix was down 1%. Adjusted EBITDA was down 3%. The decrease in adjusted EBITDA was due to higher manufacturing costs and lower sales volume, mostly offset by lower material costs, Net of cost pass through and lower transportation costs. Quarter over quarter, net revenues were down $19,000,000 or 3%, primarily due to lower pricing driven by the contractual pass through of lower material costs. Adjusted EBITDA was up $23,000,000 or 26% due to lower material costs, net of cost pass through, partially offset by higher manufacturing costs.

Speaker 3

On Slide 13, our Food Merchandising segment. Year over year, net revenues were up 9%. Price mix was up 15%, primarily due to pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier And the contractual pass through of higher material costs. Volume was down 7%, primarily due to a focus on value over volume The market softening amid inflationary pressures. Adjusted EBITDA was up 55%.

Speaker 3

The increase was due to a price mix benefit, partially offset by higher manufacturing costs and lower sales volume. Quarter over quarter, net revenues were down slightly by $7,000,000 or 2% As a decline in sales volumes of 3% was partially offset by favorable pricing as pricing actions taken to offset higher input costs, including the pricing benefit from the extension of key business mentioned earlier, offset the contractual pass through of lower material costs. Adjusted EBITDA was up $10,000,000 or 12% due primarily to a price mix benefit partially offset by higher manufacturing costs. On Slide 14, I'll discuss the Beverage Merchandising segment. A few important items to note here to put first quarter results in the proper context.

Speaker 3

In Q1, we performed a scheduled cold mill outage at our mill in Pine Bluff, Arkansas. These are typically done every 3 years and entail approximately 10 days of downtime for maintenance and service. At the same mill, we were impacted by winter storm Elliott at the start of the year, which also adversely impacted production. These events led to a meaningful degradation of EBITDA for the quarter. However, since early Q2, the mill has been back up and running with normal operations.

Speaker 3

Now for comparison to prior periods. Year over year, net revenues were down 8%. Price mix was up 7%, primarily due to pricing actions taken to offset higher input costs and the contractual pass through of higher material costs. Volume was down 6%, primarily due to the market softening amid inflationary pressures and a decline of 9% was due to the impact from the disposition of Beverage Merchandising Asia. Adjusted EBITDA was down 96%.

Speaker 3

This decrease was primarily due to higher manufacturing costs And the impact from the disposition of Beverage Merchandising Asia, partially offset by favorable pricing, net of material costs pass through. Higher manufacturing costs included $15,000,000 related to the scheduled cold mill outage. Quarter over quarter, Net revenues were down $15,000,000 or 4%, primarily due to 4% lower sales volumes, primarily due to the market softening Amid inflationary pressures, price mix was flat. Adjusted EBITDA was down $20,000,000 or 95%, primarily due to higher manufacturing costs, We proactively reduced total debt during the quarter by repaying and repurchasing $110,000,000 of our $1,200,000,000 term loan due 2026, marking a total debt reduction of $228,000,000 since year end 2021. Working capital increased compared to Q1 of last year, primarily due to the Strategic investment in inventory over the course of 2022.

Speaker 3

Since year end, we reduced our inventory positions in foodservice and food merchandising, While we built inventory and beverage merchandising in advance of ceasing operations in Canton in the Q2. Additionally, we have tightened the range of estimated cash restructuring cost for Cannon and Oateson Falls, which we expect will afford us additional flexibility with respect to capital allocation. We expect to pay out the bulk of the cash restructuring costs over the course of Q2 through Q4 of this year. As a result of the debt repayment, our cash balance declined to $427,000,000 And total debt declined to $4,000,000,000 resulting in net debt of $3,600,000,000 and a net leverage ratio of 4.5 times. We remain committed to maximizing our long term free cash flow and reducing the net leverage while maintaining our focus on driving profitable growth.

Speaker 3

We also remain committed to our dividend policy as part of our long term capital allocation plans. Looking ahead to the rest of 2023, we anticipate ending the year with a net leverage ratio in the low 4s. We also plan to make additional debt repayments in 2023 as conditions warrant. Finally, as we progress our beverage merchandising restructuring plan and strategic alternatives process for Pine Bluff in Waynesville, we will update our cash deployment plans accordingly. Now please turn to Slide 17.

Speaker 3

Our company continues to execute at a high level across all our business units and we remain well positioned capitalize on future growth opportunities despite the near term emphasis on the beverage merchandising restructuring plan. As we have highlighted, the outlook for the U. S. Economy remains uncertain As high interest rates and still elevated inflation weigh on consumer spending, which may also negatively impact our customers' purchasing and order patterns throughout the remainder of 2023. Despite these headwinds, our Q1 results demonstrate the resilience of our food and beverage packaging business the company's ability to deliver sustainable results despite the uncertainty.

Speaker 3

As we highlighted earlier, we have increased our year adjusted EBITDA guidance is $775,000,000 to $800,000,000 This reflects the expectation that we will build on the momentum of the Q1 to further improve productivity, throughput and customer service levels. We expect our quarterly performance in 2023 to follow a more traditional seasonality compared to 2022. Typically, our seasonality is driven by higher consumption during the summer months and into the Q3. Last year, the Q2 was our strongest quarter for adjusted EBITDA. This year, we expect a modest sequential upward trajectory from Q1 to Q2 into the second half of the year, which will result in challenging year over year comps for Q2, the more favorable comps for Q3 and Q4.

Speaker 3

From a macroeconomic standpoint, our full year adjusted EBITDA guidance assumes no material deterioration in the second half of the year compared to current conditions. Our full year guidance for capital spending remains unchanged versus our original guidance, while our expectation for total cash restructuring cost has been narrowed to $130,000,000 to $160,000,000 with the majority of these costs expected to occur during 2023. As a result, we are introducing new guidance for full year free cash flow, which we expect to be in excess of $200,000,000 We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate this will help us achieve a net leverage ratio in the low 4s by year end. I do want to provide some additional color on free cash flow and net leverage ratio timing from quarter to quarter. With respect to free cash flow, We expect to have negative free cash flow in Q2, followed by positive free cash flow during the second half of the year.

Speaker 3

This is due to the timing of the cash severance payments And closure costs for Canton and Olmsted Falls, which are heavily weighted in Q2. With respect to our net leverage ratio, While we are targeting to end the year in the low 4s, we expect a modest increase in Q2 as the Q2 of last year rolls off our LTM adjusted EBITDA figure In addition to the cash dynamic I just discussed, since 2023 is expected to follow a more traditional seasonal trend, We expect to see more consistent adjusted EBITDA results from quarter to quarter and declining net leverage through year end. Moving to Slide 18, we have provided a bridge from our reported 2022 adjusted EBITDA to our previous and updated guidance for 2023 adjusted EBITDA. On the forward left is our reported 2022 adjusted EBITDA of $785,000,000 As we outlined in our 4th quarter earnings call, The adjusted EBITDA contribution in 2022 from divested businesses in our Canton Mill operations on a partial year like for like basis was approximately 30,000,000 This brings our pro form a 2022 adjusted EBITDA to $755,000,000 which represents a like for like basis compared to our guidance for 2023 adjusted EBITDA.

Speaker 3

Our original guidance was for 755 $1,000,000 to $780,000,000 of adjusted EBITDA for 2023, which represented 1.7% growth at the midpoint compared to 2022. With our revised guidance today, we now expect full year adjusted EBITDA in the range of $775,000,000 to $800,000,000 representing 4.3% at the midpoint compared to 2022. To put this into perspective, the Congressional Budget Office's most recent estimate for U. S. Real GDP growth in 2023 is only 0.3%.

Speaker 3

I'll now pass it back to Mike for further comments.

Speaker 2

Thank you, John. Please turn to Slide 20. This is an important year for Packet Evergreen as we build upon our foundational strengths and increase our focus on our core competencies, but it's just as important to put 2023 into context of our strategic direction. Over the last 2 years, we expanded and strengthened our position in foodservice And consumer packaging goods through our acquisition of FabriCal integrating great brands such as Greenware and Recyclware. We made great progress in refining our portfolio to focus on our core operations in North America by executing multiple divestitures of non core businesses, including the sale of our beverage merchandising Asia business.

Speaker 2

This year through the beverage merchandising restructuring, We have taken significant steps to solidify our leadership position in large growing end markets while prioritizing our distinctive core strengths. Through it all, we have made strides in our ESG stewardship and have set a goal of having 100% of our net revenue come from products made of recycled, Recyclable or renewable materials by 2,030. This past quarter, we published our first ever task force on climate related financial disclosures Report and plan to integrate the results into our enterprise risk management program. In addition, we are actively working with our customers to develop Unique products to help them meet their sustainability goals. A copy of the TCFD report may be found at investors.

Speaker 2

Pactiveevergreendot under the ESG documents section. Finally, we have dramatically reduced our net leverage profile from 7.6 times at the end of 2021 to 4.5 times as of 1Q 2023 through a combination of solid free cash flow, Proceeds from divestitures of non core businesses and improved EBITDA performance. While 2023 is a transitionary year, We do expect to grow EBITDA and generate solid free cash flow despite the beverage and merchandising restructuring costs. We anticipate a continued reduction in our debt levels and our net leverage over the course of 2023. As John mentioned, we are targeting a net leverage ratio in the low 4s by year end.

Speaker 2

We believe these actions will build additional momentum on our existing position as the market leading North American food and beverage packaging company. We also expect our streamlined focus on our core converting operations to help us drive incremental revenue and EBITDA growth as well as enhanced free cash flow conversion. This in turn would help us deliver dependable returns and reduce our net leverage to under 4 times. In summary, we believe we have a robust platform that enables profitable growth and sustained returns with the financial wherewithal to pursue organic and inorganic opportunities to add to our business. We continuously evaluate our portfolio to ensure that we have the Optimal mix of products and capabilities to meet our customers' needs and to ensure that we are deploying our capital to maximize shareholder value.

Speaker 2

We also maintain the flexibility to divest non core businesses to help us focus on our core markets as well as delever our balance sheet. On Slide 21, I'd like to reiterate what makes Pactiv Evergreen a strong, differentiated, growing and socially responsible business. We are an industry leader in food service and food and beverage merchandising and our markets are largely recession resilient. We are also focused on generating sustainable returns and the leadership team has demonstrated our willingness to optimize the portfolio in ways that put us in the best position to deliver on our commitments. We offer a broad array of products and substrates and we have long standing strategic partnerships with Many of which are blue chip companies.

Speaker 2

We are constantly working to innovate and develop the highest quality sustainable products. We set a goal of having 100 percent of our net revenues in 2,030 come from products made of recycled, recyclable or renewable materials. All of this yields strong adjusted EBITDA and free cash flow generation, which we carefully managed to drive deleveraging and further growth through our disciplined capital allocation process. In closing, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitments to our mutual success.

Speaker 2

With that, let's open it up to questions. Operator?

Operator

We will now begin the question and answer session. The first question today comes from Ghansham Panjabi with Baird. Please go ahead.

Speaker 4

Hey guys, good morning and congrats to a very strong start. I guess, Michael, going back to your prepared comments on the obvious, which is the consumer spending environment and the associated uncertainty. Can you just give us a sense as you're thinking about volumes on a segment basis as you cycle through the rest of 2023, your comparisons are quite a bit easier, but there is that aspect of Just end market weakness. So any updated thoughts there?

Speaker 2

Yes. So just when you think about our outlook, The way we're thinking about it is that this environment, albeit challenging, we'd expect that same kind of Challenge to continue through the balance of the year. We are seeing consumer moderation and foot traffic. Interim dining, the buy down is real. The good news for our business is that when the consumer does that, it just moves the business from Our foodservice channel to our food merchandising channel.

Speaker 2

So looking at our Q1 results with the challenging macro, That's kind of how we view the year that there won't be a big pop or improvement in the consumer sentiment. So We do believe that this is sustaining through the balance of the year and that's included in how we're thinking about our outlook. The other thing to add to that would be, if you look at 2022 comps in the back half, there was a large Destocking, as many of our customers kind of ran in and dribbled into Q1, we do believe that's largely complete. And it could be an interesting back half of the year should the consumer stay where they're at today and could be a benefit even to our forecast.

Speaker 4

Okay, got it. And then your comments on the extension of business and the food merchandising, I think you called that as one positive variances relative to your internal expectations for 1Q, just expand on that. Is it going to start to impact Your volumes as you go through the year for that segment?

Speaker 3

In terms of the extension of the business, yes, so that was In terms of so to give you some context, there's a bit more disclosure in the 10 Q that we filed today. So that was essentially an extension of some of the key terms that we have with RCP, it was a two way agreement under which we supply product to RCP and RCP supplies products to PAX at Evergreen. The COLA there was a COLA revision that was signed in Q1. It was We expect to decide it in Q2, which is why we had an incremental benefit to the quarter. And there was a bit of The retroactive recovery for inflation in there.

Speaker 3

And just to give a little bit of color, the Kohler revision applied in both direction. There was a net benefit Active Evergreen based on the difference between the old and new pricing and the fact that we sell more at RCP than we buy from RCP. We received a true up during the Q1, which resulted in a roughly $12,500,000 of adjusted benefit in the quarter, Which includes roughly $7,500,000 related to prior periods.

Speaker 4

Okay. That's very clear. Thank you.

Operator

The next question comes from Kieran de Groone with Mizuho. Please go ahead.

Speaker 5

Hi, good morning. I was

Speaker 2

wondering if you can talk

Speaker 5

a little bit more about pricing and how we should think about pairing like the cost Pass through with what we may call it structural price increases that would stick as costs aside and how you think about that trending throughout the rest

Speaker 3

of the year? Thank you.

Speaker 2

Yes. So really the way we think about pricing is we have structured index based mechanisms in our contracts For our raw materials and those are all on a pass through. I would say the non index or the more Cost of living associated costs, we have arrangements built into most of our contractual paid at will pricing that allow us to Continue to get the support from our customers where inflation and cost pressures continue. And so if You look at our improved margins, it's really a result of just how we think about pricing. We're pretty elastic on both the index based and the COLA based stuff.

Speaker 2

So that's kind of how we approach it. And that's how we anticipate production in our outlook.

Speaker 5

That's very helpful. And maybe along those lines, when we think about Pricing for value and against volumes, how do we think about the impact potentially on volumes from those actions Throughout the course of the year. I mean, is there a way to parse out maybe in 1Q how much of the volumes how much of volume impact was From like destocking versus just general market weakness versus some of the initiatives that you're taking to price for value as opposed to just chasing volumes? Thank you.

Speaker 2

Yes. So it's really we can get and understand the difference between what the destocking versus maybe A value over volume impact could be. But what I would tell you generally is With where our service levels continue to be over 99% and with the kind of support our customers have given in Supporting inflationary costs, we'd expect that to continue. We have no large Volume degradation assumption and related to our value over volume strategy and certainly Our chase of volume by any means is a strategy linked to pricing.

Speaker 3

And I'll probably just Chad, where we are losing some of the where you do

Speaker 6

see some of the

Speaker 3

volume degradation, it is more on the margin and it's more towards the So it's the lower margin customers, which is where you're seeing the benefit to that approach paying off in the EBITDA That we're reflecting. I should say. Great. Thank you.

Operator

The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead. Great.

Speaker 6

Thanks for taking my question. Congrats on a strong first quarter. You gave some very helpful comments in the prepared remarks regarding the EBITDA bridge. So when you think about that midpoint of the guidance Now at high 780s, it sounded like your second quarter faces some tough comps, so maybe that looks a lot like first Order. And then that would remain that would leave about $400,000,000 for the second half.

Speaker 6

So it would imply a little bit of a better second half. Am I thinking about that the right way? Maybe just provide some more detail on how you're thinking about the EBITDA progression through the year?

Speaker 2

Yes, I think you have it right. Certainly, the back half of the year just with destocking that reoccurring and Yes. Our assumption around a softer macro economic landing, not necessarily things getting worse, but with the current Challenges carrying through the end of the year. That's exactly right. And in Q2 last year, obviously, the comps with Declining input costs and us rebuilding our strategic inventories and things like that, we had A fairly solid Q2 that had some uniqueness that won't reoccur.

Speaker 2

So, I think you had it right. I think you said Exactly how we're looking at it. John, anything you want

Operator

to add? Great.

Speaker 3

And then I agree with all that, Mike. We expect our 2Q volumes and adjusted EBITDA will both improve compared to Q1 levels mainly due to seasonality as we just mentioned. But just again to note, we do not expect the Q2 of 'twenty three to exceed the Q2 of 'twenty two Volumes or adjusted EBITDA, just given the strength of Q2 of last year, which was our best quarter.

Operator

Yes, right.

Speaker 6

And then when you look into the medium term, so you have some strategic alternatives for Pine Bluff, you've Exited some other non core businesses that accounted for, I think, dollars 30,000,000 of EBITDA last year. So when you look into 2024, We should still expect growth, is that correct, on better, maybe slightly again, no destocking, maybe a little bit healthier consumer And some of the actions that you've taken internally, so would you expect kind of mid single digit EBITDA growth as kind of steady state or are you thinking about the medium term now?

Speaker 2

Yes. We'd expect growth. I think it remains to be seen as to how strong our growth, but I don't think single digits is out of the question. I think that's Probably more realistic, but absolutely, we're expecting to grow. Okay.

Speaker 2

Thanks.

Operator

The next question comes from Anthony Pettinari with Citi. Please go ahead.

Speaker 2

Hi, good morning. Your 1Q EBITDA margins, I think, were up 100 bps year over year. As we think about 2Q, is there sort of a directional way to think about margin trajectory? And then just more broadly, Is there a way that you think about sort of normalized margins for the company or maybe a long term target? I think last year you were around 12.5%.

Speaker 2

Just wondering if you can give us sort of the near term view and then if there's kind of A long term goal or sort of normalized view?

Speaker 3

Yes, sure. So just to put it into some context, This current quarter Q1, we did see some from a corporate standpoint, some the margins were better as You referenced, but they were still brought down by some of the events in the beverage merchandising segment, which Some were one time, as I mentioned in the prepared remarks, due to the cold mill outage and the effects of winter storm, Getting beverage merchandising more normalized, we do have a little bit of noise there this quarter as we are closing we are Closing Camden in Olmsted Falls this quarter, as we get that more stabilized, you would see that the margin from that segment will improve. And then as that gets normalized, you'll see that the overall corporate margins will improve going into the Out of your quarters, I would say on a long term basis, we're generally trending toward we aim to be in the mid to high teens In terms of where our normalized EBITDA margin should be. And by the way, that's not a stopping point. We'll continue to push ourselves to exceed that, but that's I think that's the right way to think about where we'd expect to be in the near term.

Speaker 1

Okay. Okay. That's very helpful.

Speaker 2

And then just there was Kind of a spike in polypropylene prices in the quarter. I'm just wondering if you can kind of remind us your impact Or your exposure rather to polypropylene and then just more broadly kind of assumptions about resin costs As we go through the year for your guidance?

Speaker 3

Yes, we did experience that. As a reminder, we do have Majority of our contracts do have resin pass throughs and those that are not contracted, we tend to price on the spot market and so We'll recognize the material price the resin price pass through things like propylene on the spot market. I would say that as a reminder, there is a lag effect with those as you know. And so as we are seeing a bit of spikes more recently in polypropylene, There will be some margin impact in the short term, but which we will get back as that normalizes or comes back down. But the current environment for propylene specifically is factored into our guidance scenario based on what we're seeing in the marketplace.

Speaker 2

Okay. That's helpful. I'll turn it over.

Operator

The next question comes from Kyle White with Deutsche Bank. Please go ahead.

Speaker 7

Hi, good morning. Thanks for taking the question. SG and A inflation was a fairly large headwind all of last year. This quarter was actually positive On a year over year basis, just with some of your cost management, should we expect SG and A to be lower this year and for that bucket to be positive and any kind of range of benefit that we should That's included in the outlook?

Speaker 3

Sure. I think you do pick up on that trend. We are working very actively on cost management. We did see a decrease in SG and A. Part of it is the restructuring that we mentioned.

Speaker 3

So are going to be recognizing some benefits for that. We should see the full run rate of that into going into next year to the tune of around $30,000,000 So you're seeing some of that. There are some other lower kind of one time incentive pieces that were in 2022 that we're not Seeing in 'twenty three, and that is offset by some inflation. So we are seeing inflation in certain areas. But as you can tell, we're proactively managing SG and A costs, despite some of the inflationary headwinds, we are doing everything we can to continue to lower SG and A costs.

Speaker 7

Got it. And then on Foodservice, you talked about consumers trading down, But curious if you're actually seeing a similar dynamic as it relates to your business customers. Are they going to are they trading down to cheaper options that So it may not be viewed as sustainable, is that having any kind of implications on your mix?

Speaker 2

So we're seeing the trade down. I would say to a lesser extent, it's a mixed bag whether it's favorable or unfavorable to mix. With people choosing to get their calories at a lower cost, things In room dining and the trade down to either more chain or fast food based Consumption and even largely if you use Q1 as a good example, people returning to Eating at home quite a bit more is the lowest way lowest cost way to get calories. So the good news for us is We don't lose the volume when the consumer trades down. They shift where they shift the channel in which they consume.

Speaker 2

And largely our products are channel agnostic outside of the branded space. So we don't see A margin mix impact per se. We do experience the shift and the lag behind that consumer shift. So that's really the impact to our businesses, adjust our production and inventories to meet that shipping consumer.

Speaker 7

Got it. Thank you. I'll turn it over.

Operator

Shane Keeler with Bank of America. Please go ahead.

Speaker 8

Yes. Hi, good morning. This is Kashman sitting in for George Staphos this morning. So you called out a couple of times that manufacturing costs were higher across the segments. So I was just hoping to get a little bit of a better understanding as to what was Driving that and then how can we think about that in terms of trending for the rest of the year?

Speaker 8

Thanks.

Speaker 2

Yes. The inflationary challenges around labor and the cost of labor is real. So Continue to get the right kind of applicant flow and get the right folks trained. Those costs are all higher coming into the year. We expect that to continue.

Speaker 2

One of the key focuses for our business is to ensure we maintain The highest service levels and protect our customers. And in order to do that, we've made it a focus to ensure that We're bringing in quality candidates and investing in them. So that's really Where we're seeing the cost continue, and it's really more about what we've seen over the last kind of 12 to 18 months is Albeit it is starting to taper off. That's really the gist of it. And that is contemplated in our outlook as well.

Speaker 3

And Kashan, one other thing I'd add is just, as you look at some of the volume declines that we're seeing, albeit modest, there is a bit of an absorption impact here As that's influencing that manufacturing cost.

Speaker 8

Got it. And then just secondly, I guess longer term in terms of the capital needs of the business, how can we think about kind of what the normalized CapEx level should be Maybe as we move into 2024? And then relatedly, I guess, on free cash flow and leverage, how can we about that, particularly as we move beyond kind of the restructuring actions that you're taking this year? Thanks.

Speaker 3

Yes, sure. Lots to cover on that. So first on the capital needs for the business. So given the restructuring that we're undergoing, part of The goal of that restructuring around the beverage merchandising segment is to lower our run rate of Our ongoing capital needs. So this year, for example, in the business, we're expecting to have about 150,000,000 Sustaining capital, about $50,000,000 of which is in the mills.

Speaker 3

The remainder of that, there are a portion of that that is Another portion of the $280,000,000 of our guidance this year is focused on smaller business opportunities and growth projects, including the $60,000,000 new equipment that we mentioned on the last quarterly call. From From a run rate basis going into next year, we haven't provided guidance yet, but it's from a sustaining and kind of a minimal CapEx run the business, it will be coming down due to the restructuring, if that's helpful. As it relates to free cash flow guidance, It's probably helpful for me to just give you a walk of what's going into that to build up to the $200,000,000 plus that we're guiding to. And to start the bridge, At the beginning EBITDA, if you take our $775,000,000 to $800,000,000 you subtract out $280,000,000 of CapEx that we've guided to. Cash interest, we're expecting to be around $250,000,000 which is a bit lower from the guidance from last quarter.

Speaker 3

Part of that is LIBOR has come down and we've also repaid some debt, which has lowered that overall interest. Cash taxes about $70,000,000 And then the beverage merchandising restructuring charges, as we mentioned, the majority of that is to be in 2023 with probably disproportionate amounts in Q2. So call that somewhere around 120 to 130 for this year. So the remainder then for the free cash flow is working capital benefit we expect this year. So and to give you a sense of that, that includes a net inventory reduction once we seize production in Canada.

Speaker 3

One of the primary drivers will be the transition Stock of paperboard inventory we built to facilitate that exit and we expect to work through that stock through the end of the year. We have additional opportunity further reduce overall inventories without impacting our service levels. One area to highlight is working more closely with our customers as well on forecasting. And while they have also improved their own forecasting and so by aligning our planning, we've been able to improve service levels and improve efficiencies, which allows to manage our inventory more effectively. And then we are making concerted efforts to improve other overall working capital efficiency as well.

Speaker 3

And then finally, just I want to reiterate our commitment to pay down debt. And so you've seen that throughout our actions and we'll continue to look for ways to pay down debt With our excess cash.

Speaker 8

Great. Thanks.

Operator

Turn the conference back over to Mike King for any closing remarks.

Speaker 2

Thank you all for joining today. We appreciate your interest and questions. We are excited about the momentum we are building at Pacif Evergreen as we continue on our long term strategy and we look forward to updating you again in the next quarter. Thank you.

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Earnings Conference Call
KB Home Q1 2023
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