Pactiv Evergreen - Q3 2024

Executive Summary

• Q3 revenue was $1.333B (-3% YoY; roughly flat QoQ), with Adjusted EBITDA of $214M (16% margin) and Adjusted EPS of $0.36; GAAP net loss from continuing operations of $213M was driven by a $322M non-cash impairment tied to the Pine Bluff/Waynesville divestiture.
• Segment mix improved: Foodservice EBITDA rose to $120M (18% margin) and Food & Beverage Merchandising (FBM) EBITDA to $111M (17% margin), supported by favorable price/mix and lower incentive-based comp, partially offset by higher manufacturing costs.
• FY24 Adjusted EBITDA guidance was updated to $800–$810M (from $800–$820M in Q2, and $850–$870M initially in Q1); FY24 capex reduced to $240–$250M (from ~$260M), free cash flow guidance unchanged at $180–$200M, and year-end net leverage targeted at ~4x.
• Potential stock reaction catalysts: divestiture closure and shift to a more capital-light model, cost-savings momentum (footprint optimization and SG&A actions), and management’s expectation of sequential uplift in Q4 from promotions, efficiency gains, and pricing/mix.

What Went Well and What Went Wrong

• What Went Well

  • Sequential profitability improved: Adjusted EBITDA increased to $214M from $183M (+17% QoQ) on lower manufacturing costs (following Q2 outage), favorable pricing/mix and lower incentive costs; CFO highlighted leverage reduction progress and strong free cash flow.
  • Foodservice outperformed industry foot traffic, with segment EBITDA up 10% QoQ to $120M and margin expanding to 18% on favorable mix/pricing.
  • Management execution and strategic pivot: “We maintained strict cost discipline… and overcame challenges at the Pine Bluff… mill during its final quarter under our ownership,” positioning for a more capital-light model post-divestiture.

• What Went Wrong

  • Volume/macro headwinds: Company-wide volumes fell ~5% YoY in Q3 (FS -2%, FBM -8%) amid consumer price sensitivity and value-over-volume portfolio actions; net revenues declined 3% YoY.
  • GAAP net loss: $213M loss from continuing ops, primarily due to a $322M impairment tied to the mill transaction; tax expense decreased by $60M largely due to the impairment.
  • Mill disruptions: Operational challenges at Pine Bluff created a ~$17M negative variance vs prior internal forecast in Q3; Pine Bluff LTM EBITDA was negative and 9M 2024 contribution was -$38M, with Q2 most impacted.

Transcript

Operator (participant)

Good day, and welcome to the Pactiv Evergreen Q3 2024 Financial Results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Curt Worthington, Vice President, Strategy, Investor Relations. Please go ahead.

Curt Worthington (VP of Strategy and Investor Relations)

Thank you, Operator, and good morning, everyone. Welcome to our Q3 2024 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 2024. 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 31st, 2023, and our quarterly reports on Form 10-Q for the quarters ended March 31st, June 30th, and September 30th, 2024, 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. 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. Lastly, throughout the remainder of our remarks, we'll refer to Pine Bluff, Waynesville, and the associated operations we divested on October 1 collectively as Pine Bluff for ease of reference. With that, let me turn the call over to Pactiv Evergreen's President and CEO, Michael King. Mike.

Michael King (President and CEO)

Thanks, Curt. Good morning, everyone, and thank you for joining our call this morning. I'll start today off with an overview of the key themes for the Q3 and provide an update on the market. I'll also discuss the progress we've made against our strategy, including how we're positioning ourselves for growth in 2025 and beyond. Then I'll turn the call over to Jon to provide an update on our key financial metrics and discuss our outlook for the rest of the year. At the end of the call, we'll open the line for Q&A. Turning to slide five, in the Q3, revenues were $1.3 billion, and Adjusted EBITDA was $214 million, a solid 16% margin. We delivered adjusted earnings per share of $0.36 and free cash flow of $190 million.

Our team maintained a high level of execution in our core operations during the quarter and navigated a dynamic consumer demand backdrop. We also overcame operational challenges at Pine Bluff during our final quarter of owning the mill. As previously announced, on October 1st, we completed the sale of our remaining mill operations. The closing of the transaction marks an important milestone as we focus on our core North American converting operations and progress on our transition to a more capital-light business model that we expect will reduce our CapEx requirements and provide more flexibility to invest for growth. Now that we have executed on our strategy to exit paper mill operations, we expect to improve our future profitability while also reducing the volatility in our earnings.

We are now positioned to advance to the next phase of our transformational journey, which envisions us aligning with core customers through the cycle, repositioning our product portfolio to increase our presence in select customer channels, investing in growth initiatives, focusing on innovation, sustainability, and new product development, and improving operational efficiency and lowering our cost to serve. We'll continue to leverage our distinct capabilities to serve our core customers, most of whom are large-scale, nationally recognized brands and industry leaders that are well-positioned in their markets. It's because of our long-standing relationships that we have been able to navigate external challenges and outpace our end markets. Building on that strategy, we continue to focus on innovation and developing new sustainable products. We've also identified new opportunities with attractive growth prospects, which we believe will generate momentum into 2025 and 2026.

From a continuous improvement standpoint, we continue to take actions to flex our cost structure with industry demand. Our footprint optimization, as well as the cost actions we outlined in our last earnings call, continue to build momentum. We remain on track to generate $15 million of cost savings in discretionary spend and SG&A by the end of this year. In September and October, our communities faced the challenges brought by Hurricanes Helene and Milton. We're grateful our employees are safe, and we're impressed by how quickly our dedicated teams restored operations in just a matter of days. The determination and resilience shown during this time has been inspiring, and it highlights the strength and spirit of our organization. We are fortunate to also share our business was largely unaffected by the storms. Jon will touch on this later.

From an industry perspective, foot traffic at restaurants and volumes at grocery stores have continued to show the effects of lingering high prices as consumers continue to reduce their spending to fit within their budgets. Food-at-home price inflation has moderated more than Food away-from-home prices over the last few years, and consumers have responded by shifting their spend from restaurants to the grocery store, especially in recent quarters. Within Food Service, industry volumes in the Q3 were lower than the Q2. Foot traffic was down over 3% in our end markets. Within the grocery store, consumers continue to prioritize staples like protein and produce. We've continued to execute our value-over-volume framework and embrace a data-centric approach to focus on customers, products, and channels aligned with our long-term strategy. On the Food Service side of the business, this approach has helped us outpace the market over the last several quarters.

This is also a testament to our customer mix, which is weighted towards blue-chip companies that have the ability to grow share through the cycle. On the Food and Beverage Merchandising side of the business, we're in the middle innings of our value-over-volume playbook, and in recent quarters, we've begun repositioning our portfolio and our go-to-market strategy. Our objective is to concentrate on areas where we're currently underrepresented but are well-positioned to succeed and grow share. We expect these actions to translate into volume improvement through 2025 and into 2026 as the composition of the portfolio shifts to attractive new channels and end markets. Turning to slide six, over the last several quarters, an area of focus has been lowering our cost to serve, including managing our fixed cost and discretionary spends.

Our team has done an outstanding job this year executing on several initiatives that position Pactiv Evergreen for success. We're continuing to manage our cost to align with our longer-term strategy and also offset lingering consumer pressures in the near term. For example, last quarter, we initiated a cost reduction plan, which is focused on discretionary spend, and SG&A, which is expected to generate roughly $15 million of savings in this year. Our footprint optimization program, which we announced earlier in the year, is expected to reduce our overall footprint by approximately 10% over the next two years. We anticipate full-run rate cost savings of approximately $35 million by 2026. And finally, operational excellence remains core to the culture we've established at Pactiv Evergreen. Our continuous improvement mindset is reflected in our Pactiv Evergreen Production System, which has helped our plants identify new solutions to unlock productivity and reduce waste.

For example, we continue to refine the harmonization of production plans across our network by consolidating certain SKUs at the lowest-cost plants and organizing production schedules to optimize our manufacturing costs. Another example is streamlining equipment changeovers on our lines to reduce downtime in between production runs. We've been steadily building momentum on these initiatives throughout the year, and we expect them to translate into efficiency gains in Q4 and into next year. As PEPS matures, we continue to identify new ways to improve our operations, and we're confident the program will continue to yield benefits as it becomes a standard across the entire organization. We look forward to providing more detail, including the benefits, in quarters to come. Turning to slide seven, innovation is at the center of everything we do, whether it's developing advanced substrates, creating new products, or identifying new ways to serve our customers.

Innovation is also a critical driver for long-term sustainable growth. In September, we announced a new line of reduced-density polypropylene protein trays under our Recycleware brand. Our RDPP products are the perfect solution for packer processors looking for sustainable alternatives to foam polystyrene. The new meat trays are vertically integrated, meaning they're extruded, thermoformed, and padded at our facilities. These products also run well on existing overwrap equipment, meaning the switching cost for our customers is minimal. Customers have already cited the product's reduced consumption of raw materials versus other sustainable offerings as a key differentiator. We're in the early days, but we're really excited about the future prospects of our meat trays, and we're pleased with the progress so far. We expect the contribution from that product to grow as we ramp up capacity.

In addition to RDPP trays, we're continuing to collaborate with our customers and have some exciting value-add projects in the pipeline that we expect will generate momentum through the course of 2025. Some of our new products concentrate on areas we're currently underrepresented but well-positioned to grow our presence, which is part of our broader effort to reposition the Food and Beverage Merchandising portfolio and gain more exposure to attractive new end markets. For example, we're collaborating with our CPG customers to identify opportunities to develop offerings that help them differentiate their products. In October, we introduced SmartPour, pourable containers. The patented SmartPour packaging solution streamlines the pouring process, effectively eliminating the issue of messy bag-in-box spillage. The closure design facilitates pouring and sealing, while the barrier board incorporated into the package extends product freshness.

We're enthusiastic about this line of innovative technology and believe it will expand our reach into markets such as premium cereals, baking ingredients, pet food, powdered laundry detergents, and dishwashing liquids. Branded consumer products represent an underpenetrated end market for us, and we believe we're well-positioned in the market to generate momentum into 2025 and 2026 from this initiative. Another initiative for our Food and Beverage Merchandising segment is reducing our reliance on third-party distributors and leveraging our long-standing customer relationships to bolster our go-to-market approach. We believe our broad product portfolio, strategically located distribution network, and ability to innovate on behalf of our customers puts us in a great position to succeed in these categories. We're in the early stages with these initiatives, but we've already seen strong interest from our customers, and we're excited for our future. Overall, we're encouraged by the progress we've made in the Q3.

Our operational execution, commitment to driving efficiencies, and commitment to innovation are building solid momentum. Looking ahead, consumers are still absorbing the multi-year impact of elevated inflation, and we expect that dynamic will continue in the near term. That said, over the past quarter, our customers have increased their promotional activity in an effort to deliver more value to the consumer and spur demand. Time will tell if the promotions translate into lasting volume growth, but we do believe they've been helpful in stemming the tide in the near term. For now, we're encouraged that restaurants, food companies, and food retailers are taking action to provide some relief to their customers. Overall, we are cautiously optimistic and will continue to focus on the things we can control to position us to emerge stronger operationally and competitively.

We remain confident in the resilience of our business model and believe the structural improvements we have made to date provide us a solid foundation to build momentum in the Q4 and position us for growth in 2025. That concludes my initial remarks. I will now turn the call over to Jon. Jon?

Jonathan Baksht (CFO)

Thanks, Mike. I'll start with our Q3 highlights on slide nine. As Mike outlined, our Q3 results reflect our efforts to right-size our operations and manage resources to align with the broader demand environment. These factors, in conjunction with our focus on cost discipline, supported an improvement in adjusted EBITDA margins compared to Q2. We recorded net revenues of $1.3 billion for the quarter, a decrease of about 3% compared to last year. This change was primarily driven by lower sales volume but was partially offset by favorable pricing due to higher material costs. The volume trend was mostly a combination of the broader demand environment and our own portfolio actions, particularly in Food and Beverage Merchandising. However, in Food Service, we continued to outperform our industry by aligning with our long-standing blue-chip customers that are well-positioned to outpace their end markets over the cycle.

Overall volumes were down 5% in the quarter. Foodservice volumes were down 2%. However, we outpaced broader industry foot traffic trends, which were down over 3%. Food and beverage merchandising volumes decreased 8% during the quarter. This reflects consumer spending patterns as well as the year-over-year impact of our value-over-volume strategy and portfolio repositioning, which includes the initiatives Mike mentioned earlier. As we execute our plan, we anticipate some near-term impacts to volumes, but we expect that to translate to future growth as well as a more attractive business mix. Price mix was up 2% during the quarter, reflecting favorable pricing in the foodservice segment, largely due to the pass-through of higher material costs and favorable product mix in the Food and Beverage Merchandising segment. Adjusted EBITDA was $214 million, representing a 6% decrease compared to the prior year.

The decrease in adjusted EBITDA is attributable to higher manufacturing costs and lower sales volume. This was partially offset by lower incentive-based compensation costs, favorable product mix in the Food and Beverage Merchandising segment, and favorable pricing net material cost pass-through in the Food Service segment. Higher manufacturing costs primarily reflect the challenges at Pine Bluff during our final quarter owning the mill. Our adjusted EBITDA margin was 16%, flat compared to last year, but 240 basis points higher than Q2. We remain confident in the actions we're taking to adjust our cost structure to position us for long-term growth and enhanced profitability. From a quarter-to-quarter perspective, revenues were effectively flat, with lower sales volume largely offset by favorable pricing in the Food and Beverage Merchandising segment and favorable mix in the Food Service segment.

Adjusted EBITDA increased 17%, primarily due to lower manufacturing costs as a result of a planned mill outage during the Q2, favorable pricing, net material cost pass-through, and favorable product mix, partially offset by lower sales volume. We generated free cash flow of $190 million, which was a significant increase compared to the Q2. Free cash flow benefited from the timing of cash outflows and higher adjusted EBITDA. Continuing to slide 10, we'll look at results by segment, beginning with Foodservice. Segment net revenues decreased just under 1% to $670 million, primarily due to lower sales volume. This was partially offset by favorable pricing resulting from the pass-through of increased material costs. From a volume perspective, the food away-from-home space is still experiencing declining industry foot traffic as consumers adjust to higher prices.

Overall, industry foot traffic was down over 3% during Q3, which was slightly below the roughly 2.5% decline in Q2. However, we're encouraged by three main factors. First, because our business mix is heavily weighted with long-standing blue-chip customer relationships, our volumes continue to outpace the industry. Second, food away-from-home inflation, while elevated, continues to decline, falling below 4% on an annual basis in September for the first time since April 2021. And third, our customers are leaning in on promotional activity in an effort to deliver more value to consumers and drive volumes. Importantly, several leading QSR customers have communicated their intent to extend promotional campaigns into the Q4. Thus far, the increased promotions haven't resulted in year-over-year volume growth, although they have helped offset some of the near-term affordability issues for consumers.

Adjusted EBITDA increased 3% compared to last year to $120 million, and adjusted EBITDA margins improved by a little over 50 basis points. The increase primarily reflects favorable pricing, net material cost pass-through, and lower incentive-based compensation costs, partially offset by higher manufacturing costs. Net revenues were flat quarter-to-quarter, primarily due to favorable product mix, largely offset by lower sales volume. Adjusted EBITDA increased by 10%, and adjusted EBITDA margins increased by 160 basis points, driven by favorable product mix, favorable pricing, net material cost pass-through, and lower incentive-based costs, partially offset by higher manufacturing costs. Turning to slide 11, Food and Beverage Merchandising results reflect the continuation of trends we observed in Q2. Industry volumes are closer to break-even as consumers continue to shift from eating out to eating at home in order to save money.

Consistent with previous quarters, consumers are prioritizing staples like protein and produce, both of which performed well for us during the quarter. Discretionary items such as bakery continue to be impacted by the same dynamic. Egg carton volumes were impacted by the bird flu that reduced overall egg production during the quarter, although conditions have mostly normalized through early November. Outside of broader industry demand, the other main volume driver during the quarter was the impact of the year-over-year effects of our value-over-volume strategy. As Mike mentioned, we have several exciting initiatives underway that target innovation and expanding our presence in the new and promising markets. We recognize there may be some short-term impacts on our volumes. However, we view these adjustments as important steps that will ultimately lay the foundation for future growth and a more favorable business mix. We are optimistic about the positive effects on the horizon.

Taking all this into account, segment net revenues declined 6% year-over-year. Lower sales volume was driven by our focus on value-over-volume and the broader demand environment, partially offset by favorable product mix. Adjusted EBITDA decreased 15% compared to last year, primarily due to higher manufacturing costs, mostly in our mill operations, and lower sales volume. This was partially offset by favorable product mix and lower incentive-based compensation costs. Adjusted EBITDA margins were down 160 basis points versus the prior year due to higher manufacturing costs, including operational challenges at Pine Bluff and lower sales volume. On a sequential basis, net revenues were down 1% due to lower sales volume, which was attributable to seasonal trends, partially offset by favorable pricing due to pricing actions.

Adjusted EBITDA increased 19%, reflecting lower manufacturing costs, mainly a result of a planned mill outage during the Q2, favorable pricing, raw material cost pass-through, and lower incentive-based costs, partially offset by lower sales volume. On slide twelve, we have highlighted balance sheet items and key components of our cash flow. Free cash flow during Q3 was $190 million, benefiting from the timing of corporate cash outflows such as interest and tax payments, and higher adjusted EBITDA. Our ability to generate strong cash flow allowed us to reduce our net debt by $170 million during the Q3 and decrease our net leverage to 4.3x, on track with our year-end goal of reaching approximately 4x. The step down relative to the Q2 was consistent with our expectations.

Our strong cash flow generation also provides us the opportunity to reinvest in our operations to seed future growth and drive margin expansion. Over the past three years, we've embarked on several strategic initiatives aimed at enhancing productivity, increasing profitability, and achieving significant cost savings. We believe that these concerted efforts will not only improve our ability to meet the diverse needs of our customer base more effectively but also streamline our operations. Ultimately, we expect these advancements will contribute to enhanced returns for our stakeholders, reinforcing our commitment to sustainable growth and excellence. Turning to slide 13, before I turn to our guidance for the remainder of 2024, I want to briefly touch on pro forma impacts of the divestiture of our Pine Bluff mill, which we sold on October 1st. The transaction is an important milestone for multiple reasons.

First, it allows us to focus on our core North America converting operations. Next, as you can see, our LTM adjusted EBITDA and margin profile improved materially on a pro forma basis. Finally, with the net cash proceeds and the removal of the negative adjusted EBITDA attributable to the divested operations, we reduced our net leverage ratio from 4.3x to 4.1x as of September 30th. Turning to slide fourteen, on the next two slides, I'll cover our guidance for 2024 and also highlight the building blocks for 2025. We are updating our guidance range for full-year adjusted EBITDA to be $800 to $810 million. This is partially due to operating challenges at Pine Bluff during our final quarter owning the mill, which resulted in adjusted EBITDA that was approximately $17 million lower than our previous forecast.

It also reflects a sequential uplift in Q4 as industry promotions provide some volume support, along with the continued ramp-up of efficiency gains. Our guidance also assumes that we realize the expected benefits from our footprint optimization and cost-saving initiatives consistent with what we shared last quarter. The expected benefit of $15 million from cost-saving initiatives, combined with our commitment to continuous improvement, positions us to effectively adjust our cost structure in response to industry demand. We've lowered our full-year 2024 capital spend guidance to a range of $240 to $250 million compared to our previous expectations of $260 million, due to a shift in timing of project spend. Our free cash flow guidance of $180 to $200 million is unchanged. Lastly, we reiterate our expectation to reduce our net leverage ratio to approximately 4x by year-end.

Turning to slide 15, it's important to note that despite the uneven market environment, we have responded and have made significant progress against our strategic objectives, while also emphasizing the significant milestone of closing the sale of our Pine Bluff mill. Looking back to our original 2024 Adjusted EBITDA guidance range, excluding Pine Bluff, we anticipated $843 to $863 million from our core operations. At that time, the expected contribution from Pine Bluff for full-year 2024 was approximately $7 million, for a total Adjusted EBITDA range of $850 to $870 million. Over the course of the year, we experienced reliability challenges at the mill, some of which were related to our planned outage in Q2. Additionally, based on the timing of the sale on October 1st, we removed the expected Q4 Adjusted EBITDA contribution from Pine Bluff from our full-year guidance.

The end result is that Pine Bluff generated -$38 million of adjusted EBITDA for the nine months ended September 30th, which is effectively a $45 million swing, which is factored into our updated guidance range. Excluding Pine Bluff, we expect to generate $838 to $848 million of pro forma adjusted EBITDA for 2024, which is comparable to our original guidance range. There are puts and takes compared to our initial guidance as the broader macro environment has been challenging. However, we responded by scaling our operations and managing costs to deliver against our strategic priorities. Looking ahead to 2025, using the $838 to $848 million range as our pro forma run rate, all else equal, we'd expect to achieve an incremental $15 million in cost savings from our footprint optimization plan. Overall, we think this provides solid earnings momentum and a tailwind heading into next year.

Before I turn the call back over to Mike, I'd like to end by addressing the challenges posed by recent weather events, specifically Hurricane Helene, which occurred in late September, followed by Hurricane Milton in early October, which resulted in unforeseen difficulties. These challenges included significant power outages and flooding, which adversely affected our supply chains. While we encountered marginal repair and cleanup costs and some production loss, our facilities were able to operate on backup power. As you might expect, there was some residual impact that the storms had on broader consumer purchasing patterns and overall restaurant foot traffic in the affected regions we operate. However, we do not expect any significant impact from these events, and any financial impact has been included in our updated guidance range, again speaking to the resilience and durability of our operating model.

Importantly, to echo Mike, our employee safety and well-being are our top priorities. We truly appreciate their dedication and resilience in navigating these tough times together. With that, I'll turn the call back over to Mike.

Michael King (President and CEO)

Thanks, Jon. Before we open the line to Q&A, I want to reiterate that we are confident in our robust platform and believe that we are positioned to deliver profitable growth and sustainable returns in the future. Going forward, we remain committed to leveraging the solid foundation we've established, including our diverse portfolio of sustainable products, to win new business. We've taken decisive action to strengthen our foundation throughout 2024. We expect the actions we are taking today will drive continued improvement into 2025 as we strive to become a more efficient business partner to those who benefit from the broad range of sustainable product offerings we bring to market.

We are confident that the actions we are taking today will position Pactiv Evergreen to be a fundamentally stronger and more profitable company in the future. I want to thank our employees for their unwavering support and dedication. You all are the reason this journey has been possible. That concludes our prepared remarks. With that, let us open it up to questions. Operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Anthony Pettinari with Citi. Please go ahead.

Anthony Pettinari (Research Analyst)

Good morning. Hey, with Food and Beverage Merchandising, I think you talked about Value over Volume maybe in kind of the middle innings. And you also talked about maybe kind of earnings momentum in 2025 or a good setup for earnings growth in 2025. Is it possible to put any kind of finer point on when Value over Volume comps become much easier, or maybe the program runs its course, or you expect to see kind of positive contribution from these growth initiatives? Just wondering if you can put any more detail on that.

Michael King (President and CEO)

Yeah, I would say at a high level, I would say it's more beverage than the food side, just being in the middle innings. And I would tell you that as we have looked at that footprint on the beverage business and we've done things to improve it, we've also unpacked that business to now where we have room to move on prices. We have customer contracts that are expiring, and that largely happens in 2025. So we expect to see improvements largely in that business. And that's why we're in the middle innings there. In terms of the food business, I think we're much more matured in that Value over Volume than the beverage.

Jonathan Baksht (CFO)

Yeah, and Anthony, I think the only piece I would add is just around the Pine Bluff piece with the divestiture. As we talked about at a company level, we've got some momentum going into next year in terms of the negative EBITDA contribution, which was clearly to the Food and Beverage Merchandising segment. So that was roughly $38 million year-to-date that going into next year, that's going to be a more favorable comp without that negative EBITDA contribution.

Anthony Pettinari (Research Analyst)

Got it. Got it. That's helpful. And then in terms of the growth investments, is there any way to quantify in terms of a product vitality index or percentage of sales from new products, kind of where you are now, where you think you can get in 2025, or how much growth new products could add? Just from a big-picture perspective, is there a way that we can kind of track that from the outside or metrics that you use?

Michael King (President and CEO)

Yeah, we're still wrestling internally with the right KPI for that, quantifying what's new, what's not. And we look to be more open about that, but we're not in a good position to share anything today.

Jonathan Baksht (CFO)

Yeah, Anthony, I think that just the broader way to think about us going into the future, we tend, and this was. I think you should look to our general guidance around. We tend to track GDP and GDP growth, and going into next year, we're looking at that type of level for our core business, so any of these growth initiatives Mike mentioned in his prepared remarks would be incremental. We're excited about some of these new growth initiatives that we have going in, so we would hope to, we would look to those to be in addition to any type of GDP growth for our base business.

Michael King (President and CEO)

Yeah, and I guess the other thing, just to point out the obvious, is having paper mills, we've constrained the business in terms of our ability to invest. Now that we've somewhat freed ourselves up with the divestiture of the mills, our geography of the spend is definitely much more geared toward growth, linked to innovation and R&D work. So I'd expect to be in a better position in future calls to speak to that.

Anthony Pettinari (Research Analyst)

Okay, that's helpful. I'll turn it over.

Operator (participant)

The next question comes from George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director)

Hi, thank you. Hi guys, good morning. Thanks for the details. How are you? So look, I have three questions, some piggybacking on what Anthony was getting at, and I had a separate question. We have a starting point, ex-Pine Bluff, this year of between $838 and $848, correct, for EBITDA? That is going to grow GDP+, let's call it 3%-ish. There's some new products that are layering onto that. So I don't know, $860, $870.

Then I've got savings of whatever, $15 million, I think you said sequentially. Am I thinking about this the right way in terms of where you can go and/or what are the offsets? Certainly, you've got volume still negative, which is a little bit remarkable, but help me think about 2025 versus 2024 in that bridge. That's question one. Question two, distribution, right? I mean, this has always been what Pactiv was supposed to do very well, given its hub-and-spoke capability. How much did you see your products and SKUs and customers move to third-party distribution? What will we see in terms of the swing going back, and what does it mean in terms of the outlook for 2025?

And then lastly, if we didn't have the, I guess as we look out to 2025, again, back to the bridge, how much was the benefit this year from lower incentive comp, and what do we have to sort of add back or take out of earnings for next year for that component? So really back to the bridge on 2025. Thank you.

Jonathan Baksht (CFO)

Yeah, I'll start, George, and just give you some bridge-level information. So I think you are thinking about it generally the right way. We do have the $838 to $848 as a starting point, as we pointed out. The $15 million, I'll just deconstruct that a little bit. We talked about when we launched the footprint optimization initiative, we talked about $20 million of footprint benefit into 2025, and then $35 million into 2026.

And so we're still looking at that as the right ramp going into next year. It will scale throughout the year, so it'll be more back-end weighted. But $20 million is the right way to look at that. And then we subtracted five off of that, so that got you to the $15, which was the $15 million of SG&A benefit we're expected to incur this year. $5 million of that won't be repeating into next year. So take off five. So that gets you the $20 minus the five is the $15 I mentioned in the prepared remarks. So your third question was on the incentive comp piece. So the incentive comp benefit this year is $7 million. So that's apples to apples. If you could take—if we were incentive compensation at target, it would be a $7 million deduct to that level for next year.

Now, GDP is the right way to think about growth in volume for next year. So we're still looking at that as the general guidance. Now, the other thing to keep in mind is we're still in an inflationary environment. There are some headwinds from that from a cost standpoint. How much of that translates to EBITDA? We still have to give you some proper guidance on that, which we'll do at the next quarterly call. We do have efficiencies in operations that will offset that inflation, which will help offset a lot of that inflation going into next year. So there are some puts and takes as we build out our detailed budgeting plan for next year and also factor in our capital plan growth initiatives to give you a proper guide. But those are the right pieces to construct your 2025 model.

George Staphos (Managing Director)

I mean, should we land at north of $860 for next year, given your preliminary budgeting for EBITDA? Or is that too difficult to call at this juncture?

Michael King (President and CEO)

I don't think it's a reasonable number to think about.

George Staphos (Managing Director)

Okay. Okay. And on distribution?

Michael King (President and CEO)

Yeah. So I think your question was around the 2025 outlook?

George Staphos (Managing Director)

Yeah. And no, really more the distribution point you were making earlier, Mike, in terms of I think you're moving some product back into owned in-house distribution versus third party and having covered Pactiv for a long time. The distribution of the company, the hub-and-spoke model, the regional mixing centers, this was all strength of the company. So I was just curious, if I'm correct with my premise, how much had moved sort of third party and what are you bringing back? What's that penultimate look like and what does it mean for earnings?

Michael King (President and CEO)

Yeah. So I just want to clarify. So when we talk about redistributors, not like 3PLs or third party distributors, we're talking about really more of our core Value over Volume strategy. And so to say it plainly, instead of selling to businesses that would compete against us, we're going to go direct. And so we've had some customers that sell more broadline products that also sell directly against our products with other vendor products. So we've elected to stop that and go direct. And so we'd expect that while there was a near-term volume dip, and you've seen that, that we've rebounded and we've seen that come back. We forecast that in 2025 and beyond. That's really what that was. So you have it right.

Our hub-and-spoke model is the strength of the business and certainly something we wish to leverage and continue to leverage with a direct sale instead of a redistributor sale.

George Staphos (Managing Director)

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

Operator (participant)

And the next question comes from Josh Spector with UBS. Please go ahead.

Joshua Spector (Executive Director of Chemicals Equity Research)

Hi, good morning. Apologize if I missed this, but did you guys talk about what your volume expectations are that underpin your 4Q guidance? And I guess relative to that, as you look at how 3Q played out on the volume front, was that in line with your expectations or meaningfully different?

Jonathan Baksht (CFO)

Sure. Starting off with our guidance for Q4 for volume, we didn't really touch on it on the call. I would say that just to give you some broader views on volumes for the year. For the full company, we're still guiding to kind of low single digits for the whole year as you look at the full year versus last year. For Q4 specifically, we're going to be down low single digits in Food Service and up low single digits in Food and Beverage Merchandising is our expectation.

Michael King (President and CEO)

And I would say for Q3, we were fairly in line with what we anticipated. So it was a positive result looking at prior quarters and what the trending was.

Joshua Spector (Executive Director of Chemicals Equity Research)

Okay. Yeah, that's helpful. I guess just for context, obviously, the food and merchandise volume seemed meaningfully below what consensus was expecting. So I guess we had it wrong in terms of timing there. I guess I'll maybe leave it if there's any follow-up to that.

But what I wanted to ask separately was just Pine Bluff specifically, when you talked about a -$17 million versus expectations, was that all in 3Q or is that a comment for the year? And I don't know if now, since you've divested it, can you give us the contributions, the negative impacts each quarter so we can make sure we're sequencing 2025 correctly at this point? Thanks.

Jonathan Baksht (CFO)

Sure. The $17 million comment was for the Q3 in terms of some of the operational inefficiencies that we had in the quarter. So that was versus our guidance from last quarter's call. $17 million also happens to be what our expected Q4 contribution would have been. And so if you deconstruct that portion of it, since we closed that sale before the end of the year, that was the Q4 expectation. The year-to-date is $38 million.

I would have to. I don't have the quarterly breakdown here in front of me. We can follow up with you to get you the quarterly breakdown of the -$38 million. It was distributed. It was a little bit more heavily distributed in Q2 with the mill outage. In Q1, we had some weather events that also impacted the quarter. Q3 for the mill for Pine Bluff was -$3.3 million. So the rest was the first two quarters of the year.

Joshua Spector (Executive Director of Chemicals Equity Research)

Okay. No, I appreciate that. If I could squeeze in one more. At last quarter's call, you talked about some more competitive intensity, I think, within some of the grocery channels and some of the less differentiated products. Has that stabilized? Anything changed there? And I assume this is obviously directly related with some of your Value over Volume. So just wondering how we should think about that trend this quarter versus last quarter and what that might mean for the outlook.

Michael King (President and CEO)

We missed the front end of your question. I apologize.

Joshua Spector (Executive Director of Chemicals Equity Research)

Oh, sorry. I was asking if there's been any change in the competitive comments prior on competitive intensity. So basically, some of the pricing pressure in the grocery channels for some of the non-differentiated products, if that's changed at all, better, worse, unchanged versus prior quarter.

Michael King (President and CEO)

No, it's really unchanged for us. We're not seeing any sporadic pricing competition or anybody being irresponsible or anything like that.

Jonathan Baksht (CFO)

And Josh, I pulled your Pine Bluff answers by quarter. So Q1 was -$11, Q2 was -$24. And then Q3 was the -$3 I mentioned.

Joshua Spector (Executive Director of Chemicals Equity Research)

Got it. Thank you.

Operator (participant)

And the next question comes from Phil Ng with Jefferies. Please go ahead.

Philip Ng (Managing Director)

Hey, guys. If I look at your implied Q4 EBITDA guidance, it seems a noticeable step up sequentially. Typically when it's down seasonally, and then it's certainly above consensus. So Jon, I guess to kind of help us bridge the Q4 numbers, what are some of the puts and takes? Maybe it's just Pine Bluff being really bad in 3Q and that goes away. But if I heard you correctly, Jon, I think you're pointing to perhaps volumes being up in the Q4, low single digits in food. So that's a big improvement. And how much of that is contract wins that you kind of have in the bag already?

Jonathan Baksht (CFO)

Yeah. No, thanks, Phil. I can walk you through that and give you a bit of a bridge. So let's just start on the sequential view because you're right. Seasonally, Q4 is a bit lower. But this year, we do have some benefits we're expecting to get in Q4, and we'll get some good momentum going into next year. I would say if you look at it from a sequential basis, about a 1/3 of it is coming from volume price mix. If you look outside of Pine Bluff, we are expecting some growth in volumes in Food and Beverage Merchandising. We do have some seasonal declines in Food Service, as you might expect, but it's partially offset by customer wins. And so it should be lower than we might have seen in the past.

And we've been talking about in Food Service some customer wins that we'd see ramping into the end of the year. And to note also, we're still expecting to outpace the industry as it relates to Food Service, even though there is a slight decline there for seasonal reasons.

I think the other piece to think about in terms of the price mix standpoint outside of volumes is we are getting a benefit from raw material costs in the Q4 and some of our cola ramp-ups. As you think about those, they'll continue to build into the end of the year. And so we will see some favorability there. And then there is some favorable seasonal mix as it relates to some of the Food and Beverage pieces. We get into kind of the food-at-home season, so that's helping those volumes. I think the other side, about 2/3 of it, is just manufacturing costs and SG&A gains. So we do have some efficiency gains that we're expecting to see as some of our initiatives around manufacturing also ramp up into the beginning into the end of the year.

Some of those cost efficiency savings that we mentioned on the last call, we'll have a full quarter benefit of those in Q4. On the cost side, about 2/3 of that uplift.

Philip Ng (Managing Director)

Okay. The volume uptick in Food and Bev, I mean, you're down 8% in 3Q. I think if I heard you correctly earlier, Jon, you were expecting low single-digit growth. Give us a little perspective on what's driving that strength because that's a pretty sharp rebound.

Jonathan Baksht (CFO)

Sure. Yeah. A lot of it is around our food segment and Food and Beverage segment within food. There was a bit of a delay to ag season this year. Some of that was pushed off into Q4 versus our normal seasonal dynamics in Q3. We're also expecting to see a bit of strength in Mexico. The bakery season tends to be more Q4-focused. The bird flu impact on the egg business in Q3 going into Q4 should be a benefit.

Philip Ng (Managing Director)

Okay. That's helpful. I guess, Mike, you may have teased this earlier, but when I think about your Value over Volume approach in Food Service years past, we've seen a hit on volumes, but pricing EBITDA actually surprises the upside, and it tends to be a good guy. When we think about your Food and Beverage Value over Volume approach, at least early in Q3, we saw the hit in volumes, and decrementals were pretty heavy. I think you kind of teased that when you go out to 2025, you have some contracts that are resetting. That could be opportunity. Perhaps even on the volume side with wins with the right mix.

So, kind of, help us think through the opportunity in 2025. Should we expect a nice bump in profitability in EBITDA with perhaps some of these contracts resetting and then potentially some wins with a more favorable mix?

Michael King (President and CEO)

Yeah. I think generally you got it right. In terms of squaring the numbers, we're not there yet. We want to get through some of that. But you've characterized it absolutely correctly in that we've had to shrink with some to grow. And we've also, in terms of just better price mix with the current customer base, we will absolutely see a better quality of earnings.

Philip Ng (Managing Director)

And Mike, would we see that out of the gate to start next year or it's going to get us in the middle?

Michael King (President and CEO)

Largely back half.

Philip Ng (Managing Director)

Okay. All right. Appreciate the color. Thank you.

Operator (participant)

And the next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Arun Viswanathan (Equity Research Analyst)

Great. Thanks for taking my question. I guess I just wanted to get back to a couple of comments you mentioned earlier. So as far as some of those trends that you saw with Food Service still underperforming and maybe food and some of those other exposures outperforming, could you just provide some more detail there? Where in your portfolio are you seeing strength? And maybe if you could quantify that, maybe is it a 1/3 of your portfolio and maybe 2/3 in Food Service is seeing some weakness? And last quarter, you spoke heavily about the value meal initiatives at some of your customers. Have you seen any positive impact from that? And do you expect a positive impact in the future? Thanks.

Michael King (President and CEO)

Yeah. So if you look at the way we kind of characterize it is on the Food Service side, foot traffic, it would definitely be worse had the promotional activity if that wasn't initiated, and I think the fact that many of our customers have made announcements that they're going to continue that into Q4, we kind of view that as a positive. In terms of how that manifests itself in volume, we're not seeing a big rebound or anything, but we do think it would be worse, so it is starting to have an impact on the consumer. I think as prices continue to come down in more time with lower prices, it's going to be a good thing for the consumer. As far as the Food and Beverage side of our business, this is where the consumers spend their dollars to get their calories today largely.

And we're seeing that that's manifesting itself in all of our fresh channels. So protein, produce, those are still staples that we're seeing strengthen. Egg, as Jon mentioned, I would say that those are very, very good for us right now. And we expect that to continue into Q4.

Jonathan Baksht (CFO)

And when you talk about kind of Food Service underperforming, I just clarify some of the comments and we had our prepared remarks, right? The foot traffic is down 3%, over 3% in the quarter and for the year across our client base there. And we're actually trending better than that. And so we do feel like the strength of our relationship with blue-chip customers that we align with and some of our competitive strength there are helping us outperform the marketplace. It is a challenging environment.

And as it relates to the promotional activity, there were some benefits there that we saw, but it's still a bit muted given the foot traffic dynamic. We're hoping to see some more momentum there into Q4 as some of those promotions have been extended. We have seen some shift there to more Food and Beverage Merchandising. But again, just to reiterate, we have been taking a value-over-volume approach, and some of the repositioning Mike talked about earlier is what's driving some of those volume declines, which we feel are going to be transient in nature.

Arun Viswanathan (Equity Research Analyst)

Yeah. Got it. Okay. That's helpful. Then just to put a finer point on that, so is it maybe a 1/3 of your Food Service business that's really tracking with that down 3% foot traffic? And maybe more of your Food Service business is above that, or is it half? And then similarly with Food Bev Merchandising, are you kind of in line with the market or above?

Jonathan Baksht (CFO)

Yeah. I mean, I don't know if we really think about it that way. It's more from a portfolio standpoint. There's a lot of elements that are driving the overall outperformance of the industry. It's, again, aligning with some customers that are winning in the marketplace is probably the biggest factor. And we do index pretty well to those customers that are doing well in the marketplace. So I'd say there's a good portion of our portfolio, but it's not like we bifurcate in. There's some that's materially overperforming and some that's materially underperforming that it blends out to better than the market. I would say generally our customers tend to track better than the marketplace would be the way to think about it.

Arun Viswanathan (Equity Research Analyst)

And then just last quarter, you mentioned maybe some customers trading down away from EarthChoice and maybe some of the higher mix-driven items. Do you still see that continuing? And then if I could just squeeze in one more, do you feel like your leverage is tracking in line with your expectations, and you still expect to be in the low fours at the end of this year and maybe below four at the end of next year? Thanks.

Michael King (President and CEO)

Yeah. On the trade down, I don't remember disclosing anything like that. But what I can tell you is, I think, and maybe what you're referencing is on the value menu trade down where instead of the customer getting a 32-ounce drink, they're going to get a 16-ounce drink. So there's certainly, on the value meal and burger war front, there's definitely a trade down happening. And so that's coming through in some of our mix. But outside of that, we don't have customers on the distribution side or any of our branded side trading down our brands for other products. We don't see that. And then generally talk to the leverage.

Jonathan Baksht (CFO)

Yeah. On the leverage front, I think you're thinking about the right way. So we're on track with our expectations. We'd said that we want to be around four by the end of the year, and we still expect to be around four by the end of the year. That's not the destination. By next year, we will continue to deliver and anticipate being in the threes. And so to your point on where will we be at the end of the year, we haven't put out official guidance there, but I'd expect to have a three in front of it.

Arun Viswanathan (Equity Research Analyst)

Thanks.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Mike King for any closing remarks.

Michael King (President and CEO)

Thank you. As we close today, I want to thank the entire Pactiv Evergreen team for their hard work during the Q3. We are executing on our strategy and are confident we will continue to progress on our transformational journey in 2024. We look forward to updating you during the Q4 conference call next year. Thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.