Pactiv Evergreen - Q3 2023
November 2, 2023
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the Pactiv Evergreen Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Curt Warthen. Curt, you have the floor.
Curt Warthen (VP of Strategy and Investor Relations)
Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our Q3 2023 earnings call. With me on the call today, we have Michael King, President and CEO, and Jon Baksht, CFO. Please visit the events section of our investor relations website at www.pactivevergreen.com and access our supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I want to remind everyone that our discussions today will include forward-looking statements, including those regarding our guidance for 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-K for the year ended December 31, 2022, and our quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2023, for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. 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. With that, let me turn the call over to Pactiv Evergreen's President and CEO, Michael King. Mike?
Michael King (President and CEO)
Thank you, Curt, and good morning, everyone. Thank you for joining us today. Turning to slide four, we'll begin with an overview of the progress we've made against our strategic priorities, discuss our performance during the quarter, and then provide updates on our key financial metrics. At the end of the call, we'll open the line for Q&A. Turning your attention to slide five. I'm proud of the steady progress we've made toward our targets for 2023. Our solid performance during the Q3 would not have been possible without our dedicated team. We delivered 21% Adjusted EBITDA growth during the quarter, with Adjusted EBITDA margin increasing to 16.5%. In addition, we've generated $176 million in free cash flow and made further progress reducing our net leverage. Our teams continued to execute at a high level, navigating challenging market dynamics.
Our solid Q3 results reflect the resilience of our business and the company's ability to deliver sustainable returns. As a result, we are revising our guidance upwards, which Jon will discuss in greater detail. We continue to leverage our broad range of product offerings, channel coverage, and distribution network to generate improved margins and free cash flow. We remain focused on our strategy of value over volume and continue to make progress emphasizing our higher-margin products, focusing on operational excellence and improving our balance sheet. We are confident that focusing on these strategic priorities will allow us to enhance shareholder value. Next, recall that last quarter, we introduced the implementation of the Pactiv Evergreen Production System, also known as PEPS, which promotes best practices and continuous improvement. During the Q2, we shared that we anticipate eight plants to reach Bronze status by year-end.
I'm pleased to share that we are ahead of that target, and during the Q3, three of our facilities became PEPS-certified, increasing the number of our plants carrying bronze status from six to nine. Longer term, we expect three to five of our plants to achieve silver status next year, with our goal of having our first site become gold certified before 2025. While we are still early in the PEPS journey, the progress we have made since the Q2 is meaningful. We are enthusiastic about the impact this will have throughout the organization in waste elimination and improving our operations scalability. We continue to win with our key strategic customers. As we highlighted during our Q2 earnings call, our business is outperforming its end markets, partially by aligning with customers that are well positioned for long-term growth.
We benefit when our customers succeed, and our strong partnerships provide better insight into their needs. In addition, our team has been able to adapt to broader changes in demand, enabling us to better align with our customers. Although our end markets are moderating, here at Pactiv Evergreen, we are seeing positive momentum as we continue to strategically align with our key customers. Meanwhile, we remain committed to effectively balancing production costs with demand levels... and we are pleased with the progress we've made to control costs and improve efficiencies. Foot traffic in QSRs and full-service restaurants was down slightly compared to last year. However, our alignment with key strategic customers allowed our Foodservice segment to outperform the market. Over the past year, as consumers transition to lower-cost calories, they have continued to shift their spending from restaurants to the grocery store.
Within the store, they've allocated their budgets to priority product categories that benefit Pactiv Evergreen. Outside of those elements, we've also been disciplined in our value over volume approach, which has supported our price realizations during the quarter. In addition, we've been successful in reducing our manufacturing costs to drive higher profits and improve our margin profile. We've made considerable progress on the beverage merchandising restructuring during the year, including the closure of our Canton Mill and our Olmsted Falls converting facility. The reorganization of our management structure and the related combination of ourlegacy Food Merchandising and Beverage Merchandising businesses into a single segment. We remain confident that these actions will reduce our capital intensity and overhead costs and position us to remain competitive in the liquid packaging market. Moving to slide seven.
This past year has demonstrated the resilience of our business model and our ability to grow Adjusted EBITDA and free cash flow through the economic cycle. Last quarter, I highlighted the operational excellence aspect of our transformational journey. This quarter, I will highlight our diversified end market exposure, our broad product offering, and our nationwide distribution footprint, as these are critical areas that support our value proposition and provide the foundation that our transformational journey is built upon. Today, we are uniquely positioned to provide sustainable product solutions to our customers, with scale and reach unlike any other food service or beverage packaging provider. Starting with our diversified end market exposure, we sell across full-service restaurants, QSRs, convenience stores, broadline distributors, food processors, grocery stores, and beverage companies.
This means that no matter where consumers spend, whether it be inside or outside the home, we have the scale to meet their needs. This partially insulates us against macroeconomic headwinds as consumers shift their behavior to favor one channel over another. This is especially important in the current environment, as consumers have altered their buying patterns to adapt to the impacts of inflation. As mentioned previously, higher menu prices have caused consumers to trade down from higher-end restaurants to QSRs to lower-tier fast food restaurants. Our food service business serves the full spectrum within the restaurant channel, so it is a shift from one outlet to another, which gives us the opportunity to capture that foot traffic. Higher menu prices have also forced consumers to shift their spend from the drive-thru window to the grocery store.
With our presence throughout the grocery store, from the fresh food and beverage options at the perimeter of the store to other options in Food and Beverage Merchandising segment is able to capitalize on this shift and secure those volumes as they migrate over from food service. In this dynamic economic environment, with ever-changing consumer trends, we expect that our diverse end market exposure will allow us to continue to realize profitable growth, even with shifts in consumer behavior. Turning your attention to slide eight, we believe that we offer the broadest array of products and substrates within the food and beverage packaging industry, and we're constantly working to innovate and develop the highest quality, environmentally friendly products. This is a sustainable competitive advantage for us, and it offers convenience and peace of mind for our customers.
The breadth of our product offering enables us to respond quickly to changing customer needs. We can pivot to where the demand is and insulate ourselves from any singular trend at the product or customer level. We are considered a solutions provider with a host of technical and supply chain services, which has afforded us the ability to build strong strategic partnerships with our customers and become a critical component of their supply chains and future strategies. In many cases, we are the supplier of choice to help our customers meet their packaging-related sustainability goals. Because we play such a vital role in our customers' supply chains and cover such a wide spectrum of their packaging needs, our customers have a strong incentive to work with us to develop next-generation products and substrates.
We have the expertise and the know-how to engineer sustainable solutions, and Pactiv Evergreen minimizes disruption for our customers with the convenience of a turnkey solutions provider. Turning to slide nine, our strategically located distribution footprint is another key differentiator that allows us to offer best-in-class service to our customers. It also gives us an exclusive vantage point into the value chain, from upstream packaging production to downstream packaging consumption, and all the stages in between. Not only do we have a broad national manufacturing footprint, we also have a strategically located hub-and-spoke network of distribution centers that allow us to deliver our products quickly and efficiently while meeting the precise needs of our customers. Many of our distribution centers are also close to our largest, most strategically important customers, ensuring we deliver products in a timely manner.
As a result, while a lot of other packaging companies rely on just-in-time delivery, our customers can count on us for just-in-case inventory management. Our distribution centers carry stock across all categories to enable us to adapt quickly to changing customer needs. We work closely with our customers on demand forecasting, which allows us to better anticipate changes and adjust our production and inventory levels accordingly. Our manufacturing operations benefit from reducing the variability caused by changing demand levels, and our sales teams benefit from the competitive advantage of playing a critical role in our customer supply chains. We remain committed to further optimizing and improving our distribution network to operate more efficiently and meet the evolving needs of our customers, while also supporting the long-term sustainable value creation. Turning to slide 10, the market backdrop remains challenging as elevated inflation continues to impact consumers' purchasing decisions.
More recently, we are beginning to see encouraging signs of moderating volumes on both a sequential and YoY basis. In general, consumers continue to allocate spending to adjust for higher food prices and prioritize channels and product categories that we participate in. We continue to position ourselves so that we are strategically aligned with customers that are industry leaders. We believe they are winning in their respective markets, so we benefit when they succeed. On that front, we have seen limited promotional activity by some of our customers, which contributed to our Q3 volumes. Although we have not seen large-scale promotional pricing yet, to the extent that overall customer promotional activity picks up, that would be a net positive for the sector as well as Pactiv Evergreen. Regarding the raw material cost environment, the trend in 2023 has been lower cost than 2022.
We've made a concentrated effort to reduce our lag and our contractual pass-through mechanisms, and we don't expect the recent commodity price volatility to have a material impact on the results through the rest of the year. Finally, we continue to manage our controllable costs by improving efficiency and productivity across the organization. As a result of our operational efficiencies, we are seeing significant benefits to our Adjusted EBITDA and free cash flow. As a result, we've been able to strategically allocate cash to pay down debt, reducing our interest expense and improving our overall net leverage. Our beverage merchandising restructuring continues to progress on schedule, and we remain on pace to achieve our operational milestones that we communicated from the onset.
As a reminder, this is an effort to streamline our physical footprint to focus on converting operations, resulting in lower operational costs and a more capital-light operating structure, both of which support increased cash flow generation. Overall, it's taken a tremendous effort from all of our employees, particularly at the impacted facilities, to help us continue to execute according to this plan. I'm also very proud of the dedication and commitment and hard work along the way. With that, I would now like to turn the call over to Jon to discuss our Q3 results in more detail. Jon?
Jon Baksht (CFO)
Thanks, Mike. I'll start with our Q3 highlights on slide 12. We reported net revenues of $1.4 billion for the quarter. While this represents a decrease of $230 million compared to last quarter, most of the decline reflects the restructuring and portfolio optimization we have carried out. This includes the shutdown of the Canton Mill in May of this year and the sale of our Asia operations last August. Excluding those actions, our revenue was down approximately $87 million, which is mostly due to the lower raw material cost environment compared to last year, as well as strategic value over volume decisions. Q3 Adjusted EBITDA was $227 million, compared to $187 million in the year ago period.
The increase reflects our success with improving our mix while maintaining cost discipline across the organization. Our efforts delivered Adjusted EBITDA margin expansion of 120 basis points compared to the last quarter and 480 basis points compared to the year ago period to 16.5%. As we've discussed in prior quarters, we remain focused on managing our control over costs to maximize profitability and free cash flow. We increased free cash flow to $176 million in the quarter, despite $34 million in restructuring-related cash outflows. We continue to make progress, better aligning inventory with our customers and have been successful in maintaining more normalized inventory levels, which in turn frees up cash.
Our ability to generate strong cash flow continues to help us pay down debt, and during the quarter, we reduced our net debt by $160 million. Due to our improved adjusted EBITDA performance and debt reduction, our net leverage has improved to 4.2 times, which is ahead of our goal to be in the low fours by year-end. We effectively achieved that goal during the Q3. Continuing on slide 13, I'll cover our Q3 YoY results. As a backdrop, last year benefited from historically favorable spreads, driven by attractive supply-demand dynamics and the timing of our contractual pass-throughs. Those spreads began to normalize into this year as raw material costs moderated, while volumes remained under pressure due to elevated inflation levels.
Starting with net revenue, we saw a decline of 14%, mainly due to the closure of Food and Beverage Merchandising segment. excluding the canton closure and the divestiture of our Beverage Merchandising Asia business, revenue declined by 5%. Volumes are down 4% in the Q3, primarily driven by strategic value over volume decisions in food and beverage merchandising. Price mix was down 2%, mainly due to lower contractual pass-throughs as the overall raw material cost environment is lower than last year. As I'll cover in greater detail with the segment results, we continue to outperform relative to our end markets, and our financial performance in the quarter reflects this. We delivered an Adjusted EBITDA increase of 21% to $227 million.
We benefited from lower material costs, and we were able to offset lower overall volumes and pricing by managing our manufacturing and transportation costs. We are also seeing the benefits of our productivity initiatives and restructuring efforts. free cash flow increased, mostly due to improved operating results and a net working capital benefit, including the impact of working down the prior year's strategic inventory build, partially offset by restructuring-related cash outflows and higher capital expenditures and interest paid. Moving to slide 14 for a sequential quarter comparison. Net revenues were $1.4 billion, down 3% from the prior quarter. The slight decrease was mostly due to the volume impact from the Canton Mill closure and value over Food and Beverage Merchandising segment. we also experienced slightly lower price mix, driven by the contractual pass-throughs of lower material costs.
Adjusted EBITDA was $227 million for the quarter, a $10 million increase from the Q2. We benefited from lower manufacturing costs, which were partially offset by higher material costs, net of costs passed through, and unfavorable product mix. free cash flow increased compared to the Q2, mainly due to improved operating results, the timing of interest payments, and continued optimization in inventory levels, partially offset by higher capital expenditures. Turning to slide 15, we'll look at our results by segment. Our foodservice segment continues to perform well against a challenging market backdrop. Volumes were essentially flat versus last year, which is constructive given that our end markets were down low single digits. Our customers have implemented targeted promotions, but these have been somewhat limited.
At the same time, some of our key customers have gained share, and we have benefited from that dynamic. As in previous quarters, we continue to emphasize value over volume. On a YoY basis, price mix was down 5%. The decrease primarily reflects lower raw material costs, most of which were due to contractual pass-throughs and mix, as we've been successful in balancing profitability and volumes. Our Adjusted EBITDA increased 9% due to lower transportation and material costs, net of cost pass-through. On a QoQ basis, volumes reflected similar seasonal factors as observed in the Q2, with cold cuts and back-to-school products increasing sequentially. Net revenues increased $19 million or 3%, primarily due to higher volume and favorable price mix. Adjusted EBITDA was down $11 million, or 9%, due to higher material costs, net of cost pass-through, and higher manufacturing costs.
Turning to slide 16, food and beverage merchandising experienced similar trends as in the Q2, with customers responding to elevated inflation by reallocating their budget to categories like protein and eggs. In addition, the severe weather in California that delayed the fruit harvest in the first half of the year reduced overall fresh fruit quality in the Q3. This resulted in reduced fresh fruit availability for packaging, as a larger portion of the harvest was used for frozen fruits and other uses. On a YoY basis, revenue was down 23%. However, most of that was due to the Canton Mill closure and the divestiture of Beverage Merchandising Asia. Apart from those factors, volume was down 6%, which included our strategic decision to exit select low-margin customer relationships as we reevaluated our overall book of business following the closure of the Canton Mill.
Excluding those factors, underlying volumes were down in the low single digits. Adjusted EBITDA increased by 27%, mainly due to lower material costs, net of costs passed through, and lower transportation costs, partially offset by the closure of the Canton Mill and lower sales volume. On a sequential basis, net revenue was down by 12%, 8% of which was due to the Canton shutdown. Volume was down 2% due to value over volume decisions. Price mix was down 2%, mostly due to contractual pass-throughs. Adjusted EBITDA increased by 19%, primarily due to lower manufacturing costs, including the impact from the cold mill outage in the prior quarter, partially offset by unfavorable product mix. Our margins for the segment increased 470 basis points sequentially, demonstrating the benefits of the restructuring.
Turning to slide 17, we continue to make progress on reducing our leverage profile and maximizing our free cash flow. Our net leverage ratio declined to 4.2x in the Q3, driven by a reduction in net debt and a sequential improvement in adjusted EBITDA over the last 12 months. As discussed, we expect to make further improvements to our net leverage ratio by year-end and are confident that we'll be in the threes in 2024. In terms of free cash flow, we generated $176 million in the Q3 and $275 million year to date, which is ahead of our previous guidance. Our cash flow generation has allowed us to reduce debt by $523 million year to date, including $229 million of debt reduction during the Q3.
Based on current interest rates, this quarter's repayments would reduce our annual interest expense by approximately $20 million, a key contributor to future free cash flow growth. Factoring in the $1 billion of interest rate swaps we entered into during the Q4 of 2022, we now have 81% of our debt fixed, with a total average interest rate of 6.35% as of quarter end. Regarding our capital allocation priorities, our approach aligns well with our long-term strategy and underlying consumer trends.... We remain confident in our position as a market leader, and our long-standing customer relationships support future growth. We are committed to delivering profitable growth, which in turn, would allow us to meet our aggressive goals to delever the balance sheet and preserve liquidity.
As we make further progress on the beverage merchandising restructuring, we expect our business profile to benefit from lower capital intensity and reduced earnings volatility. Importantly, we have demonstrated our willingness to optimize our portfolio by exiting non-core businesses to help us focus resources on growing our core markets. As we continue our transformational journey, we expect the next stages to be less transformational as the beverage merchandising restructuring and more incremental, including some cost structure optimization and rightsizing. We expect that this may require incremental investments in the near term, generating cost benefits in the future, and making our business model more adaptable. As we consider additional cost reduction initiatives, our strong cash flow-generating capabilities provide us with the opportunity to reinvest in our business for growth.
We believe these actions will enable us to serve our customer base more effectively and operate more efficiently while enhancing returns to stakeholders. Turning to slide 18 and our updated outlook. We are pleased with our solid performance this quarter and year to date. Our company continues to execute at an elevated level across both business units, and we remain well positioned to capitalize on future growth opportunities. As we have highlighted, the outlook for the U.S. economy remains uncertain as higher interest rates and still elevated inflation weigh on consumer spending, which may also impact our customers' purchasing decisions and order patterns in the near term. Despite these headwinds, our Q3 results demonstrate the resilience of our business and the company's ability to deliver sustainable results.
To account for our strong performance year to date, we are updating our full-year fiscal 2023 guidance to the following: Adjusted EBITDA is now expected to be between $825 million and $835 million, compared to the range of $775 million-$800 million we provided earlier this year. Similarly, our free cash flow is now expected to exceed $250 million, which primarily reflects the increased guidance for full-year Adjusted EBITDA. We believe this demonstrates the excellent free cash flow-generating ability of our business and anticipate this will help us further reduce our net leverage ratio.
Our full-year guidance for capital spending remains $280 million, and we have tightened the range for total cash restructuring costs by bringing the low end of the range up to $150 million as we further refine our estimates. I'll also point out that that range does not include the benefit of any cash proceeds from the possible sale of any property and equipment from the facilities impacted by the beverage merchandising restructuring. As we have highlighted previously, we anticipate approximately $120 million of cash restructuring costs will occur in 2023. I'll now turn it back to Mike for closing comments.
Michael King (President and CEO)
Thanks, Jon. At Pactiv Evergreen, we are committed to sustainability across our product portfolio, our manufacturing and supply chain, and our communities. We take immense pride in what we do, and we continue to invest in our ESG strategy to hold ourselves accountable in all areas of our business and operations. We know firsthand that delivering innovative, sustainable products at the scale we envision can't happen without innovative, sustainable operations. Innovation is key to our goal of increasing sustainable materials in our products. This quarter, we announced a partnership with ExxonMobil to offer customers certified circular polypropylene packaging products made with ExxonMobil's Exxtend advanced recycling technology. This collaboration allows us to offer our customers even more innovative packaging options, expanding our portfolio of circular packaging. We are also excited to announce the upcoming release of our new ESG report, our first based on internationally recognized GRI Sustainability Reporting Standards.
The report will provide detailed updates on our initiatives across our ESG focus areas of planet, product, people, and governance, as well as a comprehensive set of ESG metrics. Also, the report will include the results of our first materiality assessment and the third-party assurance report for our Scope one and two greenhouse gas emissions and energy consumption. Our teams across the enterprise are eager to share the stories of their work to fulfill our purpose of packaging a better future. While we are early in our sustainability journey, we are proud of the progress we have made to date and our progress on other ESG initiatives. Lastly, I again want to highlight our team's execution and thank each of them for their continued dedication and hard work.
We remain committed to leveraging the solid foundation we have established over the years, with the ongoing objective of delivering sustainable long-term value of our stockholders. That concludes our prepared remarks. With that, let's open it up for questions. Operator?
Operator (participant)
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Ghansham Panjabi with Baird. Ghansham, please go ahead with your question.
Ghansham Panjabi (Senior Research Analyst)
Yes, good morning. Thank you, operator. Hey, guys, good morning. You know, I guess first off, as we kind of think about 3Q and, you know, the upgraded outlook for the Q4. Can you give us some specific parameters as to exactly what's driving that upside? You know, is it just progress on restructuring savings? Maybe the end markets were a little bit better than you thought. What, what's driving that? Okay, and then just related to that, maybe you could just quantify. So the $40 million increase in EBITDA YoY during the Q3, how much of that was from cost savings? And at this point, are you able to share any sort of flow-through effect into 2024? Okay, perfect. Thanks so much.
Operator (participant)
Please stand by for our next question. Our next question comes from George Staphos with Bank of America. George, please go ahead with your question.
George Staphos (Managing Director)
Hi, everyone. Good morning. I don't know if everyone else is having this issue, but I, I'm hearing, for example, Ghansham's questions, but management over the phone line, at least from where we were, was not coming through at all. If you can hear me, I guess my first question would be this: You know, you've done a wonderful job in terms of leveraging, you know, what Pactiv has already always had, you know, the distribution network, the diversified manufacturing, and, you know, pushing value over volume. Could you quantify for us, if possible, what you think your ASP has moved up in your segments, say, this quarter versus last year's quarter or year to date this year versus last year, adjusted for inflation?
So if we try to figure out how you're doing, you know, how the value or volume is coming through, is there a way for us to map that progress in that way? Second question I had, if we go to slide 21 and look at your—in the index, the appendix, your cost performance, is there a way to break out how the $94 million of COGS, year-on-year in the quarter, split out between raw manufacturing, productivity, and the like? Thank you, guys.
Jon Baksht (CFO)
Sure, George. This is Jon. Just to check, can you hear me okay?
George Staphos (Managing Director)
I can hear you guys now. It's funny, my associate, Kashan, was hearing you on the webcast, but you were not coming through on the phone line. I don't know if I was the only one, but just wanted to mention it just in case.
Jon Baksht (CFO)
Okay. No, we can check into that while we do the call. I think Ghansham was able to hear us. So let me start. I think you asked a lot of questions, so let me try and unpack it all, and let me know if I'm hitting your topic. So, you know, the first one, I think you were getting to, you know, our average sales price. What are we seeing in the market? How is that? You know, we don't get into pricing on these calls for obvious reasons.I think what I would tell you is there's an element of the value over volume approach, where on a blended basis, we're certainly looking at that, and we're really focused on margins and the spread.
George Staphos (Managing Director)
Mm-hmm.
Jon Baksht (CFO)
And as we are getting better at really assessing which products, which customers, categories are more profitable, we are focusing our efforts on really supporting those customers that drive that better profitability for us. And I think you're seeing that come through in our margins as we really focus on building our overall margins and spreads across the business. And so, but within that, there's obviously puts and takes, and in some cases, we have seen more normalization on pricing in this market. But the big picture, you know, as I highlighted in the opening remarks, our margins overall are improving. So-
George Staphos (Managing Director)
Yeah, Jon, no doubt on that. And again, congratulations on the margin performance. I was just thinking if there was a way that you could somehow, not by product line, but somehow maybe index how your, either again, your revenue per unit on average or, or maybe your spread per unit or per pound has moved up because of what you're doing. That'd also be helpful, along with the margin. But, yeah, clearly, you're getting the progress here. I'm sorry. Keep going ahead.
Jon Baksht (CFO)
Yeah, and again, we're not gonna break out exactly our average sales price. But I would say that, just to reiterate our... You know, what you're seeing a bit, too, in pricing is the commodity price environment has been coming down, and so there's been a corresponding bring down in price. But again, we've got pass-throughs, as you know, so we're seeing some of that get more normalized.
George Staphos (Managing Director)
On the $94 million of, of COGS, if you can parse that in terms of raws, you know, process, productivity, PEPs, that would be great. Thank you, Mike. Thank you. Thank you, Jon.
Jon Baksht (CFO)
Yeah, if you're looking at the slide you referenced on our investor presentation, you know, there is a, if you break that out, looking at kind of the and I think you were focused on the sequential, the bridge YoY. Is that the right one?
George Staphos (Managing Director)
It's the YoY, 3Q versus 3Q.
Jon Baksht (CFO)
Right.
George Staphos (Managing Director)
COGS in particular.
Jon Baksht (CFO)
Yeah, so, the, the vast majority of the COGS that you're seeing there is gonna be on, on raw material pricing. So as we, as we go YoY, a lot of the resins have come down. So that's, that's a big percentage of that. But embedded in that is also improvements in manufacturing and logistics. So if you were to kind of disaggregate that a bit, you know, I would say more, more than half of that is, is, is raw materials, and, which we have passed these for. And then, probably a bit more than 50% is, is raw materials, and then the remainder is, manufacturing, logistics, and just overall kind of savings from, from the restructuring.
George Staphos (Managing Director)
Okay, thank you. I'll turn it over.
Operator (participant)
Standby for our next question. Our next question comes from Arun Viswanathan. Arun, go ahead with your question.
Arun Viswanathan (Senior Equity Analyst)
Great. Thanks for taking my question. I had that same issue that George had on the first question. Hopefully, we continue to hear everyone. So I guess, yeah, just congrats on the great results. You know, I guess I just wanted to dive into kind of the outlook here. So you are guiding to a year-on-year improvement in Q4, obviously, sequentially lower due to seasonality and some other issues. But as you kind of look out, you're posting about 6% EBITDA growth for this year. Is that kind of within your targeted range? I mean, should we continue to see Pactiv kind of, you know, post that kind of mid-single digit EBITDA growth? Is that mainly because of low single-digit volume growth, or is there maybe some upside to that from restructuring and some of the other actions you're taking? Thanks.
Jon Baksht (CFO)
Yeah, so from an annualized basis, I think that's those are all quite fair characterizations. I think the benefits of the restructuring we're starting to see those in Q3. We expect those to come on a bit further in Q4 as we get more to our normalized run rate. And then some of the other dynamics that you saw from a Q3 to Q4 basis are gonna be consistent in terms of just the operational savings, the efficiencies that we built into the business. We expect those to continue into Q4.
As I mentioned to George, you know, one of the factors leading in was some material prices have come down, and so from a pass-through basis, we're seeing some of that come through, and then just back to the value over volume. We are really more focused on our business mix and customer mix, and really getting that to a better place, and you'll see that in the Q4 as well.
Arun Viswanathan (Senior Equity Analyst)
Okay. And then just as a follow-up, you did increase your free cash flow guidance to $250+. So as you look out into 2024, would you expect maybe, you know, similar kind of growth in free cash flow, that would, that would dovetail, you know, the EBITDA growth? Or could maybe the free cash flow growth exceed EBITDA because of lower working capital or any other discrete items? I mean, do you expect to kind of be below four turns of leverage next year?
Jon Baksht (CFO)
So we're, you know, thinking controllable and manageable, you know, we're not really talking about 2024 at this point. What I would tell you is we're keenly focused on free cash and deeply committed to our reducing our net leverage. So I think that's right. You know, I think as we said in our prepared remarks, you know, getting into the threes is certainly a top priority for us. But I wouldn't guess a free cash for next year at this point.
Arun Viswanathan (Senior Equity Analyst)
Thanks.
Operator (participant)
Standby for our next question. Our next question comes from Anthony Pettinari of Citi. Anthony, go ahead with your question.
Anthony Pettinari (Research Analyst)
Hey, good morning.
Jon Baksht (CFO)
Good morning.
Anthony Pettinari (Research Analyst)
Just, hey, the range for cash costs from restructuring, I think, ticked up with the revised guide, I, I think from $130-$160 million to $150-$160 million. Does that mean 2024 maybe has less than the, I guess, $30-$40 million cash costs that were previously expected, or, or is that unchanged? And then, is, is working capital still looking like, I think, $150-$170 million source of cash?
Jon Baksht (CFO)
So on the first one, yes, so just to confirm, that is the revised guidance. So we took up the bottom end of the range, $20 million. But what we did not change was our guide for 2023 cash impact. And so effectively, I would think, and we haven't provided overall guidance for 2024, as Mike highlighted. But the way to think about that, it incremental cash, as relating to that to the Canton closure and the restructuring, that's gonna be a 2024 item. So our 2023 guide does not change as it relates to the cash costs there. Just to confirm, you can hear me okay, Anthony?
Anthony Pettinari (Research Analyst)
Yeah, I can, I can hear you.
Jon Baksht (CFO)
Okay, great.
Anthony Pettinari (Research Analyst)
That's helpful. And then on working capital, in terms of a source of cash?
Jon Baksht (CFO)
Yeah. So in terms of our cash outlook for this year, that's right. The change in working capital, we have a bridge in our investor deck on slide 23. So that range of $140-$150 remains the same. In the inver-
Anthony Pettinari (Research Analyst)
Okay.
Jon Baksht (CFO)
In the earnings presentation, yes.
Anthony Pettinari (Research Analyst)
Got it. Got it. And then, you know, in foodservice, and I guess, in food and beverage merchandising as well, is there—like, when would you expect the kind of the value over volume, you know, decisions can kind of run their course? Or maybe a related question, like, as you just kind of look at the comps, you know, when would you expect, you know, volumes to inflect positively? And then, you know, was there anything in October that, you know, made you feel maybe better or worse or the same about sort of 4Q demand?
Michael King (President and CEO)
Yeah, I think if you look at food service specifically, you know, there's a lot of things that look promising. So, you know, we are mixed, specifically looking at both YoY and sequentially. You know, we're starting to see that things are moderating. From a normal seasonality, you know, things feel like we're getting back to pre-2019 seasonality, if you look into Q4, as we kind of noted previously. And so, you know, when do we get to that inflection point? I think it comes down to when does the consumer start to change their behaviors just a little more. And high menu pricing, you know, we're watching that close, I think.
Looking at, you know, that foot traffic metric that we continue to use to measure our food service success and gains and losses, you know, all those things, I think, are starting to moderate. You know, is it a quarter, is it two quarters away? We'd be guessing to say, but, I could tell you Q3 feels better. Q4 seasonality will tell us a lot more. On the food and beverage merch, I think-
Anthony Pettinari (Research Analyst)
Yeah
Michael King (President and CEO)
-you know, that, you know, we're, we're largely seeing that the fresh trend, people getting their calories, you know, both in the center and perimeter of the stores is very real. That trend, you know, I hate to call it a buy-down because all calories are expensive right now, but it is, you know, people are spending less discretionarily, so baked goods and some of the, the more less healthy alternatives aren't as priority.
People are focused on, consumers are more focused on, obviously, the core proteins and basics. And, you know, that would lead us to believe that until we start to see more discretionary spending hit the baked aisle and some of the, the more discretionary food items, that we're not, we're not there yet on food and beverage merch either. I think we're probably, you know, it's a wait and see, but things are looking positive for us.
Anthony Pettinari (Research Analyst)
Oh, okay. That, that's super helpful. I'll turn it over.
Operator (participant)
Standby for our next question. The next question comes from Adam Samuelson of Goldman Sachs. Adam, go ahead with your question.
Adam Samuelson (VP, Equity Research)
Yes, thank you. Good morning, everyone.
Michael King (President and CEO)
Morning.
Adam Samuelson (VP, Equity Research)
Morning. So maybe continuing on the questioning on the value over volume, wondering if there's any distinction or color you could provide by product category, that where maybe that is, you're seeing a particular emphasis or you're emphasizing kind of a portion of the portfolio to a greater extent than others. And conversely, is there any distinction or anything notable to glean there by substrate? Are you seeing kind of a shift more of your volumes in some of the higher more sustainable solutions, or vice versa, or conversely, the opposite, that has margin implications?
Michael King (President and CEO)
Yeah, I would say it's, there's not any one segment, customer, product type, that value over volume is, you know, prevalent versus others for us. It's really more of an overall view that we're taking as it relates to working with our partners, our customer partners, to drive volume growth. And making sure that, you know, where we can kind of extract the kind of value we see and that we provide as a, not just a packaging producer, but as a supply chain partner. You know, that's what we're seeing, that it's not just a product or a category play.
We are seeing, you know, to your question, you know, when you think about our sustainable offerings, we are seeing that, you know, as our customers continue to evolve their strategies, we are winning in those spaces. I would say, you know, it is a driver of value for us, and it's a focus for us, so I don't want to undervalue that comment. So there is, you know, there is an ability to take advantage of better margins and a better product growth profile there, and we're doing that, but separate from our volume, our value over volume strategy.
Adam Samuelson (VP, Equity Research)
Okay. No, that's, that's helpful. And then maybe one for, for Jon, just as we think about cash flow and deleveraging into 2024. Can we think about working capital next year continuing to be an incremental source of cash? Or do you think the working capital levels are now kind of where they, then the turns where they will settle out, that your cash flow will more closely track kind of the EBITDA trends?
Jon Baksht (CFO)
Yeah, it's a great question. So, and thanks for asking that. From a free cash flow standpoint, going into next year, while we're not providing guidance per se, you know, clearly, you know, by targeting to get into the threes on net leverage by next year, would certainly imply that we're gonna be generating some free cash flow into next year, which we intend to do. As you look at the components that drove a lot of that free cash flow this year, if you look at just on an LTM basis, our inventory reduction was $241 million, or $183 million this year to date. Certainly, we don't anticipate that repeating into next year.
There were some inventory dynamics as we built up that incremental inventory last year to help really drive service levels during that environment. We've gotten more efficient with that inventory this year, as evidenced by that our ability to really work down our inventory, working more closely with our customers. I frankly I think we're, you know, even moving into next quarter, I think we're getting to the point where we're getting to probably more normalized inventory levels.
And our ability to uphold that level or for incremental free cash flow, it is not gonna be the driver going into next year or even into next quarter. What I would say is that the EBITDA trajectory we're on, the margin trajectory that we're on, margin growth that we've shown, I think those are gonna be really some of the key drivers going into next year, and really extrapolating some cash from the business.
Adam Samuelson (VP, Equity Research)
Appreciate that, that color. I'll pass it on. Thanks.
Jon Baksht (CFO)
Thank you.
Operator (participant)
I'm showing no further questions at this time. I would now like to turn the call back over to Mike King for closing remarks.
Michael King (President and CEO)
Thank you, Stacy. As we close today, Pactiv Evergreen is a strong, differentiated, and socially responsible business. We are an industry leader in food service and food and beverage merchandising, and we are confident that our markets are largely recession resilient. We are focused on generating sustainable returns, and our experienced leadership team has demonstrated our willingness to transform the portfolio to put us in the best-in-class position to deliver on our commitments.
We offer a broad array of products and substrates, and we have longstanding strategic partnerships with our customer base, many of which are blue chip companies. We are constantly working to innovate and develop the highest quality, sustainable products. We set a goal of having 100% of our net revenues in 2030 come from products made from recycled, recyclable, or renewable materials. We continue to deliver strong Adjusted EBITDA and free cash flow generation, which we are carefully managing to drive deleveraging and further growth through a disciplined capital allocation process. We look forward to updating you again next quarter. Thank you for your time.
Operator (participant)
This concludes today's presentation. You may now disconnect.