Pactiv Evergreen Inc

NASDAQ:PTVE

Earnings Call Transcript

[Operator]

Greetings, and welcome to the Reynolds Group Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Thomas Degnan. Please go ahead.

[Thomas Degnan, executive]

Thank you, Stacy, and good morning. I'll start the call with a few comments on the group's performance for the quarter and year-to-date. Following that, each CEO will give more detail, starting with Lance Mitchell from Reynolds Consumer Products; and John McGrath from Pactiv; and John Rooney from Graham, Evergreen and Closures. Allen Hugli, RGHL CFO, will then cover our financial highlights and we'll then open the call to Q&A.

The quarter and year-to-date revenue and EBITDA followed the same trend as Q1. Revenue in the second quarter was up 2% and year-to-date was also up 2%. In general, this is attributed to some share/volume gains and some pass-through. EBITDA for the quarter was down 8%; and year-to-date, 12%. There were common reasons in some businesses, for example, logistics costs arising from the nationwide driver shortage; raw materials, such as aluminum and resin increases, outpacing lag; and price increases, most of which are timing; and labor shortages, particularly in Pactiv.

Pactiv's year-to-date EBITDA was down $43 million or 13%, almost all is attributed to labor, freight and resin. We're working on solutions for the freight and labor issues and pass-through will continue to improve the resin impact.

Reynolds' year-to-date EBITDA was down $28 million or 10% and that was due to raw materials and freight, partially offset by pricing.

Graham Packaging year-to-date EBITDA was down $14 million or 7%. Operation improvements continued and if we exclude our customers' share losses and one customer's self-manufacturing project, this one has now exceeded losses for 6 quarters.

Year-to-date, Evergreen's EBITDA was down $23 million or 18%. Evergreen is really all about no operations which have hurt an otherwise good year.

CSI's year-to-date EBITDA was down $4 million or 6%, of which half was due to our divestment.

So now I'll turn the call over to Lance Mitchell from Reynolds Consumer Products.

[Lance Mitchell, executive]

Good morning. Reynolds Consumer Products Q2 revenue of $797 million improved by $44 million or a 6% increase over prior year Q2. The increase was driven by price increases and sales volume. Sales volume is very strong across our Hefty waste, slider and Presto product lines. Our Reynolds and tableware products slightly lagged prior year Q2. In the case of Reynolds, this is due to a pre-buy in front of a price increase and the shift of Easter to Q1 this year.

Private-label foil prices and consumer consumption category have increased in the last 12 weeks, which is now depleting retailer inventories as we enter into Q3.

Q2 tableware revenue was impacted by the timing of promotions and a reduced trade spending. New products and promotions in Q3 will reverse that trend in tableware going forward.

Year-to-date, RCP's total revenue has increased 6%; and for the last 12 months, has increased 4%.

Turning now to EBITDA. Our EBITDA was $4 million or 3% lower than prior year Q2. Higher aluminum costs, which have been the news of late, higher resin costs and higher logistics costs were not fully offset by pricing actions in the quarter.

It is important to note that April was the only month in the quarter that was below prior year EBITDA. Additionally, we have implemented subsequent price actions effective in July that now fully offset the higher raw material and logistics cost increases.

I'll turn it over now to John McGrath.

[John McGrath, executive]

Thanks, Lance. Pactiv's Q2 2018 revenue increased by $20 million or 2% to $979 million. This increase was driven by favorable price pass-through in our contracted businesses as well as market price increases in our non-contracted businesses, net of product mix. These increases were partially offset by the divestiture of our European [indiscernible] business worth roughly $15 million. Excluding divestitures, the business grew 4% during the quarter.

Last 12 months, revenue grew 2% to roughly $3.8 billion. Pactiv's Q2 adjusted EBITDA decreased 11% to $149 million. There were 3 primary factors that contributed to this decline. Number one, we experienced higher raw material costs in [ PET ] and polypropylene during the quarter, most of which will be recovered Q3 and Q4.

Number two, we had challenges obtaining, training and to retaining both skilled and non-skilled labor in many of our facilities, which negatively impacted plant performance and corresponding costs. We have traditionally relied on a significant number of temporary employees to staff our plant. However, with unemployment levels at record lows, the availability of these workers has contracted significantly. We have developed and have begun to implement a new labor management strategy that will help us in the short run as well as accelerating our automation capital projects to eliminate positions on a longer-term basis.

Number three, industry-wide transportation shortages and rate increases have also impacted us during the quarter. We have developed and begun to implement a plan to mitigate these cost challenges and are encouraged by our early results. These declines were partially offset by increased pricing, both contractual and pass-through as well as our market price increases.

Last 12 months EBITDA decreased 2% to $634 million.

I'll now turn it over to John Rooney.

[John Rooney, executive]

Yes, thanks, John. For Graham Packaging, our revenue decreased by $17 million or 3% to $541 million in the quarter. Excluding the impact of divested businesses, revenue decreased by $5 million or 1% to $540 million. The decrease was primarily driven by lower sales volume, strategic business exits and $10 million impact from application of the new revenue recognition standard. This was partially offset by increased pricing from higher resin costs passed through to customers. From a volume perspective, while we continue to be adversely impacted by the transitioning of some volume to self-manufacturing with one particular customer, we have continued [ to have our wins of gains ] of losses, as Tom mentioned, for 6 quarters in a row. For LTM, our revenue decreased by $44 million or 2% to $2.123 billion. Excluding the impact of divested businesses, LTM revenue decreased by $13 million or 1% to $2.1 billion.

GEC EBITDA decreased by $14 million or 13% to $95 million in the quarter. The decrease was primarily driven by lower sales volume, declines in contractual price movements [ where we have been successful in ] retaining businesses and [indiscernible]. This was partially offset by lower net material costs. For LTM, adjusted EBITDA decreased $19 million or 5% to $383 million. Excluding the impact of divested businesses, LTM EBITDA decreased $18 million or 5% to $380 million.

Moving to Evergreen. Our revenue increased by $18 million or 5% to $396 million in the quarter. The increase was primarily driven by higher sales volume for paper and board products, higher pricing for paper and board products. And our sales order book continues to be healthy across all business segments, in particular, board and paper. Our LTM revenue for Evergreen increased by $41 million or 3% to $1.586 billion.

Evergreen's adjusted EBITDA decreased by $2 million or 3% to $262 million (sic) [ $62 million ] in the quarter. The decrease was primarily driven by higher raw material costs, a portion of which is recovered through customer pricing. This was partially offset by higher pricing in the paper and board markets and lower employee-related expenses.

We continue to deliver the needed improvement in our operations. Our board and paper mills are not yet where we need to be, as evidenced by this quarter being unfavorable compared to the same quarter in 2017, despite us having a favorable impact due to timing of planned mill [ outages ]. The packaging business continues to run very well, both commercially and operationally and internationally and domestically. For LTM, our adjusted EBITDA decreased by $20 million or 8% to $235 million.

Moving over to our Closures business. Revenue decreased by $11 million or 4% to $235 million in the quarter. Excluding the impact of divested businesses, revenue increased by $14 million or 6% to $235 million in a quarter. This decrease was driven by strategic business exits. The improvement in revenue, excluding the strategic exits, was driven by increase in pricing from higher resin costs passed through and higher sales volume.

For LTM, revenue decreased by $6 million or 1% to $900 million. Excluding divested businesses, LTM revenue increased by $26 million or 3% to $284 million -- excuse me, to $847 million. Adjusted EBITDA for CSI decreased by $3 million or 8% to $34 million in the quarter. Excluding divested businesses, adjusted EBITDA increased by $1 million or 3% to $34 million. The decrease in EBITDA was primarily driven by, again, strategic business exits, lower pricing [indiscernible] [ success on any business on a ] lock down contractual term. This was partially offset by lower net material costs.

CSI has continued to perform well both commercially and operationally. For LTM, our adjusted EBITDA decreased by $8 million or 6% to $127 million. Excluding the impact of divested businesses, LTM adjusted EBITDA decreased by $3 million or 2% to $119 million.

I'll turn it over now to Allen Hugli.

[Allen Hugli, executive]

Thanks, John. In summary, revenue for the group for the quarter was approximately $2.7 billion, up 2% from the same period last year, which is primarily due to the pass-through of increased input costs.

Year-to-date revenue at $5.2 billion was also up 2%. On an LTM basis, revenue was approximately $10.6 billion. Adjusted EBITDA for the quarter is $485 million, down 8% on Q2 last year, primarily driven by increased margin cost and [ a rate in passing ] increases [ due ] to certain of our customers as well as increased logistics and manufacturing costs. On a year-to-date basis, adjusted EBITDA was $877 million, down 12% on the comparable prior year period. We have reported pro forma adjusted EBITDA for the LTM period to be $1.983 billion. Full reconciliation is attached as an appendix to this presentation.

Capital expenditure for the quarter at $144 million was up $51 million on the same period last year. This increase was primarily due to work on new projects. We are focused on reducing our cost base and meeting customer requirements. I expect that the full year expenditure will be approximately $575 million.

I'll now hand it back to Tom.

[Thomas Degnan, executive]

Okay, Stacy, we'd like to open it up for questions and answers, please.

[Operator]

[Operator Instructions] Our first question comes from Sam McGovern with Crédit Suisse.

[Samuel McGovern, analyst]

So resin and aluminum prices look like they're stabilizing, so far, for the second half of the year. Can you guys give us an update on what you're currently seeing for raw materials and what you're expecting with regards to price-cost spread for the remainder of the year?

[John McGrath, executive]

So this is John McGrath. On Pactiv side, the materials that we use, which are primarily the plastic materials, we would say that the forecast for the remainder of the year is somewhat flat. So where we did see increases in some -- several raw materials on Q2, it looks like that has now started to come back down. So obviously, our goal will be to continue to recover price through our contract resets in Q3 and Q4.

[Lance Mitchell, executive]

This is Lance Mitchell. Reynolds Consumer Products, we have seen stabilization of resin products that we use as well as aluminum. And as I indicated in my remarks, we have pricing that now covers the cost of the raw material increases and logistics cost.

[John Rooney, executive]

For Graham Packaging and Closures, it looks, again, like resin is stabilizing. Fiber cost for the paper business is heading down. It looks like chemicals, also primarily impacting Evergreen businesses, is heading up as far as trends.

[Samuel McGovern, analyst]

All right, that's very helpful. And then with regard to M&A, obviously, Packaging M&A has been very active for the last 18 months. Any updated thoughts in terms of potential acquisitions or potential asset sales? And with regard to that, there was an article during the quarter highlighting the potential sale of Graham. I don't know if you guys have any comments on that.

[John Rooney, executive]

So Sam, our practice is we inform our constituents and everyone if we've made any decision to go forward on either an acquisition or a disposition, and we have not made any such decision. As far as that article, I'm not sure who that came from and -- but I mean, I'm standing by the -- we've made no decisions to sell anything or acquire anything at this time.

[Samuel McGovern, analyst]

Okay, got it. And then there's been a lot of focus on the European plastics ban and continued pressure from consumers and -- for more ecologically friendly packaging. I know you have capabilities across several different substrates, but can you comment about how you see that trend impacting the industry in general and Reynolds in particular?

[Thomas Degnan, executive]

Sure. I think this impacts Pactiv, as you said. So I think we'll let John answer the question.

[John McGrath, executive]

Sure, sure. So with regards to the EU ban, it's 10 items that are most commonly found along the beach and also in the marine environment. Of those 10 items, the items that they've banned that would potentially or could potentially impact Pactiv really would be 3. It will be cutlery, plates and straws. And first of all, we don't do a lot of business in Europe, let's start with that. So I'm talking in regards to if this ban were to, in any way, shape or form, spill over into our markets, predominantly North America. So we have built out our product portfolio, we have our line of, what we call, EarthChoice products, which are made from more environmentally friendly/sustainable type materials. So for every one of the items that's banned, we have an alternative; albeit a higher-priced alternative, we do have an alternative for those products. So at this point, we don't envision seeing a great impact from the EU ban. The one area in the U.S. that we're starting to see more and more activity is around straws, where several major brand owners have now either eliminated or have decided to put straws in, what we'll call, the back of the house, meaning behind the counter so customers would have to ask for that product. We are -- we're doing a few things around that and as far as material development goes, we'll be looking at making straw out of a more sustainable material, even more than the ones that we have today, number one. Number two, we've developed for several of our partners unique lidding characteristics that will allow you to consume the beverage without a straw. So -- and all that said, straws are less than 2% of our total business and negligible from an EBITDA standpoint. So -- and most of the straws coming into the U.S. come from offshore to start with. So we don't feel that, although the ban is getting a lot of publicity, at least in the near term, we don't see that impacting our business.

[Operator]

Our next question comes from Sandy Burns with Stifel.

[Sanford Burns, analyst]

First, I was wondering, if you could comment on what percentage of your revenues come from imported products? Because I wouldn't think much, but then there was a recent plastic news article that talked about at least the Reynolds [indiscernible] from China.

[Thomas Degnan, executive]

Yes, I'm not sure we have that off the top of our head. I know, Lance, you get some projects...

[Lance Mitchell, executive]

Yes, for the -- in the case of the Reynolds Consumer Products, we do import some specific SKUs that I would estimate is less than 5% of our product portfolio.

[Thomas Degnan, executive]

John?

[John Rooney, executive]

This is John Rooney. [indiscernible] raw materials, and it's almost all domestic.

[John McGrath, executive]

Yes, for Pactiv, it's less than 2%.

[Sanford Burns, analyst]

Okay. So on a consolidated basis, it's fairly not material, fair to say?

[Thomas Degnan, executive]

Yes, low single digits.

[Sanford Burns, analyst]

Right. Okay. And my second question is, away from the automatic raw material pass-throughs that you're implementing right now, any general color you can provide us on just how the other price increases are going in this environment? Customers fairly receptive and understanding, given the transportation issues the whole economy is facing or -- or are you facing more pushback from customers at this stage of the cycle than you would typically see?

[Thomas Degnan, executive]

So I think, probably, Lance has got branded products that he's able to put pricing in. You can comment to that, Lance. And then maybe John McGrath will talk about his street business, which is uncontracted and does not have pass-throughs.

[Lance Mitchell, executive]

Yes, in Reynolds Consumer Products, almost all of our business is non pass-through, so it is a price increase that we need to implement and discuss with our retail partners. And there has never been a time that our retail partners don't push back against price increase on behalf of the consumers. So it's always a difficult and challenging process to go through in our business.

[John McGrath, executive]

On the Pactiv side, we have roughly 70% of our businesses contracted, where we get pass-through on not only resin but also with most of those contracts, we get a cost of living adjustment provision, which allows us to adjust our price based on things like freight and labor, [indiscernible] cost and other factors of production. So we feel pretty good on our contracted business. As far as our, what we would call, our street business or noncontracted business, roughly 30%. We've implemented price increases across all major product categories and material types, and the market has been receptive to those increases.

[John Rooney, executive]

So for all the other businesses, the Evergreen brand, CSI, Evergreen has prices going up. And you see it in the market in pulp and paper and then the packaging business in Evergreen. We have prices going up for customers that are not on indexes. So it's been received in the marketplace. The other business, [ likewise with Lance, will suffer ] push-through. But it's not an absolute no.

[Operator]

Our next question comes from Karl Blunden with Goldman Sachs.

[Karl Blunden, analyst]

Just on the M&A front, I know that no decisions have been made. From an operational standpoint, there's been some integration of Graham, Closures and Evergreen over the last 2 years or so, maybe more on kind of a selling and marketing perspective. Are there challenges in terms of separating those businesses if you do decide to own a subset of them longer term?

[John Rooney, executive]

No, I don't believe there's any significant challenges. The synergies that we gain by putting them together would go away. But as far as could you do it? Sure.

[Karl Blunden, analyst]

Got you. And then with regard to the debt maturities and the callable bonds, you have a lot of callable debt in the structure. A lot of companies have come and refinanced and extended, what's kind of driving your thinking behind the current debt maturity profile? And what should we think about as you guys are waiting to do something potentially?

[Allen Hugli, executive]

We haven't made any decisions on anything yet. I think what we have said is that we will use the available cash, as it's generated, to repay debt and that we've got a target to get closer to 4.5x from where we are today. So that all continues. We are looking -- we've kept a very close eye in what the call premiums look like. And as you've pointed out, a number of them, a big tranche goes off middle of October. So potentially something could happen there. With respect to refinancing, [ we're under ] no pressure [ but we're ] waiting for the right time, I guess. No decisions have been made.

[Karl Blunden, analyst]

That makes sense. And just with regard to waiting for the right time, as we think about the second half performance and the comps versus last year, if I recall correctly, and please let me know if this is not right, raw materials are coming down in the second half of last year. So you had a bit of a tailwind from that lead lag effect and then also logistics costs were a bit lower then. So does that make 3Q, 4Q fairly challenging? Or have enough offsets been implemented to allow you to kind of get close to flattish in the second half of the year?

[Thomas Degnan, executive]

I think if I heard you right, I think you said raw materials were coming down last year and I think actually, they were going up at the end of last year. So to answer your question, I think the second half is challenging.

[Operator]

Our next question comes from Roger Spitz with Bank of America.

[Roger Spitz, analyst]

In Closures, competitive pressures have been a recurring theme. Can you add a little bit color to that? I mean, is it driven by competition with you and the other 2 large closure guys? Is it from some of the smaller closure producers? From customers self-manufacturing? Why does -- I guess I'm trying to figure out, why does closure have probably more competitive pressure than, say, some of your other businesses?

[John Rooney, executive]

Yes, I would say we have any more or less than the other businesses. But the competitive pressures in Closures, as you said, is primarily the larger competitors in the market.

[Thomas Degnan, executive]

And a follow-up on John, I don't think there is more competition in Closures than on the other businesses.

[Roger Spitz, analyst]

Okay. And in both Graham Packaging and Closures, I'm looking at the slides, you talked about resin higher -- higher resin costs, of course, but then on the EBITDA, you talked about lower material costs. Should we assume that you mean more non-resin costs are higher? Or are you down gauging or both?

[Thomas Degnan, executive]

Well, the market component of resin pricing is up, and so we do have a lag dynamic there like the other businesses that is unfavorable. We're also doing some things strategically from a procurement standpoint that are more than offsetting that -- from a sourcing standpoint.

[Roger Spitz, analyst]

And do you have a number for the full quarter on the freight logistics headwind in terms of EBITDA?

[Thomas Degnan, executive]

I know John McGrath does. Do you guys have any?

[Allen Hugli, executive]

Okay. It's about $24 million.

[Roger Spitz, analyst]

For this quarter, Q2? Great.

[Allen Hugli, executive]

Right.

[Roger Spitz, analyst]

I'm sorry?

[Allen Hugli, executive]

No, we're right, $24 million.

[Roger Spitz, analyst]

Yes, good. And lastly, I -- you talked about, I guess, in terms of cutlery, tableware and straws; straws imports being a big factor. But would you be willing to tell us sort of where your market position is and market shares, perhaps, are in each of cutlery, tableware and straws in the U.S. market?

[John McGrath, executive]

I would say that on straws, we would probably be at around 20%, with most of that business being sold to the foodservice distribution community versus the quick-serve restaurants, which again most of the quick-serve restaurants are importing those straws from offshore. On cutlery, pretty much the same story, we're probably 20% to 25% share, with the largest single player being the product coming over from Asia. And then on plates, it's kind of a mixed bag. I mean, we sell plates across 4 different substrates. So if I were to look and try and aggregate all 4 of the plate material types, we'll probably have around a 30% share. Now again, the plates in the EU that are being proposed to be eliminated are the plastic plates. There are lots of other options when it comes to plates, whether it be molded fiber, pulp or just straight paper board. So again, I think the key takeaway should be for all of the products, straws, cutlery and plates, there are alternatives. And Pactiv is well positioned with those products.

[Thomas Degnan, executive]

And so for our other businesses, there's very, very small volumes in those areas -- or products.

[Roger Spitz, analyst]

Got it. And with straws, are you -- with that 20%, are you #1, or perhaps #1 in food distribution service? In cutlery, #1 and plates #1? Or are there -- I mean, you did mention one of the guys in cutlery being...

[John McGrath, executive]

Yes, we're -- so let's just say we're -- we'd be 1 or 2 in virtually every category we compete in.

[Operator]

Our next question comes from Richard Kus with Jefferies.

[Richard Kus, analyst]

Just a follow up on Roger's question on the freight and logistics headwind. Can you talk a little bit about what type of trend you're seeing as you go into the back half in freight? And then, whether or not you would expect that headwind to diminish as you get through the year since, I think, freight was increasing late last year?

[Thomas Degnan, executive]

So I would -- I'll make a comment and then see if any of these guys want to add in. The freight issue was about driver shortage. So what you have, in general, is not many people are interested in the lifestyle of being all over the road, tractor, trailer driver. So the -- as drivers retire, the trucking companies are having a real hard time finding replacement drivers. If that's the world we live in, we're working on trying to figure out how do we get the freight companies' attention so that we are a customer of theirs that is preferred and we're also looking at different ways, maybe customer pickups and things like that. But in general, I think it's an issue with the number of drivers available. Anybody else want to add?

[John Rooney, executive]

It's exasperated by change of regulations. Effectively, drivers were removed because they can't drive as many hours at the same [ points is additive in nature ]. [indiscernible]

[John McGrath, executive]

Yes, from my perspective, look, it's -- freight's up some 15%. That will continue in the second quarter, probably push on into 2019. The mitigation that we're doing, obviously, getting price increases to our customers to offset is probably the largest single thing that we can do in this environment. However, we have several initiatives around taking trucks off the road, maybe filling up the trucks for shipping a lot fuller as well as trying to secure dedicated carriers for the most common lanes that we have. But we don't see any relief in the near term. To Tom's point, driver shortage; to John's point, hours of service legislation are going to continue to put a lot of -- and demand and healthy economy is going to continue to put a lot of pressure on the transportation industry.

[Richard Kus, analyst]

Got it. So it sounds to me like this is really just a new paradigm and you guys need to find ways to mitigate that cost with some reductions or either higher prices from your customers.

[John McGrath, executive]

Exactly.

[Richard Kus, analyst]

Got it. And then, on the Graham side, how much did volume impact EBITDA in the quarter?

[John Rooney, executive]

9.3 for Graham.

[Richard Kus, analyst]

Okay. And then, would you expect that impact to get smaller in the second half? Or is that something that we should expect for the remainder of the year?

[John Rooney, executive]

Expect it to be smaller.

[Operator]

I would like to turn the floor over to Tom for closing comments.

[Thomas Degnan, executive]

All right. Well, thank you, Stacy, and thank you everybody listening in on the call for your time and we look forward to speaking with you at the end of the third quarter. Bye.

[Operator]

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.