Thank you for standing by. This is the conference operator. Welcome to the Pactiv Evergreen First Quarter 2021 Earnings Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Dhaval Patel, Senior Vice President of IR and Strategy. Please go ahead..

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen and welcome to our first quarter 2021 earnings call. With me on the call today, we have Michael King, Chief Executive Officer; and Michael Ragen, Chief Operating Officer and Chief Financial Officer.

Before we begin, please visit the Events section of the company's Investor Relations website at www.pactivevergreen.com and access the company's supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation.

Before we begin our formal remarks, I would like to remind everyone that our discussions today may include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them.

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 for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Lastly, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

And reconciliation to comparable GAAP measures are available in our earnings release. With that, let me turn it over to Michael King.

Mike?.

Thank you, Dhaval. Good morning, everyone, and welcome. Before jumping in and with this being my first earnings call as the CEO of Pactiv Evergreen, I thought it might be helpful to give a bit of insight on my background leading up to now. I'm a pedigreed chemical and mechanical engineer.

My career started in the operations and development space of the automotive industry, and it's rapidly progressed into both private and public sectors with companies like Lear Corporation. TI Automotive, FRAM and Autolite as well as Huhtamaki packaging and most recently, Graham Packaging.

My sweet spot is in driving business transformation through culture, manufacturing turnaround and end-to-end systems integration. My approach is hands-on and collaborative. I'm very results focused with a keen eye to long-term and short-term viability of the business.

I have to say that it's been a pleasure to meet so many of our Pactiv Evergreen employees over the past 2 months as I've taken over as the CEO. In my short tenure, I visited our mill operations and several of our converting facilities.

I'm confident that we have an amazing team of talented individuals across the organization that are well suited to manage the current challenging environment as well as the opportunities of the future.

The first quarter in 2021 presented a number of challenges as our COVID-19-pressured business was also impacted by an unprecedented winter storm, Uri, as well as a scheduled cold mill outage.

Despite these challenges, we managed to deliver solid results across the segments and remain laser focused on improving our paper mills and eliminating waste through a host of strategic initiatives. If I could turn your attention to Slide 3. During this presentation, we will discuss key business takeaways and first quarter 2021 highlights.

We'll give a -- we'll provide an update on the business. We'll go through our first quarter financial performance. We'll provide an update on our full year 2021 outlook. And we'll conclude this with questions and answers today. If I could direct your attention to Slide 5.

Our first quarter results continued to see steady improvement, and underlying business activity were negatively impacted by continued depressed volumes due to COVID-19 along with Winter Storm Uri and the planned cold mill outage.

In Foodservice and Food Merchandising, we actually saw year-over-year adjusted EBITDA improvement of 9% and 4%, respectively, for the quarter despite the negative impact of COVID-19 and the storm. The total company volume was 3% up from the month of March. We expect the stronger year-over-year volume growth to continue for the remainder of 2021.

We are still relatively early in the process of our operational review of the Beverage Merchandising segment and our next-generation Pactiv Evergreen waste elimination program. We do not have an update for you at this time, but we plan to provide you further details in the coming months.

The company has continued to focus on paying down debt and has repaid $59 million of notes in the quarter. Please now turn to Slide 6. Now let's move to quarter 1 2021 highlights. Net revenue of $1.164 billion was down 4% from Q1 2020 due to the continued impact of COVID-19 as well as lower raw material costs passing through the system.

We would note net sales are recovering and were up 7% year-over-year for the month of March. Net loss from continuing operations was $15 million and earnings per share from continuing operations was a loss of $0.07.

Adjusted EBITDA of $77 million for the quarter was down 47% from Q1 2020 due to the impact from Winter Storm Uri, the cold mill outage as well as COVID-19. These results were partially offset by favorable raw materials. Free cash flow, defined as adjusted EBITDA less CapEx, was $17 million and declined versus Q1 2020 driven by the depressed EBITDA.

Finally, our Strategic Investment Program is on track and delivered $23 million of benefits in the first quarter. If I could direct you to Slide 8. As we have previously discussed, Pactiv Evergreen continues to have many EBITDA growth levers that will deliver benefits in 2021 and beyond.

As the overall economy continues to rebound and COVID-19 subsides, we should realize significant volume upside and leverage operational costs. The incremental operating cost during the COVID-19 pandemic will also decline as mass vaccination continues across the country.

The secular shift to more online ordering, delivery and takeout will also help drive our volume growth. We plan to continue investing in incremental capacity to meet customer demand. We view sustainability as another pillar of our growth story and also a differentiator for the business.

We are able to provide a broad portfolio of sustainable products to our customers as well as work with customers to develop new, sustainable products as they shift their product offerings to meet customers' preferences. Finally, cost reduction initiatives and optimization will also continue to contribute to EBITDA growth. Please now turn to Slide 9.

As one of the largest companies in the food and beverage packaging industry, we recognize the responsibility we have to lead and inspire when it comes to ESG issues. In our latest sustainability report, we outlined where we are headed, and we are committed to updating all our stakeholders on our progress towards excellence.

When it comes to protecting our planet's resources, we are currently finalizing our 2020 greenhouse gas emissions data and examining options to accelerate our reductions to date and help mitigate climate change. One data point that we can share today shows our commitment to another focus area, and that is sustainable forestry.

In 2020, 30% of the fiber we procured came from third-party certified sources, up from 23% in 2019. Related to our products pillar, we're building the broadest offering of sustainable packaging in the industry, which helps us reach our goal that by 2030, 100% of our products will be made with recycled, recyclable or renewable materials.

During the first quarter, we launched 10 new products which were all fiber based. That brings the total number of new items we've introduced to 94 in the last 1.5 years. Valuing our people has always been a top priority at Pactiv Evergreen. And in the first quarter, we saw overall injury rates come in below target and 3x better than industry averages.

Looking beyond our people, we celebrated National Volunteer Week by launching a new program that rewards actions for our employees and their families to better their communities.

Finally, as a newly public company, we are working with our Board of Directors to develop transparent policies that promote effective governance, and we look forward to sharing more in the future.

We'll be providing greater external reporting on ESG topics in the coming quarters and years, and we invite you to view more details at the link included in this presentation. Please now turn to Slide 10. Another key focus for Pactiv Evergreen has been innovation. We have continued to invest in capabilities to make products from a number of substrates.

The integration of Evergreen into Pactiv only further enhances those capabilities. This allows us to be the right partner to work closely with our customers as they tackle the challenging requirements of a dynamic consumer that has evolving needs and preferences of functionality and sustainability.

We have now launched a total of 94 new EarthChoice products with 22 launched in the first quarter of 2021 as we focus on sustainability-oriented products to align with today's customer preferences. In addition, we are launching new products focused on food safety and tamper evident to address customer needs.

We have not only developed a number of projects to realize $6 million of EBITDA and synergies in 2021 from the combined Pactiv Evergreen, but we've also identified an additional $25 million of potential synergy opportunities. Please now turn to Slide 11. We remain on track to complete our Strategic Investment Program in 2021.

We will have spent a total of $661 million by the end of the year on a number of programs that has a total average a 2- to 2.5-year payback. We are in the maturing stages of both our Beverage Merchandising operational review and our next-generation Pactiv Evergreen waste elimination programs.

We plan to provide more information on these programs over the coming months and quarters as we start to implement actions across the business. I will now turn it over to Mike Ragen for a detailed financial review..

the effect of Winter Storm Uri, which cost $34 million; a cold mill outage, which cost $16 million in the quarter; mill operational performance, which cost $16 million; and the effects of the COVID-19 pandemic, which impacted the business $14 million. Moving to Slide 15. Here, we estimate the Q1 impact of COVID-19 and Winter Storm Uri to our business.

The Q1 adjusted EBITDA impact of COVID-19 was $38 million mostly driven by volume, price and higher manufacturing costs most notably in our Foodservice and Beverage Merchandising segments. In Q1, Winter Storm Uri had a onetime impact to our business of $39 million.

The impact was concentrated on our facilities in Arkansas and Texas, where we incurred higher energy costs and needed to shut down sites quickly, incurring damage in the process.

We estimate that we will also see a further $10 million of costs in Q2 due to damage incurred during the storm and higher unrecoverable raw material costs to ensure certainty of supply to our customers. Moving to Slide 17. Looking at our outlook for 2021, the ultimate impact of the COVID-19 pandemic to Pactiv Evergreen remains uncertain.

In our forecasts, we have made certain assumptions regarding a second half recovery of Foodservice and Beverage Merchandising revenues that are dependent upon increased mobility and may not eventually. We have been neither conservative nor aggressive in these assumptions.

At this time, we are updating our full year adjusted EBITDA guidance to $630 million to $645 million from our earlier projection. Approximately $50 million of the change to our guidance is due to the impact of Winter Storm Uri, whilst $20 million is related to mill operations within the Beverage Merchandising segment.

Turning around the mill operations within the Beverage Merchandising segment remains a priority. We have the resources in place to effect the turnaround and are continuing to invest to ensure that the turnaround takes place. We expect the strong performance in our Foodservice and Food Merchandising segments to continue throughout the year.

One quick note on Q2. In addition to the residual impact of $10 million from Winter Storm Uri, the recent raw material spikes will negatively impact second quarter results. Our contractual price pass-throughs will then take effect during the second half of 2021, and we expect to see strong margin improvement in the back half. Thank you for your time.

As an appendix to this document, we have included Q1 revenue and adjusted EBITDA bridges versus same period last year, consolidated statements of income/loss, a reconciliation of net income/loss to adjusted EBITDA and free cash flow and a summary of progress in our Strategic Investment Program.

I'll now pass it back to Mike King for closing comments..

Thank you, Mike. In closing, while the first quarter was challenging, we look forward to the continued opportunities ahead of us as business activity returns and drives continued recovery in our Foodservice and Food Merchandising businesses.

I also look forward to turning around the performance in our Beverage Merchandising business and, in particular, our mill operations. With that, we will now open it up for questions.

Operator?.

[Operator Instructions] The first question is from Anthony Pettinari from Citi..

Welcome, Mike.

Given the unprecedented resin inflation that you're seeing, can you just maybe remind us or put a finer point on the time line to get caught up on that inflation in terms of the lags, whether they're 1 quarter, 2 quarters? And then just your assumptions for the direction of resin prices for the remainder of the year that's embedded in your outlook..

Yes. So this is Mike Ragen. So I'll take that one. What we're going to see in Q2 is we will see somewhat of a disconnect between our revenue and our costs. The resin prices spiked early in the year. A lot of that is still in inventory for us. As you know, we hedge the lag in -- particularly in Foodservice and Food merchandising.

And we will see -- but that's not 100% perfect in terms of the hedging. We will see a lag through Q2. But in Q3, our pricing will be back up on top of the resin, and we will restore our normal margins. We are expecting resin costs to subside through Q3 and then sort of flatten out through Q4..

Okay. That's very helpful.

And then, Mike, understand that you're still undertaking your review and it's early days, but is it possible to identify 1 or 2 things that you think the company could improve on either operationally or commercially that really stand out to you as an opportunity given your history and experience?.

Yes, yes, good question. There's a host of reliability issues that we've been solving in parallel in both mills. Our converting operations, I would tell you, run fairly well. So the focus is truly the mills. I would also say commercially, we're evaluating pricing across the board. That certainly stuck its tongue out as an opportunity for us.

And really, just as we continue the strategic review, doing a holistic look at product proliferation and give you a sense of the body of work around our uptimes and how that's tying to labor challenge in the country right now with our largest competitor being the U.S. government in terms of labor, we're managing that.

And so insulating ourselves on labor, uptime efficiency and then commercially looking at price, all those are levers right now..

The next question is from Ghansham Panjabi from Baird..

Congrats, Michael and Dhaval, on your new roles..

Thank you..

I guess following up on Anthony's question on just kind of looking at the construct of guidance. You lowered EBITDA for 2021 by about $70 million. I think you called out $50 million from the Winter Storm Uri and then $20 million from the mill issue. But costs are obviously much higher, just not resin but freight, labor, as you mentioned, et cetera.

Are you assuming that you fully recover price/cost specific to these issues by the end of 2021? Or are there any positive offsets we should consider relative to your initial guidance?.

Yes. This is Mike Ragen again. So we are -- look, if I just take a step back. In our Foodservice segment, 80% of our revenue is on pass-through. And in Food Merchandising, it's a similar number. And in Beverage Merchandising, on the carton side of the business, it's around 80% as well. And the remainder of the business, a lot of it is market based.

So we are expecting to recover the bulk of the input cost increases or get our prices up to cover that. And that's contractual, and that's the way we've modeled things out. Now are there upsides to that? Look, if resin drops, if input costs drop, sure, we might see some upside.

But the way that we've modeled it is, as I said to Anthony, is that it drops a little and then sort of flattens out in the back end of the year..

Okay, great.

Just to clarify, if resin stays flat between now and year-end, would you recover everything by the end of 2021? Or would that spill over into 2022?.

We'll recover by the end of 2021..

Got it. Perfect. And then I think you mentioned 3% volume increase in March year-over-year. Just kind of give us context as to what March 2020 look like.

And then what are you seeing so far in April across the board by the 3 segments?.

Sure. So -- and I'm going to -- hopefully, this isn't too much of a -- too much information. But I like to look at 2019 rather than 2020, but -- particularly for April. But look, in total, our volumes were up in March, as we stated, Foodservice volumes in March.

Everyone needs to be -- to understand that 25% of our business in Foodservice is institutional. So things like schools, stadiums, offices. They still haven't really opened or they've opened to a certain extent, but they're not fully open.

And so when I look at this versus -- for Foodservice versus 2020 in March, we're up around 7%, and we're about flat with 2019 in terms of volumes. In April, we're up versus 29 -- I don't even want to talk about 2020 because that's when the world stopped. But we're up 1% or 2% in April on 2019 numbers. So positive there.

In Food Merchandising, we were a little down in March versus 2020. We're about 3% down in March, but versus 2019, we're about 6% up. And in April, we're looking -- we're about 7% up on 2020 and around 3% to 4% up on 2019. And then in Beverage Merchandising for 2021 versus 2020, we're about 3% up, and we're about 12% up on 2019 in March.

And we're seeing 2021 about 3% up on 2020 and a little down on 2019. So -- and obviously, month-to-month, you can see pulls -- pull forwards, pushbacks and all that sort of stuff, so that's why I give you the 2 months.

So I think what we're seeing is we're seeing strong recovery in Foodservice with upside to come as further openings occur in the areas that I mentioned around the institutional part of the business, 25% of the Foodservice business historically. Food Merchandising, we're seeing good, solid volumes.

We will obviously see a little bit of a pullback in things like protein trays, in cartons, those sorts of things. But we will see growth in areas that almost disappeared last year, things like bakery containers that -- as people weren't celebrating graduations and things like that. We will see that return this year.

And then in Beverage Merchandising, we think we'll see -- as schools go back, we'll see more school milk. We'll also see the pull-through from Foodservice on cupstock, the cups -- paper cups that go into a lot of our Foodservice customers. So we're encouraged.

We're not declaring victory yet, but we think the volumes, they're currently strong, and we think that they're going to continue like that as the economy continues to open up..

The next question is from Arun Viswanathan from RBC..

Great and welcome, Dhaval and Mike. So I guess I just wanted to ask about the Strategic Investment Program that was described during the IPO process.

Maybe could you update us on your progress there, especially in light of the $20 million of headwinds that you've been experiencing within Beverage Merchandising?.

Sure. So as an appendix to the presentation on Slide 23, it provides the summary. To date, we've spent $498 million of the $661 million in the program, and we continue to spend at rate. During the first quarter, we saw a benefit of $23 million from that, which is very positive. I think last year, we were at -- for the full year, we were at $65 million.

So $23 million in a quarter means that we're accelerating on those savings, which is great to see. Through Q1, we spent -- in the mills, we took down the Pine Bluff mill. Mike King outlined the cold mill outage, and I mentioned that, that cost us $16 million in EBITDA in Q1. However, we invested substantially. We rebuilt a boiler.

We did a lot of investment at that time, which is great. And we will spend circa $100 million in the Evergreen Beverage Merchandising business this year, the bulk of which will be in the 2 mills. So we're continuing to invest there. And we'll continue to invest to see the benefits that we're expecting from -- as the mills turn around..

So as a follow-up, just given what you said and given some of the cost pressures, so I imagine you would be caught up on resin price inflation by the end of this year. You'd get the $50 million back from the storms next year, and then you'd add in the increases from the SIP or the benefits.

So would you expect 2022 to look more like '19 then? And obviously, I guess that's dependent on the Foodservice recovery to a full extent.

But is that a fair characterization of how you're thinking about the longer term or the next couple of years?.

So I don't want to overcommit here, but I would expect that 2022 would be better than 2019. And if I just sort of walk you through my thoughts on it.

The second half of this year, I mean, you can infer the numbers that we're expecting to see in the second half of this year, and a lot of that is around recovery from COVID, benefits from our Strategic Investment Program and essentially just costs in our plants coming down as we've really increased costs there.

And so -- and plus, to your point, we are recovering and we'll recover through our contract pass-throughs the increased costs in resin and other raw material inputs. So our exit run rate should be very strong, and we will continue to see benefits from the Strategic Investment Program.

We will continue to see -- we're not saying that by the end of the year, we'll be recovered from COVID. That will linger into next year. And we also have other programs that Mike King outlined that we will provide further clarification on in future calls. So my personal view, and I think what Mike and I have discussed, is next year, we'll exceed 2019..

The next question is from George Staphos from Bank of America..

Again, welcome, Dhaval and Mike. I want to start with my first question really more around volume, and then I want to get into Evergreen and the mills to the extent that we can talk.

So Mike or Mike, the little bit of weakness that we saw in Food Merchandising volumes in the quarter, is that just what we would expect a little bit of weakness because of the reopen? So you're getting it in Foodservice, so that means we're not shopping the perimeter of the store as much for food at home.

Or is there something else behind that? And a unrelated volume question.

How are you marketing EarthChoice and the plastic packaging you make in that business as sustainable? What's your -- what are you finding as most resonating with the customer there? Is it the recyclability or something else that is allowing you to present that as a sustainable choice?.

Okay. So..

Well, let me take the EarthChoice..

Yes, please. You go ahead, Mike..

Yes. So I'll answer your second question, George. On the EarthChoice, it's both. It's recyclability, for sure, but it's also recycled content as we look at those levers. It's not the same across the board. But certainly, those are the 2 -- out of the 3 pillars, the 2 that we're leveraging in the poly side of EarthChoice..

And how much recycled content are you using right now within EarthChoice or across the whole platform?.

I'll have to get back to you on that.

Do you know, Mike Ragen?.

I'm sorry.

The question was how much recycled content?.

Yes..

Yes. I don't know. Is it 15% or 20%? I'm not -- we can get that exact number. I don't -- we don't have it off the top of our head. It's..

That’s fine. .

It depends on the product itself. We can do -- for example, recycled PET, we can do 100%. But it just depends on the clarity required and so -- and the cost and things like that. So -- but we -- we'll balance that out. And so it's not one answer across the board..

We can save it for later. I was just asking in total where you are right. Or now versus '20, how much content did you use. But we can sort of dig into that off-line.

And on the Food Merchandising volume trends and what's driving that?.

Yes. So what we've seen, we have -- we sell into the consumer channels. We've seen some lower volume there. And we've seen a small pullback in protein trays and egg cartons, which we'd expect..

Okay. Turning to Evergreen and the mills. I guess the overarching question is, if we look back, the guidance for the business and for the whole company, which is largely -- the reduction has been largely driven by Beverage Merchandising, it's been well over $100 million.

As you've been able to look at it, what has been the biggest driver of the variance if you grew that number within Evergreen? It sounds like it's mostly reliability.

And what are you finding is causing you most of the problems right now in terms of reliability at the 2 mills? Is it the head box? Is it something else? And what gives you the confidence, given what you know right now, that you'll be able to resolve those issues? Because old mills sometimes take a lot more investment to get up the curve than initial expectations based on past experience.

So what's giving you the confidence there?.

Yes, I'll take this one. So not a simple answer, and it's certainly different. We have 2 mills, as you know, and both are in different stations in their excellence journey.

I would tell you, if you break a mill into its 7 or 8 sub-facilities, there isn't one of those sub-facilities that hasn't needed special attention to get to the best place we can on our cost curve. I would tell you Pine Bluff -- just generally, you should think about Pine Bluff as a bit further in their journey.

Our operational metrics are all headed in the right direction. We're just coming out of a cold mill outage, where we've been able to invest heavily in all 8 of those sub-facilities, if you will, whether it's chip production, pulping, bleaching. Every one of those sub-facilities is getting a lot of attention, and we're seeing that improve.

I would say, to your granular question, our paper production side or in our board production side, our paper machines run well. So it's not head box issues in Pine Bluff. It's not -- we're not having overhaul-related or major issues.

It's really a story of reliability on all the upstream and making sure that those things which have, frankly, otherwise been hampering uptime don't hurt our ability to be efficient on the paper and board side. And similar story in Canton, frankly. There's been a lot of investment in Canton. We did not have a cold mill outage.

So we're doing a lot of things. We're flying the plane and fixing major items that as we look at the medium- and long-term viability of that operation, without having a cold mill outage, we're doing everything we can to, again, not see the downtime manifest itself into our paper and boiler production. So similar story.

It's all in the upstream and getting consistent labor and consistent -- taking advantage of the downtimes we have to keep the machines up is the focus. And so it's not like there's one big rooming item.

It's more systemic, and that's why we're somewhat reluctant to go into a lot of detail on the strategic review until we get through what might be some step function changes we can make there. I hope that answers your question, George..

No, Michael, it's very helpful. More work to be done, but we appreciate it..

The next question is from Kyle White from Deutsche Bank..

Mike, Dhaval, congrats on the new role. Mike, I know it's relatively early days here, I mean, in your role.

But when you take a look at the business portfolio, specifically looking at Beverage Merchandising, just trying to understand your thoughts in terms of what you -- how you view that segment in regards to the overall portfolio at Pactiv Evergreen..

Yes. So I kind of think of it as liquid boards and cupstock and things that we vertically integrate, and then I think of everything else. So our coated groundwood or uncoated free sheet businesses. I kind of look at it that way.

And I don't have any -- I can tell you that it's exciting to see what the synergies and really the benefits that our converting facilities across the board will realize as we continue to straighten the mills out on the liquid packaging side, liquid paper side.

But I -- it's too early for me to be able to comment on coated groundwood or uncoated free sheet spaces, all of which we're -- we have pretty good saturation in those spaces, on our SKUs.

And -- but I can tell you that we're rolling all areas of each segment over and looking at it from -- whether it's commercial levers and pricing to profitable SKU mix to where we want to lean in on products like EarthChoice. And so it's a full end-to-end look.

I know I didn't give you probably what you're looking for because we're just not there yet on all the segments, but that's kind of how I think about it, as 3 big buckets, one of which is really exciting, I can tell you that. The other 2 we're reviewing in detail..

No, that's helpful.

On the $25 million of additional synergy projects that you have identified, do you have a time line on when you expect to realize these? And what's kind of driving these synergies?.

Yes. It's premature to be able to give you an exact or even an indicative. I'd like to get through the strategic review before we go live on that..

The next question is from Sam McGovern from Crédit Suisse..

With regard to the impact from the Texas storms, can you talk a little bit more specifically about how it impacted you and whether there's any recoveries that you guys would anticipate from any business or option insurance?.

Mike, do you want me to take that?.

Let me take the front end, and I'll let you talk about the recovery potential..

Okay..

The -- to say it was an eclipsed event that was somewhat unfortunate -- we planned a cold mill outage for the week after when the storm hit. What the storm did was force us to pull the cold mill -- take the mill cold sooner than we wanted. So it was, no pun intended, a perfect storm. It hit us right at the worst time it could.

So taking a mill cold during a cold snap in the South, freezing pipes, exposing already weak linkages. There wasn't one -- if you think of the mill as kind of 8 or 9 sub-facilities, there wasn't one of those sub-facilities that wasn't greatly impacted.

And so you couple that with the cost -- the rising cost of energy for us, particularly natural gas, having to commit to purchase natural gas to keep things heated, coupled with the breakages and really a cold storm in a mill that far South really exposes anything that's weak, things that would normally be maintained.

And so it was -- it exacerbated our ability to, a, focus on the things that we had already planned in the cold mill, but it also -- a lot of things that we hadn't planned to work on needed to get fixed quickly. So we were down longer than we wanted to be and certainly paid more for the energy during that period of time.

And the body of work and the scope of work that we had planned in that outage, whether it be recovery boilers, whether it be -- a lot of what failed was pumps. We had several pump failures, turbines and energy -- backup turbine generators. There's a host of things that exposed themselves during that -- the storm for us in the Pine Bluff mill.

And then Mike, I'll let you talk to the energy side of that and potential for recovery, et cetera..

Yes. So in terms of recoverability, we're reviewing all of our options as you'd expect. We're not sure that we'll get anything back, but we're pushing for it. So we're hopeful. We haven't factored anything into our forecast, though. The energy piece is -- as you'd expect, energy prices spiked.

And before we shut down, particularly in Arkansas, the mill, we saw natural gas prices through the roof, and that obviously cost us a lot of money as well..

Okay. Great. That's helpful.

And then just with regard to the rising raw material and other costs, how should we think about the impact to the working capital line in terms of cash flows as we roll through 2021?.

Yes. So we have seen -- in Q1, we saw a $50 million increase in our inventories due to the increased raw material costs. So we're managing our inventories right now and trying to somewhat offset that. But we did -- in Q1, we saw a $50 million increase to working capital.

And through the end of the year, that will be somewhat higher due to rate, but we are -- we've been doing a lot of work on our -- what we talked about through the IPO process, our integrated supply chain program. And one of the benefits of that program is to allow us to bring our inventories down.

And so we will see an offset to that, the higher rate number. But -- and that's -- so physical inventories will come down, but we're expecting to see total inventory to be up by $30 million, $40 million at the end of the year because of higher raw material costs..

The next question is from Mark Wilde from BMO..

Mike Ragen, I wondered if you are able to quantify the second quarter impact from the resin mismatch..

Well, I can and have personally. But in terms of what I'm expecting to see in terms of our guidance for Q2, we're expecting to see, as we've said already, strong volumes. However, a lot of that volume impact will be offset by the higher raw material costs in the quarter. So I would not expect to see a materially higher quarter than last year.

However, then, we'll recover and we'll see higher margins through Q3 and Q4.

Does that help?.

Yes. I just -- what I was hoping for is that maybe you could give us sort of a range in terms of millions of dollars of impact from just the resin mismatch in the second quarter..

Okay. So it's around $50 million to $60 million..

Okay. All right.

And then another question I had was just what type of volume expectations on a year-over-year basis do you have built into the second half at this point? Is it possible to give us some guidance about what you're embedding in the numbers right now on a segment-by-segment basis?.

Sure. I'll give you some guidance. So what we're expecting to see is -- in Foodservice, what we've embedded in the numbers is to be -- and it's easier for me to talk versus 2019 because I don't know whether..

That's fine. That's fine. That's fine..

2020 was a little all over the place. But -- so we've sort of said in our Foodservice numbers to be 4% to 5% down versus 2019. Now as I've said earlier, that hasn't manifested itself in March and April in Beverage and Food Merchandising, where we would expect to be around flat to 2019.

And in Beverage Merchandising, we would expect to be a little down in the early months and then pick back up in the back end to be flat to '19..

Okay. All right. That's very helpful. And then Mike, if I could. Last summer when the management provided many of us on the call with projections for 2021, those numbers were almost $200 million higher than the current guidance. Now if we leave aside some of the issues from the first quarter, there's still a big gap there.

Can you just talk about what the 2 or 3 drivers have been to kind of reduce guidance over the last 8 or 9 months? And then also, what you're doing going forward to kind of improve that guidance..

price and volume and essentially the recovery of the mills and the timing around that. So in terms of the price and volume, we've seen lower pricing, particularly in the paper segments. Also, some pricing on board volumes because we want to keep the mills full.

And we've had to chase volume there to make sure that we are keeping -- we're not taking any downtime. So -- and so we've had to sell board volumes at lower pricing than what we had assumed, again, around recovery. Secondly in that area, schools.

Again, I mentioned that in Foodservice, same in Beverage Merchandising, it's a big part of our business, school milk. And that manifests itself in the board as well because we also sell to competitors who convert into school milk. So they're the big pieces on price and volume, and that's about half of the $80 million.

The other half is mill recovery timing, $40 million, okay? So the speed at which the mills are turning around is not as fast.

And then what we just outlined this morning was they're not recovering as quickly than what we had assumed in our prior guidance, and that's brought it down another $20 million, okay? And then the last piece is obviously the storm, $50 million. So that should walk you backwards from where we were to where we are today..

Okay. Very helpful.

And kind of going forward, Mike?.

So going forward, you mean about like how we sort of..

I mean, just sharpening the guidance, yes, because this is a -- it's a huge drop over the last 8 or 9 months..

Sure. So I'd sort of look at this year as a bit of a tale of 2 halves. This year, Q1, you've seen the results. Q2, we're going to be -- we'll be weighed down somewhat by the raw material increases and us catching price back up. However, I think what you -- what I hope to see and what we're starting to see is stronger volumes.

So you'll be able to see that, and that should give you some confidence in what we're saying about Q3 and Q4. Obviously, proof is in the pudding. Then in Q3, Q4, we should see stronger volumes. We will have caught up on price.

And we would expect that some of the positive trends that we're starting to see in the mills continue to improve such that we're exiting 2021 at a nice exit run rate.

In terms of what next year looks like, and I'm not going to commit to any numbers, but the way that I look at it is we'll see continued recovery from COVID, we'll see continued benefits from our Strategic Investment Program, which will play themselves out over the next year or 2.

And some of these other programs, which we'll outline in upcoming calls, we should see some benefits from that.

So the volume tailwinds that we have in front of us, combined with reducing costs in our plants around COVID, plus getting on top of the mills, again, we haven't demonstrated that, but we've got the right structures around that, I think, will lead to improved results in the back half of this year and then going into 2022..

Next is a follow-up question from George Staphos from Bank of America..

I'll try to make a quick lightning round here. So Mike or Mike, when would you expect to have new leadership for the mill system and Evergreen? Number one.

Number two, can you remind us what was the capital spending outlook? And might some of the required remediation lead to more spending? And then lastly, with Canton, do you need to take a cold outage this year so that you're not trying to, as you put, fix a plane while flying it at the same time?.

So thanks, George. And now I'll piggyback because I have the answer to the question. I couldn't tell you on the recycled content as well. But new leadership, our hope is before we have our next earnings call, we have a new leader in place or sooner. Capital outlook, I think our number for the year is $305 million.

We don't really anticipate going over $305 million. Canton, no, we will not be taking a cold mill outage. We're not anticipating that in 2021. And the answer to your prior question on recycled content is the minimum is 25% in our poly EarthChoice. And it can go as high as 100%, but the minimum is 25%..

The next question is from Scott Schwartz from HPS Partners..

Do you have any thoughts surrounding your 2023 maturities, the ones that are remaining?.

We're reviewing that at the moment. No definitive thoughts. But obviously, we would look to do something with that in the next year..

This concludes the question-and-answer session. I'd like to turn the call back over to management for any closing remarks..

Yes. Thank you very much. I want to just thank everybody for joining us today. We look forward to brighter quarters and talking about the progress this business is making as we continue the year. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..