Pactiv Evergreen Inc
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Pactiv Evergreen Inc
NASDAQ:PTVE
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Greetings, and welcome to the Reynolds Group First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Degnan, Chief Executive Officer of Reynolds Group.
Thank you. Mr. Degnan, you may begin.
Thank you, Devon. Good morning, and welcome. Today, I have Allen Hugli, CFO of RGHL; Lance Mitchell, CFO of Reynolds Consumer; John McGrath, CEO of Pactiv; and John Rooney, the CEO of GEC, which is Graham, Evergreen and Closures, with me on the call.
Q1 2018 was challenging for us. While revenue was up 2%, EBITDA was down 16% in Q1 2017. Every business, except Graham Packaging, was behind last year. The main reason for this result was a runoff in raw material costs over Q4 2017 and Q1 2018 and some operations issues, particularly in Evergreen and Pactiv. While this is a significant decline versus last year, there are clear, addressable reasons and actions to take which will compensate for the start of the year and the 3 quarters that remain.
To explain with more detail, Lance Mitchell, John McGrath and John Rooney will speak next. After that, Allen Hugli will cover the financial highlights for the group, and then we'll take your questions.
Now I'll turn the call over to Lance.
Thank you, Tom. Reynolds Consumer Products, our revenue increased by 5% to $664 million in Q1. The increase was driven by the initiation of price increases that we've been implementing to offset higher raw material and freight costs. For the last 12 months, Reynolds Consumer Products revenue was $3 billion.
Turning now to EBITDA. Our Q1 EBITDA of $108 million is down 18% or $23 million below prior year. That's certainly disappointing result. However, I want to emphasize this is not indicative of performance capability of this company or a change from our previous positive trajectory. This is driven by cost issues that will be reversed with sufficient time, primarily in Q3 and Q4 of this year. Specifically, resin and aluminum costs are $32 million higher in Q1 of this year versus prior year. We partially offset that impact with $23 million of higher pricing and lower trade spending. However, that still resulted in $9 million of the $23 million deficit.
Logistics cost increases, primarily driven by higher freight costs added another $9 million to the year-over-year increases. Total raw material logistic cost increases minus price increases and lower trade spending was $18 million in Q1. The remaining $5 million was higher SG&A and conversions costs primarily driven by higher year-over-year wages.
The fundamentals of this business remain strong. We've lost no business or share position. We're implementing price increases and cost reduction actions to more than offset the raw material transportation cost going forward. We continue to grow distribution of new products and hold or gain share with existing products. Our new plastic wrap product is demonstrating outstanding distribution gains and consumer acceptance. We just started advertising this new product. We've also gained strong distribution for the new Hefty Hot Cup product. We've gained waste bag and injection molded plates distribution in the club channel.
In summary, new product introductions and distribution gains will drive organic growth going forward.
We did have lower sales volume in Q1, almost exclusively because of slow Reynolds Wrap sales. We implemented the December 31 price increase, which resulted in many wholesalers stocking up in front of the increase. After April, that inventory stockpile is expected to be depleted.
So in conclusion, at this point in 2018, I'm enthusiastic we can achieve year-over-year EBITDA growth, barring any unforeseen significant changes to raw material costs.
I'll now turn it over to John McGrath.
Thanks, Lance. Pactiv's Q1 2018 revenue increased by $22 million or 3% to $893 million. This increase was driven by favorable price pass-through in our contracted businesses and favorable foreign currency impact. These increases were partially offset by the divestiture of one of our European businesses. Last 12 months revenue increased by 1% to $3.8 billion million.
Pactiv's Q1 2018 adjusted EBITDA decreased by 16% to $127 million. There were 3 primary factors that contributed to this decline. First of all, we experienced some $40 million of higher raw material costs that were a result of price increases on those raw materials in Q4 2017 as well as Q1 2018. We have partially recovered the increases through pricing actions throughout Q1. However, the remainder of the recovery will materialize in Q2 and some in the beginning of the Q3. Number two, we experienced significant manufacturing issues in January and February, primarily due to post-holiday startups in several of our plants as well as lack of labor in several key facilities. However, during the month of March, we got back on track, and we anticipate more normalized production costs for the balance of 2018.
As Lance alluded to, industry-wide transportation shortages and rate increases impacted Pactiv as well during the quarter. However, we have developed and have begun to implement a plan to mitigate these issues and are encouraged by the early results.
In summary, despite the tough start to the year, we believe we have identified and begun implementation on many key initiatives that will allow us to eliminate the shortfall by year-end.
Last 12 months EBITDA decreased by 2% to $652 million.
I'll now turn it over to John Rooney.
Okay. Thanks, John. Starting with Graham Packaging, our revenue as reported decreased $7 million or 1% to $537 million in the quarter. Excluding the impact of divested businesses, revenue increased by $4 million or 1% to $534 million in Q1 2018. The increase was primarily driven by increased pricing from higher resin cost passed from the customers, along with favorable foreign currency impact. This was partially offset by lower sales volume and the impact of application of a new recognition standard.
From a volume perspective, we are still adversely impacted by the transitioning of some volume to self-manufacturing, and some of our markets are declining a bit. But we continue the positive trend with now 5 consecutive quarters, where wins from new business had exceeded losses, excluding, as I've said in the past, the one qualifier for self-manufacturing.
For LTM, revenue as reported decreased by $55 million or 3% to $2.14 billion. Excluding the impact of divested businesses, LTM revenue decreased by $27 million or 1% to $2.104 billion.
In terms of Graham Packaging EBITDA, our adjusted EBITDA was flat at $97 million. The significant drivers were improvements from cost-saving initiatives and improved operations. This was offset by declines to contractual price moves, where we've been successful at retaining business and extending term, lower sand offset by lower sales volume.
For the LTM, adjusted EBITDA as reported decreased by $12 million or 3% to $397 million. Excluding the impact of divested businesses, LTM adjusted EBITDA decreased by $7 million or 2% to $394 million.
Moving over to Evergreen. Revenue increased by $6 million or 2% to $395 million in the quarter. The increase was primarily driven by higher price for liquid packaging board, higher sales volume for paper products and carton packaging, partially offset by lower sales volumes from liquid packaging board, which is primarily timing-related. Our order book is healthy, including both board and paper. And LTM revenue was relatively flat at $1.568 billion.
Evergreen's adjusted EBITDA decreased by $21 million or 33% to $42 million in the quarter. This decrease was primarily driven by 2 factors, and those 2 factors were nearly evenly split. 52% of the swing was due to higher input costs for fiber and resin, adversely impacting earnings to some recovery expected from customer pass-through over the next few quarters. Further recovery will be dependent upon market pricing increases, where we do not have direct pass-through with our customers. That was 52% of the swing. 48% of the swing was operational issues at our 2 mills. And of that 48%, it is fairly evenly split amongst 4 things. First 2 were planned outage time differential. Pretty straightforward. It was March 2018 versus April 2017. The second thing was cold weather impact on equipment runability and material supply. None of those mills are in cold weather states, but they received a bunch of cold weather this year. The next 2 of 4 items within the 48% was unexpected equipment repair needed during the planned outage, which caused our outage to run longer than planned. And lastly, just poor general runability to varying degrees at both mills. We're starting to show signs of improvement at both Mills with April 2018 results better than prior year April and also better than first quarter 2018.
The packaging business within Evergreen continues to run very well, both domestically and internationally and both operationally and commercially.
For LTM, adjusted EBITDA decreased by $30 million or 11% to $237 million.
Moving over Closure Systems International. Our revenue as reported increased by $10 million or 5% to $216 million in the quarter. Excluding the impact of the divested businesses, revenue increased $21 million or 11% to $207 million. The increase was primarily driven by higher sales volume, mainly in North America, increase in pricing from higher resin costs passed through to customers and favorable foreign currency impact.
For LTM, revenue as reported decreased by $4 million to $911 million. Excluding divested businesses, the LTM revenue increased by $5 million or 1% to $833 million.
Closure Systems adjusted EBITDA as reported decreased by $1 million or 3% to $33 million in the quarter. Excluding divested businesses, adjusted EBITDA remained flat at $29 million. This was primarily driven by higher sales volume, primarily North America, offset by higher net material cost due to the lag of pass-on resin cost increases, also lower pricings as we retained and grown volume in North America. CSI continues to perform steady both commercially and operationally.
For LTM, adjusted EBITDA as reported decreased by $9 million or 6% to $130 million in the quarter. Excluding the impact of divested businesses, adjusted EBITDA decreased by $7 million or 6% to $117 million.
And I'd now turn it over to Allen Hugli.
Thanks, John. In summary, revenue for the group for the quarter was approximately $2.5 billion, up 2% from the same period last year. On an LTM basis, revenue was approximately $10.6 billion, essentially flat. For the quarter, adjusted EBITDA was $392 million, down 16%. We have reported pro forma adjusted EBITDA for the LTM period of $2.021 billion. A full reconciliation is attached as an appendix to this presentation.
Capital expenditure for the quarter at $133 million was up $39 million from the same period last year. This increase was primarily due to work on new projects. These are focused on reducing our cost base and meeting customer requirements. I expect that the full year expenditure would be approximately $550 million.
During the quarter, the group disposed of certain noncore businesses in the Pactiv, Graham Packaging and Closure segments. Proceeds of approximately $100 million were received. Also during the quarter, the group repaid $325 million of indebtedness, including $300 million of its 6.875% notes.
Now I'll now hand it back to Tom.
Thank you, Allen. And Devon, we can now open the line for question and answer.
[Operator Instructions] Our first question comes from the line of Sam McGovern with Crédit Suisse.
With regard to Evergreen, the planned mill outage, can you remind me of the timing of that? Is there any impact in Q2? And then what's the dollar impact that we saw in the first quarter?
Yes, so the dollar impact for the first quarter with the timing differential was $3 million even. And then into the second quarter, there will be a bit of a carryover as the outage had extended beyond what we had planned. But beyond that, we're up and running, and again, as I mentioned, running better that we have.
Got it. And then with regard to the labor and transportation, as you guys had with Reynolds more broadly, can you talk about the impact to the business? What steps you guys are taking to address that? And how long it will take until that sort of normalize?
Yes.
Sam, I think I'm going let John McGrath answer that question.
So starting on the labor, we did, in our business, experience some challenges getting labor into our plants. If you look at the 46 Pactiv locations, we used a lot of temporary labor in our plants for some of the nonskilled jobs. And with unemployment hovering around 4%, it's becoming increasingly tough to get that labor in the plant. So as a result, we had to run higher over time to cover those critical positions. However, we are implementing a program right now with automation, and we would look over the next 12 to 18 months to automate a lot of those nonskilled labor-type jobs. And we -- like I said, the program has kicked off. We're on track, and the savings are quite compelling that we're going to look at over that time period. So we will not have a problem going forward with this. We have plans to cover the labor issues. We're also using some fairly creative metrics to get some people in the plant. We're hiring some of the wounded warriors. We're looking at some handicapped people, who were going to make some reasonable combinations in our plant. So a lot of challenges, but we are figuring out solutions to the labor side. Regarding transportation, industry-wide shortage of drivers are really driving up rates with most of our carriers. A lot of things we're looking to do. One thing is we are passing those increases along to our customers in the form of price increases. That's going offset quite a bit of the rate hikes. We're also looking to do some things around cube utilization on the trucks and other things that'll try and take more trucks off the road. So all of those programs are in flight, and we believe that we will mitigate the transportation increases between now and the end of the year.
Okay. Got it. Just last question on resin. Can you guys quantify the year-over-year hit from resin? And just remind us in terms of the pass-throughs and timing of when you'll get -- when you expect to make that back?
Well, Lance already said resin and aluminum was $32 million for him.
Yes, resin for Pactiv was $40 million during the period.
And John Rooney?
Input cost, $12.1 million for the period for Evergreen.
And do you guys have input on the others?
I can talk to resin across the group.
Go ahead.
Across the GEC businesses, Graham Packaging, Evergreen and the Closures business, the market impacted us around $30 million, but we were able to recover about $22 million of that through taxable rent in the period.
Our next question comes from the line of Karl Blunden with Goldman Sachs .
Just on the raw materials again. On the aluminum side and the paper/fiber side of the business, what does timing look like there in terms of pricing that into your relationships with customers?
Lance, why don't you talk about aluminum first?
Aluminum, as I mentioned, we had an -- we've already implemented the December 31 price increase. We have another price increase that's going into impact on July 1.
And fiber, John Rooney.
Yes. For the paper part of the business, the lag, assuming that prices flatten and don't go up, is about a 1 quarter lag, so we get some of that back. The market pricing, there is already market pricing in place that has stuck, and it looks like there's additional pricing coming, but it's difficult for me to forecast that with certainty. But it looks like we're getting relief there as well.
Great. And then just on how you do the aluminum. Not sure if you can provide any more detail on that. It's been very volatile recently. How do you incorporate the spikes into your pricing?
You're asking how do we get price increases when aluminum cost goes up?
Well, when you see kind of the price in April, it's very dramatically -- what should we think about you guys locking in as a just kind of prevailing price when you go into those contracts? Or how would you be able to take into account the volatility there and potential for more?
Most of the aluminum is in Reynolds Consumer Products. There are no real contracts in our business. It is market-based pricing. And there's [ been vols ] on Q1. But there's been an average through that, but it's settled that at approximately $1.25 per pound, and that's the price increase that we're implementing across our product line.
And I would add to Lance's comment that the aluminum in the main goes into branded products, and we are the only branded aluminum foil. So we are the leader in this, which means we have more control over this than if we were second or third in the share position.
That's helpful. And just on Graham. It looks like in solid quarter in a row, flat now. Should we be thinking of this as the resin cost headwinds normalize at a business that can now start adding to growth for the company?
Yes, we're doing better, and we've dampened some of our volatility. I would say that we're not completely out of the woods. But addressed in terms of are we getting better or getting worse, we're getting better. We still have a need for improvement, and we're on that path. So it's -- I'm not declaring victory at this point, but we have improved in a number of areas, but we've got much work to do.
Our next question comes from the line of Roger Spitz with Bank of America Merrill Lynch.
This is Bill Sappern on for Roger. In Graham, you've spoken about customer self-manufacture for isotonics or perhaps you were referring to hot fill in general. But what do you think the market share is for self-manufacture in 2017? And what would it have been 5 or 10 years ago?
John, before you answer, this is one specific customer who we're not naming that we're talking about. So it's not, in general, isotonics. You can go ahead, John, and tell him what you already think that is.
Yes. I'm not really sure how to respond to that question, because it is a singular customer, and it's -- they're moving a singular product line of a large volume to self-manufacture, and their intent is to move 100% of that product line. It's not 100% of their business with us, but it's 100% of that product line. And if you went back X years ago, it would've been closer to 0% at self-manufacture for that product line.
I would also add, this is not unusual. We see this in Closures also when customers attempt to do this. Some are modestly successful. Some are not.
Okay. And then just one more quick question. For 2018 cash interest expectation, do you have any change relative to what you provided at the end of last year?
Allen?
It's gone up a bit as LIBOR has gone up. But it's still, give or take, call it, $600 million.
Our next question comes from the line of Richard Kus with Jefferies.
So I apologize if I missed this, but what was total net price cost spread across the business on a year-over-year basis in Q1?
I don't think we said that. I don't think we know. We'd have to add that off. Don't know if Allen has got some view on that.
Well, I think the total cost up was approximately $100 million, and the pricing related directly to -- it gets complicated that the pass-through is about $50 million and then Lance did some other price increases. So I don't know, $30 million, $40 million?
That's helpful. And then as you look towards Q2, with the pricing actions that you have announced, would you expect that number to be closer to breakeven on a year-over-year basis, I would think?
Yes, if we're successful. And a lot of the stuff gets down to uncontracted, competitive situations. If we're successful in our, what we call, hand-to-hand combat, yes, we should be able to compensate for it.
Okay. Okay. And then have you guys had any change to the leverage target where you're trying to get the business here over the course of the next year or so?
No, no.
Our next question comes from the line of Sandy Burns with Stifel.
Could you just remind us, with the transportation and labor costs that you're seeing, do you have any contractual ability to pass those through? And if so, is it on the same schedule as resin and raw materials? Or is it maybe only once a year? Or lesser ability to pass it through? Or none at all?
So I think the only place where we have pass-throughs on transportation are in the Pactiv food service business.
Yes, that's correct. We don't have any pass-through on the labor piece, on transportation. It really varies by customer based on our contractual arrangements. Normally, in most contracts, there is a provision once a year to adjust for what I'll call broad cost of living-type allowances, in which transportation would be included.
Okay. And just as a follow-up to that, since I imagine all your competitors, all the packaging companies, are facing the same issues. What's been the feedback from your customers so far? Are they pushing back hard? Do they understand the dynamics of what's going on in transportation and more accepting of these increases?
Well, customers always push back high when we are trying to raise prices to pass through cost. They do understand the dynamics, and they have their own distribution issues, so they're also seeing it. Not sure it's really that relevant, though. I mean, we never have an easy price increase.
Our next question comes from the line of [ Fritz Lou ] with Allianz Global Investors.
Could you please tell me actually the dollar term, what the -- your labor cost kind of increase was this quarter? And then you talked about automation, but that's going to take a while. So how do you see labor kind of impacting your margins for the whole of '18?
Well, I mean, I think the labor costs, in general, are just inflationary. So we probably had a target of 2.5%, 3% increase cost year-over-year. The second part of the question was...
Automation.
Automation. So part of what Allen talked about with the capital expenditures, you can see increased capital expenditures out of us in the course of the year and into next year. Much of this is aimed at automation, which will lower cost and also give us somewhat relief. It isn't just cost. It's availability of labor that's an issue for us also. So both of those things are going to get addressed in the course of the year and into next year. You don't do this kind of automation in so many plants in a short period of time. It takes a while.
Okay. So what is your -- what do you expect to spend in CapEx then in '18, '19 total?
Allen?
Well, it's $550 million for '18. I don't know if we settled a number for '19 yet, but it's over [ 5 ].
Our next question comes from the line of Mack Fuller with GSO Capital Partners.
Most of my questions are answered. One quick one. Just from -- in terms of the divestitures for the quarter, how much did that represent EBITDA?
What was the last comment? Is that what?
The divestitures that you did this quarter, how much of an impact to EBITDA did that have? I guess, how much was that be for the quarter?
Yes. Allen, do you know that number?
If it -- to the -- just for the quarter itself, it was $2 million to $3 million.
Okay. And how much was it in terms of EBITDA that -- I guess, for next several quarters?
I think it's about $17 million on an LTM basis, give or take.
[Operator Instructions] Our next question comes from the line of Richard Yeh with Citigroup.
Is that all we should expect for asset sales? Or do you think there'll be some more in the in the near and medium term?
I don't think we have much happening in asset sales in the near term.
Thank you. There appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Degnan for closing comments.
All right. Well, thank you, Devon, and thank you, everybody, for participating in the call. And we look forward to speaking with you in about 3 months' time. Goodbye.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.