Pactiv Evergreen - Q2 2022
August 4, 2022
Transcript
Speaker 0
Good morning, and welcome to the Pactiv Evergreen Second Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded today. I would now like to turn the conference over to Dhaval Patel.
Please go ahead.
Speaker 1
Thank you, operator, and good morning, everyone. Thank you for your interest in Factiva Evergreen, and welcome to our Q2 2022 earnings call. With me on the call today, we have Michael Cain, Chief Executive Officer and John Back, Chief Financial Officer. Please visit the Events section of the company's Investor Relations website atwww.pactiveevergreen.com and access the company's supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation.
Before we begin Our formal remarks, I would like to remind everyone that our discussions today will include forward looking statements, including statements regarding our guidance for 2022. 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 most recent annual report on Form 10 ks and our upcoming quarterly report on Form 10 Q for a more detailed discussion of those risks.
The forward looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update 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 As a substitute for the results prepared in accordance with GAAP, any reconciliation to the most directly comparable GAAP measures is available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, let me turn the call over to Active Evergreen's CEO, Michael Keane. Mike?
Thanks, Davil.
Speaker 2
Good morning, everyone, and welcome. Yesterday after the market closed, Pactiv Evergreen released its Q2 2022 results. I'm pleased to report that we had yet another strong quarter as the team to focus on and deliver improving business results. Revenues continue to benefit from pricing due to lag raw material cost pass throughs, while adjusted EBITDA benefited from the pricing net of higher costs as well as the benefit from the FabryCal acquisition. We continue to make steady progress across the organization over the past few quarters.
While COVID is still something we track, it's not impacting our business as significantly as it Has in the past. The labor gap that we had highlighted last year and previously this year has narrowed considerably, Thanks to the strong efforts across the organization. Finally, our profitability is improving versus last year's depressed levels. All of this is possible because throughout the organization, we continue to drive and embrace a culture of excellence and continued improvement. We also saw better cube efficiencies, improved productivity and an increase in automation across our warehouses.
In general, We are seeing more stable operations across all three segments. At the same time, we are seeing higher raw materials And inflation cost and we intend to take pricing actions were needed to return profitability to normalized levels. We've also delivered on our broader strategic initiatives as the integration of FabryCal is proceeding ahead of plan and earlier this week we also announced The close of the sale of our Asia based business. The sale of the Asian business allows us to focus on our strong North American business, while also enhancing our balance sheet. Finally, I'd like to take a moment to welcome John Bakcht, our new Chief Financial Officer to the team.
John brings with him extensive financial expertise with prior experience as an investment banker as well as a CFO dealing with the public markets. We look forward to working with him and for all of you to get to know John. Let me now turn it over to John to walk us through a more detailed review of our financials in the Q2. John?
Speaker 3
Thanks, Mike. Before I begin my discussion of our financial results, I'd like to take a moment Thank Mike and the broader Pareto Evergreen team for such a warm welcome to the company. It's exciting to be a part of an organization with a strong values and purpose driven culture. In my short time at the company, I'm impressed with the strong fundamentals of the business, while at the same time having opportunities to continue to build on the company's recent success. For those of you I haven't had the opportunity to meet yet, I'd like to give you a sense of what drew me to pactive evergreen.
As a company recently taken public, I find the investment case for Packet Evergreen to be compelling and potentially overlooked by the broader market. As most of you on the call today know and bears reinforcing, we are one of the largest producers of fresh food and beverage packaging in North America with scale and a nationwide footprint to provide a compelling value proposition for our customers, which includes leading market share in several product categories. While we, like everyone, have experienced inflation and supply chain driven headwinds, positions us for further growth. We are committed to a more sustainable future with 64% of our revenues in 2021 Coming from products made with recycled, recyclable or renewable materials. Financially, we remain committed to our dividend policy, which Currently provides a yield around 4%.
I'm sure my enthusiasm is evident and I look forward to our continuing dialogue. I'll now move into our financial results. Moving to slide 6 and touching on our Q2 2022 highlights. As Mike stated, we continue to make steady progress and delivered another strong quarter. Net revenue was $1,640,000,000 up 21 percent versus prior year.
Net income was $74,000,000 with diluted EPS of $0.40 Adjusted EBITDA was $249,000,000 up 92% versus the prior year quarter and our free cash flow for the quarter was negative $18,000,000 Moving to slide 7, looking at our year to date 2022 financial performance. Net revenue was $3,135,000,000 versus $2,516,000,000 in the same period last year, an increase of 25%. The increase was primarily due to pricing pass throughs And the Fabrikale acquisition, which offset volumes down 8%, primarily due to strong sales in the prior period as businesses and restaurants reopened post COVID-nineteen Team lockdowns, labor shortages and the exit of coated ground work. Adjusted EBITDA was $431,000,000 versus $7,000,000 in the same period last year. The improvement in EBITDA was driven by favorable pricing, net of material cost pass through, Improved and more stable operations that Mike referenced earlier as well as the acquisition of Fabrikal.
The increase in adjusted EBITDA also includes the benefit related to Prior year period costs of $50,000,000 from Winter Storm Yuri. Free cash flow was $52,000,000 Moving to slide 9 and a deeper discussion of our Q2 2022 performance. Net revenue was $1,640,000,000 versus $1,352,000,000 in the same period last year, an increase of 21%. The increase primarily related to higher price mix Due to material costs passed through to customers and pricing actions, plus the acquisition of Fabrikal, volume is down 10%, primarily due to tough comps Adjusted EBITDA was $249,000,000 versus $130,000,000 in the same period last year, an increase of 92%. The increase was primarily due to favorable pricing, net of material cost pass through and the impact of the Fabrikal acquisition, partially offset by higher manufacturing costs, Lower sales volume and higher employee related and logistics costs.
I'd also note that net income benefited from a one time positive litigation settlement Approximately $15,000,000 in the quarter. This amount is reported in our other income line, but is not included in the calculation of adjusted EBITDA. Free cash flow defined as net cash flow provided by operating activities less CapEx was negative $18,000,000 $42,000,000 in the same period last year. The negative cash outflow was largely due to a planned build in inventory of $154,000,000 We do not expect significant inventory builds on a volume basis for the remainder of the year. Moving to slide 10.
This slide helps to bridge Q2 year on year revenue and adjusted EBITDA. Looking at revenue, when compared to Q2 last year, The key drivers of our revenue growth were price mix of $309,000,000 $121,000,000 from the acquisition of Fabrikal, offset by lower volume and FX. For adjusted EBITDA, price mix favorability and a $34,000,000 benefit from the Fabrikal acquisition More than offset higher costs and some volume deterioration. Moving to slide 11 and our results by segment for Q2. Our Foodservice segment saw net revenues up 39%, driven by higher pricing to recover COGS increases as well as the impact from the acquisition of FabryCal, which offset volumes down 9% versus strong prior year sales volume.
Adjusted EBITDA for the segment was up $103,000,000 versus the same period primarily due to favorable pricing, net of material costs passed through and the impact from the acquisition of Fabrikal, partially offset by higher manufacturing costs, lower sales volume and higher employee related costs. Our Food and Merchandising segment saw net revenues up 14%, driven by favorable pricing, primarily due to higher material costs passed through to customers and pricing actions, partially offset by lower sales volume, primarily due to labor shortages. Adjusted EBITDA for the segment was up 32% versus the same period last year due primarily to favorable pricing, net of material costs Pass through partially offset by higher manufacturing costs and lower sales volume. Our Beverage Merchandising segment saw net revenues up 9%, driven by favorable pricing, primarily due to pricing actions, higher material costs passed through to customers and favorable product mix, partially offset by lower sales volume, primarily due to our exit from our coated groundwood business. Adjusted EBITDA for the segment was $29,000,000 versus $15,000,000 in 2021.
The key drivers were higher pricing, partially offset by higher material, manufacturing, employee and logistic costs as well as an $11,000,000 cost due to scheduled annual pulp mill outage. Moving to slide 12. We ended Q2 With $246,000,000 in cash $4,200,000,000 in total outstanding debt, as indicated in our press release earlier in the week, We have closed the sale of the beverage merchandising agent business, which will further strengthen our balance sheet. We expect proceeds of around $3,700,000,000 pro form a for the Asia business sale proceeds. We ended Q2 with a net debt to LTM adjusted EBITDA ratio of 5.3, Well below the 7.6 at the end of 2021.
We expect our net leverage to be below 5 when we report our Q3 and Q4 results. Additionally, we are evaluating other alternatives to further deleverage the balance sheet. I'll now pass it back to Mike for further comments.
Speaker 2
Thanks, John. If I could turn your attention to Slide 14. I'll provide a brief This allows us to analyze, report on and audit our energy, our emissions, our water and our waste data across the entire enterprise. As we finalize our environmental disclosures for 2021, we are proud to report an 18% Scope 1 and Scope 2 greenhouse gas emissions reduction In 2015 2021. At Pactive Evergreen, we promote responsible forestry and we are committed to increasing the use of certified wood In promoting forest certifications, we recently published an updated sustainable forestry policy as well as new goals related to sustainable forestry.
As much as we value a sustainable supply chain, we're also committed to support our customers' efforts on their path to a sustainable future. In June, we published our 0 waste implementation guide to provide food service operators like recreational venues, stadiums or colleges A resource to begin their journey to 0 waste. By closing the loop, operators can cut greenhouse gases, manage risk, Litter and pollution reinvest in resources all while value creating value for their operation. Under our people pillar, We are spending a significant amount of time strengthening our support for our team members' career development, introducing a new tuition assistance program Finally, I couldn't be prouder to celebrate Packet Evergreen's 1st female Board Chair, Leanne Baker. Leanne has been a Director since our IPO and we're looking forward to benefiting from her leadership and experience in helping to build more gender equality in boardrooms.
To learn more, we invite shareholders to view our latest disclosures and other reports found at investors. Pactiveevergreen.com In the ESG section. Now if I could turn your attention to Slide 15. As our results indicate, We are making steady progress in returning our profitability to more normalized levels. As a result of the strong start to the year, we are now Expecting our 2022 adjusted EBITDA to be in the $750,000,000 to $770,000,000 range.
Additionally, we expect to be free cash flow positive for the remainder of the year following the inventory build the first half of the year. We continue to see improvements in the labor markets. We are now focused on employee training and retention, while still finishing filling the open positions we have. As my opening comments stated, we continue to see improvement across all operations. We are however still dealing with broader inflationary pressures as well as volatility linked to raw material markets.
In addition, we now have the added uncertainty around volume recovery due to the fears of a recession. We believe our portfolio is fairly resilient in recessionary times, but it is prudent to remain cautious in the current environment. Given the timing lag for inflationary cost pass throughs, we anticipate This quarter will represent our peak EBITDA for the year and would expect more normalized results the next two quarters, particularly given the lower seasonal demand At this time, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. We remain focused on continuing to improve our production capabilities and service to our customers. With that, let us take your questions.
Operator?
Speaker 0
Our first question will come from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Speaker 4
Great. Thanks for taking my question. Congratulations on the progress here and The turnaround. So I guess, first question is just on the price cost situation. As you noted, you are still experiencing some raw material inflation and some inflation across other categories.
Yet you are kind of have implemented some pretty sizable price increases over the last couple of quarters. So As we kind of lap those, what kind of pricing should we expect going forward? And have you seen any kind of potential elasticity response from your I. E. Pivoting away or trading down or what would you kind of describe the environment as?
Thanks.
Speaker 2
Yes. Thanks, everyone. So our pricing is 2 key elements. Yes, it's our raw materials as you know and then what we're calling our cost of living or other non material related costs. I would tell you, we've made a great deal of progress as it relates to getting customer support, both contractually As well as transactionally on our non raw material recovery.
And so you see that, I expect that, that continues Throughout the future of this business, our target is 100% recovery in that regard. And as you can see, we've demonstrated for the First 2 Qs of this year that we've been able to get that kind of support, I'd expect that to continue. On the raw side, Those are more contractually and index based recoveries. And those will also while we've worked to try to tighten those things up, Those things are going to be more of what you're used to seeing. Our each one of our segments has a different lag, And those lags will dictate how the material falls out.
We will see the same kind of pricing strength, I think to a lesser degree given what materials are doing the raw materials are doing. But on the cost of living side, I expect the strength to continue.
Speaker 4
And just as a follow-up then. So you noted some volume softness, but that was mainly Tough comps, is that how we should read it? And have you seen potentially any areas A softness or is it again just a comp issue and you expect maybe some volume acceleration next year on those easy comps?
Speaker 5
How should
Speaker 4
we think about volumes as well? Thanks.
Speaker 2
Yes, good question. Yes, so We are seeing a moderation in some of our foodservice business in terms of volumes as we kind of get into Q3 here. And we in late Q2 even we saw a little bit. I would tell you in our bevmerch business, we can sell every ton we can produce. Demand is still very strong for fiber products.
Both our paper and our board products So that demand does not seem to be softening. And on the food merch side, we've largely constrained Our own demand with labor challenges. So it's difficult to say if anything is moderating there. I will tell you that our assumptions for the back half is we do see some moderation, but most of our products, if not Almost all of our segments are in non discretionary products. Our products are the products people need and use every day.
So I don't expect a huge fall off in terms of our demand. There will be some moderation in segment shift. We see that in recessionary periods in the past as mobility shifts, but we're well positioned to handle that. Thanks.
Speaker 0
Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.
Speaker 6
Yes, thanks. Good morning, everyone.
Speaker 1
Good morning. Good morning.
Speaker 6
Good morning. So I guess the first question maybe on the continuing on the demand side and You alluded to some production constraints and this goes back not just this quarter, but going into the year. What would your What could your volumes have been in the 2nd quarter, if you didn't have those production constraints? I'm just trying to get a sense of Especially the down 9% in Foodservice, what that could have looked like if we then think about underlying demand Slowing in the back half, so how we think about the external environment versus some of your internal constraints?
Speaker 2
Yes, that's difficult. I mean, we made some conscious decisions to exit areas. I mean, you look at the coated ground with volume, Setting that aside, rough numbers, was it 1% or 2% of volume that we missed as an opportunity? Maybe. But I think the real decision and one of the things that really constrained our demand and try to position Well, for the back half and future queues was the rebuild of our inventory.
And we did that, so we weren't constraining the demand. The other thing is, it's hard to also give you an answer on that without understanding all our customer inventory levels. And We know that those things remain fragile. Our customers have not fully rebuilt most of their inventories yet either. So it's hard to say.
I'm sorry, I don't have a real good answer for that, but I'd be guessing if I tried to say it was more than a percent or 2% maybe.
Speaker 6
Okay. So and maybe then You talked about kind of foodservice demand slowing, I guess, through July and presumably in June and later in 2nd quarter, any way to dimensionalize, kind of the magnitude there? And any Specific color by product line or customer type of vertical, whether that's QSR, casual dining, institutional, who have any visibility to that, that'd be helpful.
Speaker 2
Yes. We're seeing some mobility shift. People are still going to the restaurants, sitting down, eating, taking food out. In We're seeing that kind of trend up a tad. QSR Mobility, no secret there.
I don't think anybody is missing the plot there that it is slowing. Although for us, it's just been moderate, and I think that that's probably the likely trend. But outside of that, there's really not been a large scale shift for us. And I think some of that's masked by the fact that we're able to now service customers at a higher level given our inventories. So anything that we were missing, we're kind of getting back through better service.
Speaker 6
Okay. And if I could just ask a quick clarifying question. So the total company EBITDA bridge for acquisitions, I Presume that contribution is all Fabrikale. So just want to confirm that and the business that it would seem 28% EBITDA margins in the quarter if that's the case and Is that just price cost being as favorable in that business as it was in your base business and so that would moderate because it would look like the 9 months since you've owned it have already well exceeded kind of the preceding LTM from when you announced the acquisition last September.
Speaker 2
Yes. I think if I understand your question, we are pricing across we have pricing responsibility and Fabrykel, that business is no different for us. It's Presenting exactly the same kind of performance that the broader active business has. And then, Yes. Yes, I'd say that the strength is we're well ahead of schedule in terms of the synergies we expected in that business.
It's largely integrated. We're already on the same ERP systems, all the footprint and asset synergies and The other tertiary things that we planned have largely been executed and so that's flowing through and is a big piece of I would tell you price generally across the broader business tick and then absolutely that acquisition has been a good thing for
Speaker 6
Okay. I appreciate all that color. I'll pass it on. Thanks.
Speaker 0
Our next question will come from Kieran De Bruin with Mizuho. Please go ahead.
Speaker 5
Hey, good morning. I was just wondering if you could touch a little bit more and you spoke to it a bit, but on the labor availability and some of those higher manufacturing costs and What you've seen on that front, it seems like you've made a lot of progress, but there's still a little bit of an overhang. How are you thinking about that in the back half of the year potentially easing? Thank you.
Speaker 2
Yes, thanks. Good question. Thanks, Tieran. Yes, so we have made a lot of progress in labor. And I would tell you that Largely, our focus is retention and making sure that The investments we're making in our labor force, both to train and retain folks, pays off and that, that labor gap doesn't widen.
So that's priority 1. Hiring the right kind of folks, the folks that want a long term path to a better future, All the things that we've done to put in place, a stable work environment that people want to walk through the doors every day. We're at a point now where we're actually trying to be a bit more selective and we expect that while we made big drives to close that labor gap in Q1 and Q2 largely, that we're really focused on getting the right kind of technical talent in our factories. And that won't be as fast paced as it was in Q1 and Q2. And largely, Where we've constrained only one of our business units, which is our food and merch business in terms of labor.
We've really focused on fixing that from a headcount. But as far as foot traffic, people applying for jobs, that's not a problem. It's really for us skilled labor and making sure we do the right thing for the business.
Speaker 5
Great. That's great color. And then just a really quick one on a follow-up. For the sale of the Carton Packaging and Machinery business in Asia, how should we think about, I guess the magnitude of that impact on sales and profits in the second half or as it rolls off the business. And I think you alluded to it quickly.
The $300,000,000 Profits of the sale, we should think about that kind of going towards that pay down. Is that the right way to be thinking about it? Thank you.
Speaker 2
Yes. I think generally that's we've been pretty clear that lowering our gearing, dropping our leverage is The priority certainly has not presented itself. There are other uses that make better sense that would also be deleveraging or improve our EBITDA. We look at that, but right now our priority is balance sheet health and paying down the debt.
Speaker 6
Great. Thank you.
Speaker 0
Our next question will come from Janssen Panjabi with Baird. Please go ahead.
Speaker 7
Hey, guys. Good morning. Mike, just going back to your earlier comments on foodservice and some of the variability there, and there's a lot of noise from last year and so on through COVID. Where are we in that segment relative to the pre COVID baseline from a volume standpoint? And then do you think the weakness that you're seeing is just a comparability issue because last year things opened up and there was inventory builds and so on or is that incremental weakness?
Maybe you can just share what Customers are sharing with you at this point.
Speaker 2
Yes. It's a bit of a mixed bag and a good question, Johnson. I don't Comps are certainly we did open up strong last year and there was a we are feeling a bit of that. But I would tell you the consumer shift makes it difficult to say if we're pre 2019. I think there's a bit of a new normal we're starting to see.
And if I look at it on a like for like basis to kind of pre COVID, I think we're now flat. And as a whole, I'd say even across the broader business, we're pretty flat, not just in foodservice, but foodservice, I'm pretty confident We're flat. There has been a mix shift segment to segment, but yes, the comps last year weren't representative of a new normal.
Speaker 7
Got it. And maybe a question for John on free cash flow. John, can you maybe just update us on Some of the cash flow items, CapEx, cash tax, cash interest, just trying to get a sense as to what the cash position looks like coming out of this year?
Speaker 3
Sure. Happy to. So if you take our EBITDA guidance and then just walk it down. So CapEx, We're seeing in the range, probably in the 260 to 270 area for the year. Interest, as you know, we do have A fair amount of variable rate debt, but just looking at the curve and an estimate is probably around $200,000,000 for the year, somewhere in that area.
Taxes, it can have a bit more variability to it. But if you take the first half and just normalize it or annualize it, you're looking in the $160,000,000 area for that. So that gets you to a free cash flow for the year somewhere in the $150,000,000 area. And then again that's not necessarily guiding to working capital in that area. But what I would say is just really focusing on inventory.
What I did say in the prepared remarks, we're not anticipating any further inventory builds. And so From that perspective, I would take that number reflects more
Speaker 2
of a flat working capital.
Speaker 7
Perfect. Thanks so much.
Speaker 2
Sure.
Speaker 0
Our next question will come from Kyle White with Deutsche Bank. Please go ahead.
Speaker 8
Hey, good morning. Welcome, John, and looking forward to working more closely with you. Congrats on a really strong quarter, guys.
Speaker 3
Thanks, Dominic.
Speaker 9
I wanted
Speaker 8
to focus in on the guidance raise. I appreciate the raise. I guess I'm trying to understand Is the outlook increase purely driven by the first half performance being better than you expected? And then you kind of kept the second Have relatively unchanged from your initial expectations coming into the year or just how should we think about that?
Speaker 2
That's exactly how you should think about it. That's fair.
Speaker 8
I guess if I follow-up on that, then why shouldn't we expect this kind of price cost that you've been realizing over the first half to continue into the second half Given that from our vantage point, it seems like a lot of the input costs have been relatively stable. I mean, obviously, energy markets have been a little bit volatile. I can't imagine that pricing is slowing down at all for you. So you talked about this quarter being Peak EBITDA for the year, is that just a function of normal seasonality or is it because of what you see on the horizon as it relates to demand or inflation on the business?
Speaker 2
Yes. So for us, what you see in raws now largely won't impact It will be a Q1 dynamic. So we're actually digesting what raws have done in the first half of the year. So with the lags on the material side specifically, you've got falling material costs, for instance, on polypropylene. Yes.
With that falling, we have to pass some of that raw material that back to our customers. So there's a piece of that that's not indicative of current state. The other side of that is you're right, we will continue to price through And cost of living adjustments, and so that will remain, like I mentioned earlier. That also said, we do As I mentioned, we do have non discretionary products. These are products people are going to use every day.
We do expect some continued moderation there. And so I think we're just bringing a balanced look at the forecast. You're right, pricing, we do expect to take the same approach. But that seasonality in the back half of this year and Kind of the uncertainty around what's going on economically, we just feel like we've taken the right look at volumes and we know we've got
Speaker 0
Our next question will come from Anthony Pettinari with Citi. Please go ahead.
Speaker 9
Hi, this is actually Brian Bergmeier sitting in for Anthony. If you back out the mill outage, beverage merchandising EBITDA would have been pretty close to 2019 levels. Do you think that the segment can get back to that $45,000,000 $50,000,000 EBITDA per quarter range, maybe in the second half of twenty twenty two or In the front half of twenty twenty three or is that a little bit too aggressive right now?
Speaker 2
I think definitely for twenty twenty two that would be too aggressive. Just given what we have planned for back half and the fact that we do have an outage in the back half of the year. I would tell you that I don't think you're off base for that being a future Run rate for the business, I'm reluctant to give you kind of a timeline on that. But certainly, we're looking at quarters away, not a year away to get there.
Speaker 9
Got it. Understandable. Thanks.
Speaker 2
I would underscore yes, go ahead.
Speaker 9
No, no, no. Go ahead.
Speaker 2
Yes. I just would say, I'd underscore the fact that we are with the mill outage, I do believe that we would If we set the mill outage aside, which was a benefit for the mills, the mills have both of our mills that done very well in terms of making progress. So We are largely stabilized there. So that's why I'm confident on you that those are the kind of run rates we are targeting to stabilize the business.
Speaker 9
Got it. Okay. Thanks for that. And then last one for me. In the prepared remarks, you mentioned some Possible further deleveraging portfolio moves are being considered.
Can you provide any detail on maybe the size or scope Of those or is it a little bit too early? I'm just trying to think, could it be closer in size to the recent Asia Pac sale or something significantly larger or Smaller than that or maybe it's just too early to tell.
Speaker 2
It's just too early to tell.
Speaker 9
Okay, got it. That's it for me. I'll turn it over.
Speaker 0
Our next question will come from Andy Sheffer with Onex Credit Partners. Please go ahead.
Speaker 10
Hi, good morning. Can you describe for us The labor fulfillment levels in each of the three business segments sort of where you've come from, where you are now and How fully staffed you typically run?
Speaker 2
Yes. I mean, at the height of the pandemic, which was Yes. We peak gap in our labor market It was north of 20% hourly. On top of that, I would just trying to work backwards and give you both goalposts. I would tell you that Yes.
Normalized pre pandemic levels, we would kind of range in our what we call our vacancy rate For hourly workers between 5% 10%. And today, we sit here between 9% 10% vacant. And I would tell you segment base wise, our largest exposure is our food and merch space. And then after that, We're pretty healthy in both of the other two segments.
Speaker 9
Okay. Thank you
Speaker 10
for that. And then in terms of the volume, I thought what I heard you say was that your restocking of inventory ate into The volume that you could deliver, so you were purposely dialing it back. But I'm not sure how much that was. And then Was there also some sort of customer optimization anywhere that you were doing in terms of Deciding that business didn't make sense and we'd rather just put it into inventory or Just move on with various customers. Was that any part of that volume decline?
Speaker 2
So for us, We constrain our own demand largely due to not having the right products. And so we did not constrain demand To the extent we wanted to rebuild inventory. We rebuilt the inventory, so we're not constraining demand. So we Establishing healthy inventories and the right products is a better way to look at that. So if If a customer needed product and it was there, they got it.
We didn't make a decision not to ship our customers based on products that were sitting there. Secondly, I don't see inventory levels And customer rationalizations, it wasn't a strategy we implemented to try to rebuild inventory levels. It Normal course decision making for us that whether we rationalize SKUs or customers, it was all done in the normal course decision making not to reestablish inventories or improve certain strategic customers over others. And we've largely kept that As a strategy, we want to be there for all of our customers.
Speaker 10
And was any of that because of lack of Material inputs in terms of what products you did not have or was it just the world Shifted, as I think as you were alluding to and maybe a new normal and that's what caused the mismatch of What you had versus demand?
Speaker 2
Yes, there's bits and bobs that continue to pop up, but they didn't constrain our ability to get product. We switched modes. We did things, all heavy lifts to get our materials there. I would tell you on the aluminum side, that's one area where our aluminum products Are suffering due to material availability, and that's a widely known dynamic in global basis a pretty good constrained commodity.
Speaker 1
Thank you.
Speaker 0
Our next question will come from George Staphos with Bank of America. Please go ahead.
Speaker 11
Hi, guys. How are you? Thanks for the details and congratulations Mike, I just want to make sure just a point of clarification. I apologize, maybe I'm the only person who So in the last quarter, did you or did you not constrain your shipments To some customers as you sought to rebuild inventory or was your volume what your volume would have been and you were still able to rebuild your inventories? How should I read that?
Speaker 2
Yes. George, you're absolutely right. We did constrain demand to many of our customers in the Q1 and coming out of Q4, Because we didn't have the right days of supply and right days of right products, frankly, on the shelf.
Speaker 5
Okay.
Speaker 11
So there was a negative effect even if you don't want to necessarily quantify it, there was some negative effect on your volume that you otherwise would have reported And the results you would have put up because of that strategy, would that be fair?
Speaker 2
Yes.
Speaker 11
Okay. Appreciate that. If I could, my follow on question and piggyback a little bit on what Kyle was getting at. So As you look back over 2Q, what was the 1 or 2 biggest factors That drove performance better than your original expectations. Because I think coming out of 1Q, the guardrails were sort of on, hey, Performance probably wasn't going to be that dissimilar from 1Q.
Again, you did very well and much better than we would have modeled. What were the key Factors there that were better than your expectations in 2Q. And as we look out to the second half, sure, Perhaps we're in recession. Sure, there's inflation, but your pricing givebacks as Where would your run rate sort of EBITDA be? What would the range be for 3Q?
Why wouldn't it be very comparable to what we saw in 2Q? Thank you and good luck in the quarter.
Speaker 2
Yes. Thanks, George. So I would tell you the biggest thing is our contractual pass throughs are working. So our ability to get price and support from our customers on inflationary and Rob, as you highlighted very correctly, It's one big area where we saw Q2 strength. The second is our labor recovery is ahead of plan.
Yes, we expected to drag well into Q3 and potentially into Q4 before we were able to reestablish inventories. So we are getting the benefits and we started getting the benefits of some of that constrained demand Being unconstrained through mid to late Q2. So we won on that front despite what the volume story says on a moderation Segment by segment. You set coated groundwood aside, which is a large chunk of the volume. Many of our subcategories and mix are favorable for us.
And so that's Q2 kind of in a nutshell is price and labor recovery, Reestablished inventories to take care of a better mix and demand. On the back half, with what So you highlighted polypropylene, we can use that. Polypropylene has been falling and we are passing Those savings back to the customers. Now polypropylene flattens out in the back half, Which is the assumption and we kind of don't see that continued strength. It starts to go the other way.
And we are largely in the mode of Passing back versus enjoying the lag, so to speak. Okay. But so how
Speaker 11
big of a step down right now from what you can see do we see 3Q versus 2Q considering The volume decel perhaps a narrowing of spreads even though again I think there's a lag on when you pass through. Is there any way to put a range on that? Thanks and good luck in the quarter.
Speaker 3
I would just this is John.
Speaker 1
I'll just jump in. Hey, John. Yes, you
Speaker 3
can put a range you can take a look at our guidance and just back The EBITDA is for the back half of the year if you're looking for guidance for that. The only other thing I'd note is that we're expecting Q4 just to Seasonally weak as you look at the remainder of the year forecast for EBITDA. So Q3 should be a bit better than Q4.
Speaker 11
Thanks. I'll turn it over.
Speaker 0
There are no remaining questions in queue. And with that, we will conclude our question and answer session. I would now like to turn the conference back over to Michael King for any closing remarks.
Speaker 2
I just want to thank everyone for joining us today. Certainly, appreciate the conversation and look forward to further discussions in Q3.