Pactiv Evergreen - Q4 2022
March 7, 2023
Transcript
Speaker 0
Good day, and welcome to the Pack Div Evergreen Incorporated 4th Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Curt Worthington, Vice President, Strategy and Investor Relations.
Please go ahead.
Speaker 1
Thank you, operator, and good morning, everyone. Thank you for your interest in Pack of Evergreen, and welcome to our Q4 2022 earnings call. With me on the call today, We have Michael King, President and CEO and Jon Bakst, CFO. Please visit the Events section of our Investor Relations website atwww.pactiveevergreen.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 would like to remind everyone that our discussions today will include forward looking statements, including, but not limited to, statements 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 can 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 ks for the year ended December 31, 2022, 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 a reconciliation to the most directly comparable GAAP measures is available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, Let me turn the call over to PacDiv Evergreen's President and CEO, Michael Chang.
Mike?
Speaker 2
Thank you, Curt, Good morning, everyone. I'd like to start by welcoming Curt to his new role as Vice President, Strategy and Investor Relations. Curt brings more than 25 years of experience in the industrial and finance sectors and we're excited to have him on the Pactiv Evergreen team. Yesterday, after the market closed, Pactiv Evergreen released solid 4th quarter and full year 2022 results, which exceeded the high end of our full year guidance range of $760,000,000 to $780,000,000 Our $785,000,000 of full year adjusted EBITDA highlights the many strengths of our organization as we accomplished numerous goals while managing through the obstacles presented to us over the last couple of years from the onset of the pandemic. Turning to the agenda on Slide 4.
I will start today's call with a strategic update as well as some details of the beverage and merchandising restructuring plan that we announced yesterday as a part of our earnings release and related SEC filings. I will then provide some comments on our 2022 full year highlights. John will then discuss Q4 results and full year financial performance in more detail. Finally, I will cover our ESG update their 2023 outlook and then we'll move to some Q and A. On Slide 6, starting with an overview of how we are driving strategic focus with a high level of focus on these strategic areas.
We are focused on food and beverage. We are number 1 or number 2 in the majority of our markets. We have strong relationships with our customers, many of which are large blue chip companies. We are focused on North America. This is where we see our best opportunities for profitable growth.
This is where our operations and our customers are and where we are operating at scale. We are focused on converting operations and are decreasing our exposure to high capital intensity, low margin raw material operations. We will discuss this further as we get into the details of our beverage and merchandising restructuring announcement. We are focused on We are on trend. The packaging space is constantly changing.
We are constantly innovating to stay ahead of the latest trends. We are a packaging solutions provider. We don't just sell cups or containers. We provide our customers with complete Solutions that address their needs across all types of substrates and applications. And importantly, we generate dependable returns.
With balanced product and end market exposure, we are focused on driving profitable growth and generating consistent returns for our shareholders. Moving to Slide 7. We have consistently emphasized several key themes in our communications. We said many times that we would focus on our core North American high margin business, that we would streamline our operations, That we would deleverage and that we would put a high level of focus on ESG. As we stand in early 2023 and look back, We can be proud of what we have done in each of these areas.
We've already made great progress in reshaping our portfolio to focus on our core in North America. We have executed multiple divestitures of non core businesses, including the sale of our Asia Beverage merchandising business, which realized proceeds of over $330,000,000 We acquired Fabrikale expanding and strengthening our position in the foodservice and consumer packaged goods businesses and integrating great brands such as Greenware and Recycledware. We have centralized our organization, reduced our net leverage ratio both by paying down debt and by increasing adjusted EBITDA. And we are continuing our strong focus on ESG. Today, we will discuss what is next.
The beverage merchandising restructuring plan we announced yesterday is the next big step in our evolution to become a stronger, More competitive business. This will be a significant multiyear effort designed to further advance all priorities that we have established. Moving to Slide 8. We previously announced that we would undertake a long term strategic review of our beverage merchandising segment to identify options to optimize its footprint, implement manufacturing improvements and identify operational efficiencies to help us meet our customers' Changing needs and strengthen our leadership position in food and beverage packaging here in North America. This evaluation process has led to a number of significant changes in this segment, including the sale of several international locations.
We have progressed our internal strategic review further and our Board has approved further actions, which include simplifying our production strategy to more effectively align with our strategic focus. Additionally, we will be reorganizing our management structure and combining our food merchandising and our beverage merchandising businesses. These strategic actions are expected to reduce our ongoing capital intensity and fixed overhead costs. We intend to maintain supply continuity and take measures to ensure that we can continue to support our customers. We believe that these proactive steps will position us to remain competitive and position for sustained profitable growth and returns in the liquid packaging market by increasing which is our lowest margin operation.
Slide 8 shows a high level view of what our beverage merchandising business looked like at the time of our IPO in 2020 and what we project that it will look like in the future. In 2020, This business had a large global footprint and was a low margin, high CapEx business with vertically integrated manufacturing, including our mills. Since our IPO, the integration of the beverage merchandising business Evergreen into the legacy Packet business has been a strategic priority. The business included operations in Asia, Central America and the Middle East with 14 facilities and 5,000,000 square feet of manufacturing space. We've already executed a number of actions to reshape our portfolio.
We've exited coated ground with paper business well as operations in Asia, Central America and the Middle East. The additional restructuring actions we've just announced envision an evolution And our business profile to one that is focused on carton converting and filling machinery and is combined with our food merchandising business, reducing the number of facilities by approximately 40% and the associated square footage by almost 50%. These changes will drive significant cost benefits with a lower CapEx requirement and increased cash generation. Moving to Slide 9, the key steps we plan to take as a part of our beverage merchandising restructuring over the coming months include: We expect to close our mill in Canton, North Carolina during the Q2 of 2023. We expect to close our converting facility in Olmsted Falls, Ohio during the Q2 of 2023 and concurrently reallocate its production to our remaining converting facilities.
The plan will result in a workforce reduction of approximately 1300 positions. We remain committed to doing what's right, treating everyone with respect Delivering on all our commitments and we will provide outplacement assistance and severance to impacted employees consistent with the company's policy and labor union agreements. I also want to take this opportunity here to express my gratitude to our dedicated employees at the affected locations for their years of service. We are investing approximately $60,000,000 in state of the art equipment, which supports our converting strategy for our beverage business. We expect this investment will significantly lower our cost and will position us for growth in 2024.
We will combine our food and merchandising and beverage merchandising businesses into a single business starting in Q2 of 2023. As a result of the restructuring, we expect to incur non cash charges in the range of $310,000,000 to 330,000,000 primarily during 2023 related to the acceleration of depreciation of plant and equipment. We also expect to incur unpaid cash charges in the range of $130,000,000 to $185,000,000 during 2023 2024 related to severance and associated benefits and exit and disposal and other transition costs. Once these actions are complete, we believe our beverage and merchandising business will be better equipped to deliver more reliable and sustainable results. While we plan to incur one time non cash charges and cash outlays primarily during 2023 2024 To implement these plans, we expect to begin realizing the benefits to our operating results as we close out 2023 and move into 2024.
We are targeting an annualized reduction in our cost of approximately $30,000,000 and approximately $50,000,000 in reduction of CapEx, with full annualized run rate of these benefits expected to be realized beginning in 2024. We also intend to continue exploring strategic for our mill in Pine Bluff, Arkansas and our facility in Waynesville, North Carolina, while we continue to operate them. The company has not yet set a timetable for completion of this review. Overall, we believe our restructuring plans will enhance our ability to deliver shareholder value to reduce operating risk and earnings volatility and will reduce the capital and overhead required to sustain the business, all while maintaining high service levels for our core customer base. Moving to our full year 2022 highlights on Slide 11.
2022 was another productive year for us. This great organization executed very well on many fronts. We reported full year net revenues
Speaker 3
of $6,200,000,000 a 14% increase
Speaker 2
over the prior year on strong pricing and cost pass throughs combined with the benefit from the acquisition of FabricHealth. Our sales volumes declined 8% largely due to the outsized impact of the reopening of the U. S. Economy post COVID lockdowns in the prior year and softening sales volumes into year end. Additionally, the sale of our Beverage Merchandising Asia business in Q3 of 2022 contributed a further 2% decline in volume year over year.
Our year over year revenue performance highlights our successful efforts to manage price while restoring the business to target customer service levels. We stabilized our workforce, invested in inventory to return to target levels, Improved equipment effectiveness and production throughput and effectively managed our pricing amidst the challenging inflationary environment. We ended the year with strong operating results. Our full year adjusted EBITDA of $785,000,000 which exceeded our most recent guidance is a testament to the company's resilience in the face of challenging market conditions brought on by elevated inflation and interest rates, a tight labor market and the resulting market volatility. During the year, we were able to further divest non core businesses for aggregate cash Proceeds of $383,000,000 We reduced our net leverage ratio to 4.6 times as of year end, down from 7.6 at the end of 2021.
In addition, we transferred an aggregate $1,900,000,000 of gross We published our updated ESG report in August 2022 and we remain focused on our ambitious goals, one of which is having 100% of our net revenues In 2030 come from products made from recycled, recyclable or renewable materials compared to 66% in 2022. I want to thank everyone at Pactiv Evergreen for the diligent efforts and focus that helped us achieve these accomplishments. Looking at 2023, We are of course well into the year and we have more work ahead of us to continue delivering on our commitment to streamline our business and enhance shareholder value. Our areas of focus during 2023 will include the efficient management and execution of our restructuring plans, delivering for our customers, proactive force trading, productivity and our commitments to sustainability that I will touch on in my concluding remarks. I will now turn it over to John to discuss our 4th quarter highlights, business drivers and 4th quarter segment performance before my discussion on ESG, outlook and closing remarks.
Speaker 4
John? Thanks, Mike. Turning to Slide 12, starting with 4th quarter results. Net revenues were $1,500,000,000 with adjusted EBITDA of $167,000,000 Net revenues And adjusted EBITDA were both down versus the prior year quarter and versus Q3. Our 4th quarter performance was impacted by expected seasonal weakness Coming off the summer months that typically bring stronger demand combined with higher manufacturing costs and a broader slowdown in consumer spending that further impacted volumes.
Looking at our business drivers, as noted in our most recent earnings call, 2022 was a challenging year with regard to inflationary cost pressures that affected many aspects of the business, most notably wages, input material and logistics and softening demand late in the year. Generally on these points, we are seeing a moderation that could indicate that inflation has peaked, although we are cautious because absolute inflation levels remain elevated, which we expect will continue to keep pressure on interest rates and the consumer well into 2023. Moreover, inflation levels in the food sector remained at more levels than general inflation and we saw the impact through softer sales volume in Q4 and this trend is continuing into the start of the year. While we have seen pricing traction across most areas in the business, we are also seeing increased pricing pressure from foreign imports driven by the drop in shipping rates and the strength of the dollar. One positive is that resin prices have plateaued and in some cases begun to decline modestly.
These impacts are mostly passed through to our customers, albeit with a lag. We are seeing declining input costs, transportation costs softened in late 2022 and continue to soften in 2023. Natural gas has seen a meaningful decline. Other input costs such as energy, chemicals and wood have generally stabilized. While U.
S. Unemployment remains low, wages have generally stabilized. However, employee retention and training at lower skill levels remain a key focus area. We have noted sales volumes as a recent challenge as consumer demand in many areas is moderating. In our Foodservice segment, from the recent shift out of dine out to dine in at home by the consumer.
Combined with continued resilience in retail, notably in the protein and egg channels. And our beverage merchandising segment continued to see softness in board sales and uncoated freesheet. Finally, Winter Storm Elliott created operational headwinds for our beverage merchandising mills during the Q4 and we expect there will be residual impact during Net revenues were down 3%. Volume is down 10%, primarily due to the market softening and inflationary pressures across all segments, a focus on value over volume and the strategic exit from the Croated Groundwood business in the Beverage Merchandising segment. Revenue was also impacted by the disposition of Beverage Merchandising Asia and Closures Businesses.
Price mix was up 11% primarily due to the contractual pass through of higher material costs and pricing actions across all segments. Adjusted EBITDA was down primarily due to higher manufacturing costs, lower sales volume and higher employee related costs, partially offset by favorable pricing, Net of material cost pass through, higher costs included $8,000,000 of additional costs incurred related to the impact of winter storm Elliott and $8,000,000 related to scheduled coal mill outage. The increase in cash flow was primarily due to positive working capital changes. Moving to Slide 14 for sequential quarter comparison. 4th quarter net revenues were $1,500,000,000 down 8% versus the prior quarter, largely on declining sales volumes across all segments from slowing consumer spend, Seasonality and the sale of the Beverage Merchandising Asia business, partially offset by price mix in our Food Merchandising and Beverage Merchandising segments due to material cost pass throughs and other price actions.
Adjusted EBITDA was $167,000,000 for the quarter, a $20,000,000 decline from Q3 2022 levels. Our sequential volume declined as expected due to a combination of shifting consumer trends as a result of the ongoing pressure of elevated inflation, seasonal trends and the sale of our beverage merchandising Asia business in the Q3. 4th quarter was also impacted by Winter Storm Elliot. In addition, as we reached target inventory levels earlier in the year, we were able to manage production during the quarter to ensure working capital efficiency as illustrated by the slight decrease in inventory at year end. 4th quarter free cash flow of $84,000,000 benefited from working capital inflows, largely driven by a $79,000,000 decline in accounts receivable and a $58,000,000 decline in inventory as volume softened versus the 3rd quarter, which are partially offset by decline in accounts payable.
While we are focused on methods to gain additional working capital efficiency in the near future, I expect a near term drag on operating cash flow in early 2023 related to cash payments to be made under our 2022 annual incentive plan, in addition to certain one time cash outlays related to the beverage merchandising restructuring. Continuing on Slide 15 and our results by segment. In our Foodservice segment, year over year, net revenues were down 7%. Pricemix was up 6%, primarily due to the contractual past due of higher material costs and pricing actions taken to offset higher input costs. Volume was down 12%, primarily due to continued focus on value over volume and the market softening amid inflationary pressures.
Adjusted EBITDA was down 13%. This decrease was primarily due to lower sales volume and higher manufacturing and employee related costs, partially offset by favorable pricing net of material cost pass through. Quarter over quarter, net revenues were down $83,000,000 or 11 percent due to lower sales volume and unfavorable price mix of 2% amid shifting consumer and seasonal trends The slowing of consumer spend is also driving our customers to partially destock. Adjusted EBITDA was down $23,000,000 or 20% due primarily to lower sales volume. On Slide 16, our Food and Merchandising segment.
Year over year, net revenues were up 9%. Price mix was up 16%, primarily due to pricing actions taken to offset higher input costs and the contractual pass throughs of higher material costs. Volume was down 8%, primarily due to market softening amid inflationary pressures. Adjusted EBITDA was up 20%. This increase was primarily due to favorable pricing, net of material costs passed through, partially offset by higher manufacturing costs, lower sales volume and higher employee related costs.
Quarter over quarter, Net revenues were down slightly by $8,000,000 or 2%, as a decline in sales volume of 6% from seasonal trends, combined with the slowing of consumer spend, was mostly offset by a 4% favorable price mix from higher material costs passed through to customers and other pricing actions. Adjusted EBITDA was up $13,000,000 or 19%, due primarily to favorable pricing, partially offset by lower sales volume. On Slide 17, our Beverage Merchandising segment. Year over year, net revenues were down 7%. Price mix was up 13%, primarily due to pricing actions taken to offset higher input costs and the contractual pass throughs of higher material costs.
Volume was down 10%, primarily due to the market softening amid inflationary pressures and the strategic exit from the coated groundwood business. The decline of 10% was due to the impact from the disposition of Beverage Merchandising Asia. Adjusted EBITDA was down 53%. This decrease was primarily due to higher manufacturing and employee related costs and the impact from the disposition of Beverage Merchandising Asia, partially offset by favorable pricing, net of material costs passed through. Higher manufacturing costs included the impact of winter storm Elliott and a scheduled cold mill outage.
Quarter over quarter, net revenues were down $37,000,000 or 9%, primarily due to 8% lower sales volume primarily from uncoated freesheet and liquid packaging board and a 3% lower volume due to the sale of the Asia operations in Q3, partially offset by 2% favorable price mix due to contractual cost pass throughs. Adjusted EBITDA was down $5,000,000 or 19% due largely to higher manufacturing costs primarily due to winter storm Elliott and a scheduled cold mill outage and lower sales volume partially offset by favorable pricing and the collection of $5,000,000 in insurance proceeds related to winter storm Yuri. Next on Slide 18, we highlight our balance sheet and cash flow items. We ended the year with $531,000,000 in cash, Net debt of $3,600,000,000 and a net leverage ratio of 4.6 times, down from 7.6 times at the end of 2021. We took additional actions during the Q4 to further delever our balance sheet and reduce our interest rate risk.
We repurchased $92,000,000 of aggregate principal of our 7.95 percent and 8.38 percent debentures due in 20252027 at 97% of par. During January February of 2023, we have repurchased or repaid in aggregate $110,000,000 of debt maturing in 2026. These transactions combined reduce our annual cash interest expense by $16,000,000 at current LIBOR rates. With LIBOR rising from a recent low of 0.1% to its current rate of 4.71%, interest on our debt has become a headwind and a source of volatility to our cash outlays. Therefore, we took the opportunity in Q4 to execute $1,000,000,000 in notional value of interest rate swaps against our U.
S. Term loans to fix the LIBOR component at a weighted average rate of 4.12%. When factoring in the interest rate swaps, We have reduced our floating rate exposure from 53% of our total debt to 29% over the past year. Presently, every 100 basis points change in LIBOR has an $11,000,000 annualized impact to interest expense, down from $22,000,000 prior to the aforementioned transactions. We will continue to evaluate our alternatives to further improve our financial position and mitigate volatility.
Deleveraging remains a focus area for capital allocation. Lastly, our legacy PACTIV Evergreen pension plan is fully funded And our planned assets are largely allocated into fixed income to derisk volatility with no material funding obligations for the foreseeable future. Full year free cash flow was strong at $156,000,000 despite a significant strategic investment to rebuild our inventory to target inventory levels that we discussed on prior calls. I'll now pass it back to Mike for further comments.
Speaker 2
Thank you, John. Please turn to Slide 20. Moving on to some updates on our environmental, social and governance efforts. Supporting our purpose of packaging a better future, our ESG efforts are designed to build a more resilient and sustainable pact of Evergreen for our employees, our customers, our shareholders and the communities in which we live and work. The first item I would like to highlight is the collaboration with AmSty that we announced in February.
AmSty is a leading manufacturer of polystyrene in North America and has pioneered the circular recycling of polystyrene. Through this partnership, we will offer recycled polystyrene products, helping our customers and our company progress toward our respective sustainability goals. This important partnership expands our portfolio of circular packaging and helps fulfill our company's purpose of packaging a better future by providing innovative, sustainable solutions. Secondly, we are proud to see that our efforts to build a more sustainable company were recognized by prominent ESG rating agencies, which improved our ESG ratings in 2022. To learn more about our ESG activities, we invite you to view our latest disclosures at investors.
Activeevergreen.com in the ESG section. Now please turn to Slide 21. I'm pleased with the company's performance during And excited about our opportunities for further growth. We remain cautious on the macroeconomic backdrop As inflation and interest rates remain elevated amidst the recent pullback in consumer spending and the potential for a slowdown in the broader economy. However, we expect our business to remain resilient with relative stability across our 2 food business units, while we restructure our beverage business.
We expect to deliver 1st quarter adjusted EBITDA of approximately $160,000,000 This reflects the seasonality we expect to see in the Q1 and the impact of moderated consumer demand, continued softer volumes we saw in the Q4 and also includes a trailing impact of Winter Storm Elliot our beverage merchandising mill operations. With the announced changes in our portfolio, we know that our earnings journey over the next year or so will be a bit bumpy. In order to position for long term growth, the company is getting a little bit smaller in the short term. Overall, we believe that With a proper focus on margin and service levels, solid execution of our restructuring plans, our recent improvements in productivity and throughput And the input cost stabilizing, we can deliver full year adjusted EBITDA for 2023 in the range of 7 $55,000,000 to $780,000,000 Looking at our plan, we expect to see modest improvement in the second half of the year compared to the first half. Given the significance of the announced restructuring plan, our goal is to provide further clarity on guidance as the year progresses.
This guidance excludes the impact of the previously mentioned one time cash and non cash charges related to the beverage merchandising restructuring. However, our guidance does reflect the phased benefit from the restructuring. To further bridge our 2023 adjusted EBITDA guidance Relative to 2022 given the restructuring, in 2022 we generated $785,000,000 of adjusted EBITDA. The adjusted EBITDA contributions in 2022 from divested businesses and our Canton Mill operations in a partial Year like for like basis was approximately $30,000,000 This results in a pro form a base of $755,000,000 of 2022 adjusted EBITDA. So as we bridge from 2022 to our 2023 adjusted EBITDA guidance, We expect our food businesses to remain relatively stable year over year, while beginning to pick up some benefit from the beverage merchandising restructuring beginning in the Q2 of 2023.
Other 2023 guidance points. We expect capital spending to be approximately $280,000,000 which includes spending on the new beverage merchandising converting equipment I previously mentioned and capital to maintain the mills during the transitionary year. We expect to book between $440,000,000 $515,000,000 of restructuring charges, including $185,000,000 of cash charges. We fully expect that the hard work we are doing on restructuring will better position the business fundamentals this year and will set us up for a better outlook in 2024. We will continue to focus on executing our strategy and servicing our customers while generating attractive sustained returns for our stakeholders.
On Slide 22, I'd like to reiterate what makes Pactiv Evergreen a strong, Differentiated, growing and socially responsible business. We're an industry leader in food service, food and beverage merchandising And our markets are largely recession resilient. As you saw from our recent announcement, we are taking decisive actions to shape our portfolio and generate profitable growth and returns. We offer a broad array of products and substrates. We have long standing 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. As mentioned earlier, we set a goal of having 100 percent of our net revenues in 2,030 come from products made from recycled, Recyclable or Renewable Materials, all of this yields strong adjusted EBITDA and free cash flow generation, which we carefully managed to drive deleveraging and further growth through our disciplined capital allocation process. In closing, I would like to thank all of the Packet Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customer and vendor partners for their continued commitments to our mutual success. With that, let us open it up for questions.
Operator?
Speaker 0
We will now begin the question and answer session. The first question today comes from Kieran De Bruin with Mizuho. Please go ahead.
Speaker 5
Hey, good morning.
Speaker 2
Good morning. I was just wondering
Speaker 5
if you can talk a little bit About what you're seeing relative to volumes, I think you mentioned there's still a little bit of destocking, but maybe that seems to be somewhat done in the Q1. Are there any key pockets of strength? I also think you mentioned kind of reduced foot traffic in QSR, but are there other pockets where maybe you're seeing a little bit more resilience? I think you said notably protein or refill. Any color you can give us in terms of how to think about volumes during the Q1 and then maybe you're thinking about that progressing throughout the year would be helpful.
Thank you.
Speaker 2
Yes, absolutely. So, yes, We did know that we are seeing a moderation of volumes in several of our channels, primarily in our foodservice business. The destocking largely that we've seen is really a result of a couple of things, a, our ability to service our customers. So as we've improved our service, Especially in the distribution space, our customers have taken that opportunity to reduce their inventories And we don't think that that's something that's sustained or going to be prolonged. We do think that the chop on destocking is coming out or has largely come out.
We started seeing that in Q4 and with what we're seeing here in Q1, that's where we are. As it relates to any foot traffic related, so if you think about our products in terms of how Consumers get their calories, whether it's within their home or outside the home. We are seeing that there is A shift in consumer sentiment between the dine out versus the dine in experience. Yes. When things are good and the economy is booming, mobility is up, people are out and about and they're dining out.
And The first step we saw largely in Q4 was people started buying down, so doing more quick serve restaurant buying. And now what we're seeing is a shift from that quick serve restaurant buy down to more of a in store Or getting our calories at home. So the trends that we know that are kind of a little stronger Would be in kind of the egg protein and egg space for us, so our food and beverage merchandising spaces. And that's really driven by people going to the stores, buying food and taking it home, Which is a trend we're seeing through Q1. As far as the full year, We're not pessimistic, we're not optimistic, but what I'd tell you is we don't expect to see further deterioration as it relates Yes, some big crash in mobility from where it's at in Q1.
In fact, we hope it is inventory stabilized at our distribution customers That we start to see that consumer confidence post starting in Q2 and strengthening through the back half of the year. So That's kind of our view of 2023, where we stand today. So strength on in home Moderation and kind of outside the home calorie intake.
Speaker 5
Great. That's fantastic color. And then just maybe a quick follow-up. When you spoke a little bit about the input costs, so if we think about just General input costs coming down, how do we think about pricing in the context of like a falling raw environment, like the stickiness of Pricing and some of the pricing that you've got through that you've pushed through maybe outside of the pass through provisions? Thank you.
Speaker 4
Sure. There will be some benefits from some moderation in those input costs. I would say that a lot of that does Yes, eaten up by the contractual pass through. So I don't know how I wouldn't necessarily count on a lot of benefits From that particularly, but there is still a focus on pricing actions and quality of earnings as we look out to 2023. So There could be some potential pickups there.
Speaker 5
Great. Thank you.
Speaker 0
The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Speaker 6
Great. Thanks for taking my question. Congrats on the year and the restructuring announcement. So I guess My first question is just on the guidance. So it looks like you're down maybe on the at the midpoint $17,000,000 or so, and Q1 itself is down about $7,000,000 so Sequentially, so I mean, it sounds like maybe you could say by Q4, you'd see a net neutral result year on year or maybe even some growth.
Is that the right way to think about it? And if so, is that mainly driven by the actions that you're taking or maybe some Market recovery as well, maybe you
Speaker 2
can just flush out some
Speaker 6
of those assumptions for us. Thanks.
Speaker 2
Yes. Depending on the baseline use, Arun, you're absolutely right. What I would tell you is the way we're kind of looking at it, Q1, we would be up Year over year ahead, we now had a near $22,000,000 lagging impact from winter storm Elliott. So Late in the year, you may recall, we had a decrease in the South similar to Yuri. To a lesser extent, we were more prepared And we came out of that with a lagging in our specific to our Pine Bluff, Arkansas paper mill, Yes, several days of loss production in January.
So that's one big Qualifier in terms of our Q1. So and then for the full year, I would tell you that when you look at our exited operations And divestitures, the baseline is 755 versus 785. We absolutely plan to grow through the Q2 and Q4 in terms of our ability to Take it after productivity, but also see a return to some volume strength or the moderation at least kind of taper off that we're Thank you, everyone. So yes, I would say net neutral to up, back half certainly is the right way to think about it. But From a year over year perspective, I think the understanding of those kind of 2 big basis start points for us, We're managing through the cost of a pretty good start, a whack at the start here with that storm and then getting better as the year progresses.
Speaker 6
Okay. Thanks. And then just on the restructuring announcement. So this has been an ongoing journey for you guys. Just wondering when you look at the current plan or the new plan, should we expect any dispositions?
Or I know you're folding in beverage merchandising into food merchandising. So will you start looking at that as an integrated portfolio that Is going to go forward as is or are there other pieces that potentially you'd look to exit? And I know you've said that there's no timeline per But what are you looking to kind of accomplish as far as is this A real core business for you guys as far as beverage merchandising. I know you have 4 pillars there. So are you looking to maybe complete some of those pillars as you Get through this restructuring plan or is it mainly just hitting those savings numbers?
Speaker 2
Yes, good question. Over the last 2 years, we've been pretty transparent that it's going to be an iterative process. And as we've tried to Be as transparent as possible and we have things to announce, we've done that. I would say all of our steps thus far have been Sequential and enable the next. So if you look at the progress we've made With some of the divestitures, some of the exits, those do set up our ability whether from a cash flow generation Or just a resource management perspective, our ability to take the next big step.
And so this recent announcement is a really big step for us in improving our quality of earnings. And so when you look at our ability to redeploy capital, which is one of the constraints of the business, Being transparent, one of the constraints is no secret that we've had, that enables us to think more broad about How we execute on those pillars you mentioned. And so now whether we AgCenter to further divest any other assets, I would tell you our strategy remains the same. We're North American centric. Our goal is to continue to leverage our Ability to manufacture profitably here, our converting operations are very core to our business.
As it relates to anything outside of that in the segment, we do plan to leverage the restructuring To where we operate as one merchandising segment, as noted in my prepared remarks, we do see a lot of synergies in terms of That core team, the capabilities and those are something we expect to unlock in the next kind of 18 months. So you should think of it as a food and beverage merchandising business unit. We do intend starting in April to report that way. And that's kind of how we're looking at it. So really going from 3 businesses, 3 segments to 2 segments as a result of this restructure.
Speaker 6
Thanks.
Speaker 0
The next question comes from George Staphos with Bank of America. Please go ahead.
Speaker 7
Yes. Hi, good morning.
Speaker 8
This is actually Kash and Keeler on behalf of George. George had a call. So I guess first, can you maybe just expand on what you're expecting in terms of interest expense for this year? And then maybe Other items like taxes and working capital to help us get to net income and free cash flow for 2023?
Speaker 4
Yes, sure. Happy to. Yes, so for 2023, just to give you a bit of a sense of some components of that being free cash flow. So you have our EBITDA guidance for 7.55 $5,000,000 to $785,000,000 CapEx, the guidance is $2.80 for the year. Cash interest, given at current LIBOR rates, we do have Some exposure to floating rates, but just given current LIBOR rates is roughly 265.
Cash taxes will be in line with last So we call it around $70,000,000 The other cash item guide is $130,000,000 to $185,000,000 for the restructuring. Now we mentioned that's 23% and 24%, but I would tell you that the majority of that is going to be sitting in 2023. And then we should pick up a little bit of working capital benefit from the closure of Ken as we release some of that working capital that could be in the range of $30,000,000 to $40,000,000 And then as you look at our inventory levels, last year we had some more strategic inventory build. This year we expect we are expecting that we are at target levels. And we this year should be around there should be a bit of a benefit broadly across working capital otherwise.
Then obviously then we've got the dividend, which will be we don't have dividend approved for the remainder of the year from our Board, but if we were to keep the same dividend, we'll be around $70,000,000
Speaker 8
Great. That's helpful color. And then can you just discuss maybe leverage kind of where you expect to be At the end of the year, especially as you're balancing kind of the restructuring with beverage preservation and pricing? Thanks.
Speaker 4
Sure. No, and with all these things, there are a lot of moving pieces. But I would tell you our commitment to getting to below 4 times remains. And I think over the course of the years with all the puts and takes, We do expect that we'll be in a position to improve on our net leverage ratio. So we closed the year at 4.6 And I would expect some modest improvement on that by the end of the year.
Speaker 8
Great. Thanks.
Speaker 0
The next question comes from Ghansham Panjabi with Baird. Please go ahead.
Speaker 9
Yes. Hey, guys. Good morning. Just to confirm and to make sure I have this right. So once your Structuringdivestment plans complete, you'll be a pure converting operation on the paper side, but still have dual substrate products across the portfolio.
First off, is that right? And also, will this ultimately require to sort of modernize the downstream converting assets? Just trying to get a sense as to how well capitalized The converting assets are at this point?
Speaker 2
Yes. If I got you. I understand your first question is, do we intend to have dual substrate We don't intend to have any change in our portfolio from a substrate perspective at all. So our fiber based portfolio remain intact with all the announcements. I believe that's what you were looking for.
If and then your second question was? Yes. So yes, we absolutely are leaning in To our converting operations, not just on the fiber side, but in the carton converting as well as the balance of the business. So, we also in our release as well as prepared remarks, you mentioned that we are investing in Modernizing our converting asset base as we consolidate as well.
Speaker 8
Okay, got you.
Speaker 9
And then the 10% volume decline from 4Q, it looks like percent was just the divestment. How does the remaining 6% parse out between end market weakness and just your decisions to manage price or volume? And then separately, your comments on input cost, resin prices are starting to move at least so far this year. How do you sort of expect that to evolve
Speaker 4
Sanj, we really don't get into the different mixes there. In terms of the resin price movement, Over the course of the year, we are as I mentioned, we're expecting to have general moderation to some benefit The resin price movement overall as the year progresses, although a lot some of that benefit or a lot of that benefit will be passed through through our contractual pass throughs, but as we look at our broader pricing strategy and our quality of earnings, we will continue to look at places Where we can add the most value
Speaker 3
to the
Speaker 4
portfolio in terms of our product mix?
Speaker 2
Yes. There was no In terms of the volume question, yes, there was nothing that happened to our beverage volumes that was Unrelated to the discontinuation as well as the retail weakness that we saw. And so if you think about the areas we serve, it's fresh dairy, non dairy and juice spaces. So Higher prices on the shelf really I think were what drove the decline that you saw. It's nothing more than that.
Speaker 9
Got it. Thank
Speaker 0
you. The next question comes from Anthony Pettinari with Citi. Please go ahead.
Speaker 7
Hi, this is actually Brian Bergmeier sitting in for Anthony. Thanks for taking the question. Considering that customers are still destocking as we get into the Q3, is it fair to think about the magnitude The year over year volume decline from 4Q maybe being similar in the first half of the year, is there any reason why that volume trajectory would change meaningfully?
Speaker 2
Yes. Well, for us, we believe that the destocking largely started in Q4, At least for our customer base. And so as we look at the drivers behind some of that and what's enabled We believe that the service levels have returned from not just us, but the broader base. Yes, we've seen our distribution specifically, distribution based customers really kind of right size their inventories As they've gotten safety, we don't expect that to be a reoccurring theme and we certainly see that That was met with a softening consumer through the holidays. So that we don't believe that that's a sustained Q4.
That's not a normal Q4. And so outside of normal seasonality, we're not anticipating kind of a year over year decline because of those things reoccurring, That answers your question. To say it differently, where our Q4 for 2023 should be a better Q4 than in 2022.
Speaker 7
Okay. Yes, that makes sense. Thanks for the detail. And then, last question for me, Just a couple of the year over year EBITDA bridge items. Are there any remaining FabriCal synergies that you're still targeting?
And how much of a benefit in op cost reduction are you expecting from the restructuring program to kind of land in 20 $3,000,000 I know you said $30,000,000 overall, but just thinking about the impact of this year?
Speaker 4
Sure. I'll take that. From the fabric house piece, I think we mentioned last call, we've effectively integrated that business and We're at full run rate synergies as of Q4 of last year. So going into Q1 and going into this year, we are record well, there's no further Uplift from a fabric house standpoint. So at this point, we have been fully integrated.
As it relates to the second part of your question, In terms of the synergy uplift, we are going to phase those in over the course of the year. We mentioned that the Can closure will be in Q2. We're consolidating the business units starting in Q2 as well. So we would expect some of those synergies to start rolling in the back part of the year. And just to give you some order of magnitude, given that we're going to hit a run rate around 30 going into 2024, You could probably model about half of that approximately half of that value is included in this year's guidance.
Speaker 0
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Speaker 8
Yes, thank you. Good morning. So I guess the first question is in foodservice. And as I look at the volumes, organically in 2022, the volumes are down 8. They were up 8 organically in 2021 against kind of the depressed COVID levels.
And I appreciate that there's some noise with Kind of fabricall kind of layering in here, but it just would seem kind of striking kind of that on an organic basis the volumes are Back at 2020 kind of performance and we'd love to get your views on kind of market share and I know you talked about value over volume, so Maybe kind of conscious mix shifts that you've had in terms of deemphasizing certain product lines. But can you just help us think about kind of the areas of the portfolio where you think You might not have been kind of growing the volumes as fast as the aggregate market has?
Speaker 2
Yes. So if you think about our foodservice volume And the complexion of that business, we're chains are quick serve and we're also distribution. So historically, if you look at what's happened, you said it properly, Yes. We had a snapback effect with the depressed levels of COVID, and that you saw that 8% rebound. On the other side of that, we're greatly influenced and if you watch our food merchandising business, typically when the consumer Makes a large shift in how they get their calories.
There's a buy down between the distribution and the chain restaurant channels for us, So within foodservice. So that buy down, you wouldn't see a large decrease. But what you see on the other side is when the consumer takes the next Pricing business and that's kind of the step we're at within the consumer buying decision cycle is that there a lot of our consumers are Our customers are facing the same thing, higher menu prices, lower volumes. And so The tickets are higher. It's more expensive to eat out of the house.
And while store shelf pricing is up, it's still The softest landing for the consumer. And that's what you're seeing in foodservice right now is that choppy consumer buy signal. And It's really driven by decreased mobility in some cases, but also the higher menu costs and prices That are out there versus the retail, the shelf prices and the value they get.
Speaker 8
Okay. That's helpful. And then just a follow-up on beverage merchandising. So with the closure of Canton, I mean, the slide talks about kind of not being Having integrated mill business anymore, you talked about exploring strategic alternatives for Pine Bluff, but that's obviously still Your principal supply of liquid cartonboard. And so is the idea there that if you as you kind of look at Potential alternatives like that the idea would be that mill is still operating and if there's a sale or a divestment of some sort that
Speaker 9
that would come with some
Speaker 8
sort of supply agreement for your converting
Speaker 2
Yes. So as we highlighted in the prepared remarks, Pine Bluff is a critical Pine Bluff and Waynesville both are critical to our ability to operate successfully and they'll remain critical in whatever future Strategic alternative we select. Sales is certainly one avenue we could go down, but Yes, we continue to own the mill. We're committed to operating the mill and give it all the food, water, shelter it needs to support Our core converting operations. So I think you said it right.
Anything we do there, we're certainly going to protect Our core converting business on the carton side there and certainly Pine Bluff and Waynesville To a degree are critical in those considerations.
Speaker 8
Okay. All right. That's helpful. I'll pass it on. Thank you.
Speaker 0
The next question comes from Ed Rucker with Barclays. Please go ahead.
Speaker 10
Thanks for taking my question. My first one is just on back to the balance sheet. Specifically on the ratings, it seems like given what you've done with the balance sheet, reducing actual gross debt, getting leverage down and What seems like committed to getting below that 4 times, I feel like the ratings may be a bit behind. Just want to get your thoughts And if you've had any questions or excuse me, conversations with the rating agencies and if there's any Your goal is to get to a higher rating.
Speaker 4
Sure. So we don't control our ratings. First off, as you know, We do have an active dialogue with both S&P and Moody's and talk to them about our balance Our plans for capital allocation, cash flow, etcetera. I would say just broadly speaking, again, the ratings is entirely up to them. They We tend to look at gross debt more so than net debt.
So as we talked about the 4 times target, That is a net debt number. And from that perspective, I think those agencies would look to us to use We ended the quarter with $500,000,000 plus of cash. So I think if you look at some of the actions that they're looking for, We did spend $200,000,000 over the a bit over the last 3 months of Q4 and into this year, dollars 200,000,000 of cash. I think they've looked for the company to spend more of that cash on delevering as more signals. But I think we And if you look at the reports, I think the commentary has been more positive as it relates to our ratings.
And I think we're on the right path it relates to further upgrades there, but again, I can't speak to the agencies and what their actual Ratings are we'll just keep focusing on things we can control, which is continuing to delever.
Speaker 10
Got it. And then, kind of in relation to that, if you do see some divestitures with Pine Bluff and Waynesville Or really any free cash flow generated or the cash you have on the balance sheet right now. Now that you've locked in A more certain interest rate at least on the term loan and I know you've paid off debt in January or February. Would you target some of the or continue to target I guess Some of those higher coupon unsecured with
Speaker 4
gross debt reduction? Yes. I can't signal any future actions we may or may not take, obviously. All I can leave you with is that deleveraging is still a focus as I mentioned. And we do have some excess cash I think it's a balance of delevering and growth.
So we mentioned we talked about investments in some of our converting assets, Capital that we're staying this year that's going to position us well for the future all on. We are focused on returns as we invest in business we're sensible. So It will continue to be a balance as we look at where that capital goes.
Speaker 10
Great. That's helpful. Thanks.
Speaker 0
The next question comes from Kyle White with Deutsche Bank. Please go ahead.
Speaker 3
Hey, good morning. Thanks for taking the question. A lot of moving parts on volumes with consumer behavior shifting, inflation as well as destocking. Are you able to just give us a bit more guardrails On volumes and what your expectations are for the company for 2023 on a year over year basis that is assumed in the outlook?
Speaker 4
No, I mean, just broadly speaking, If you look at we're not included in the guidance isn't a material shift in volumes, particularly around the Food businesses, beverage as there's a lot of moving pieces there. So the beverages take that to the side. But on the food business, volume should be relatively In line with volumes from last year. Yes, that's helpful.
Speaker 3
Yes, makes sense. That's helpful. And then on the CapEx this year, I think you said it was $280,000,000 that you're expecting. Is that the right long term target that we should expect for the business Just given the restructuring program or is there another step down later post this year?
Speaker 4
We're not providing any future guidance beyond that. As we talked about, the $280,000,000 is inclusive of the $1,000,000 that we talked about in terms of modernizing some of the converting assets on the beverage merchandising side, longer term By reducing our exposure to mill operations to the closing of Canton, we are going to be more capital light, which is one of The goals, but there are opportunities as we talked about for deleveraging and also growth capital. And so on a balance We'll continue to look at opportunities where we can continue to invest in a sensible basis, but no Further guidance from that perspective, but I will say that our maintenance capital is going to be reducing with less exposure To the mill operation.
Speaker 3
Sounds good. I'll turn it over.
Speaker 0
The next question comes from Curt Woodworth with Credit Suisse. Please go ahead.
Speaker 11
Yes, good morning. Thanks for fitting me in. So I guess if you're kind of looking at food volumes roughly flat this year and given the pro form a EBITDA, Is it fair to say that from a price cost perspective, you're assuming neutrality or slight benefit? And When we look at price cost in last year, just looking at the EBITDA averages, it was about a positive 280,000,000 And I know part of that was mix management. So, yes, any color you can give on that would be helpful.
Speaker 2
Yes. Look, our pricing strategy is to stay on the right side of the price cost curve. And so we positioned ourselves Kind of coming out of the pandemic with contracts to support that with our customers. And outside of our index based movements, that's Yes, following commodity costs and things like that are all considered. So yes, I think the way you said it occurs The right way to think about it.
We don't plan to get on the wrong side of price cost this year.
Speaker 11
And then in terms of Kind of the SKU optimization that you've talked about or the value over volume, is it are you kind of done on that front? Do You have the portfolio or the SKU composition about where you want it and therefore volumetrically going forward, you should more reflect what the market is doing? And then I think you touched on this a little bit earlier, but from a market share perspective or a new product introduction perspective, are there any unique levers you have this year that you could discuss? Thanks and good luck.
Speaker 2
Yes. No. So I would say that we are largely through that process. And certainly, as we look at our 2023 opportunities, Where we can capitalize on our ability to service and take advantage of There is to push broader product shifts products in the areas where the consumer shifting, that's where we're largely looking to capitalize So whether that's more mold with fiber on the ag side or Shifting substrates on the protein side, anywhere we can lean in and use our ability to be flexible from a substrate perspective Where we're looking to value and really fight off the volume challenges that we're seeing.
Speaker 11
Okay. Thank you.
Speaker 0
This concludes our question and answer session. Would like to turn the conference back over to Mike King for any closing remarks.
Speaker 2
Thank you and thank you all for joining today. We appreciate your interest and your We're excited about the momentum we're building here at Fact of Evergreen as we continue to execute on our long term strategy.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.