Good morning, and welcome to Pactiv Evergreen's Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator instructions] As a reminder, today's conference call is being recorded.

I would like to turn the conference over to Dhaval Patel, Senior Vice President of Investor Relations and Strategy. Please go ahead..

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our second 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 the call over to Michael King.

Mike?.

Thank you, Dhaval. Good morning, everyone, and welcome. Yesterday, after market close, Pactiv Evergreen released its second quarter 2021 results, that were broadly in line with the guidance we have provided in the last quarter.

We saw a noticeable improvement in our volumes across our business segments, especially in foodservice as consumers recover from the COVID-19 pandemic. We expect this trend to continue into the second-half of 2021.

On the cost side, we saw a similar dynamic as across the industry with inflation in raw material and logistics putting pressure on margins, as input prices for resin and paper rose substantially. As you know, these input costs are linked to indexes and the lag in pricing recovery impacted Q2.

Assuming the rate of increases in input slow or turn around, we would expect it to recover raw material cost in the second-half. In Q2, we began to make progress in turning around our beverage merchandising business. While we are pleased with the progress, there's still more to be done.

As part of that plan, we are pleased to announce a new addition to our team. Byron Racki will be joining us as the President of our Beverage Merchandising unit effective August 16. He brings a wealth of knowledge and experience in the paper industry, including a successful turnaround history, and we look forward to having him join our team.

I'm very proud of our teams as they remain focused on maximizing our businesses to service our customers and meet our stakeholders' expectations. Please now turn to Slide number 4. During this presentation, we will discuss key business takeaways and second quarter 2021 highlights. We'll provide a business update.

We'll go through our second quarter financial performance, and discuss our full year 2021 outlook. We will conclude with questions-and-answers. Please now turn to Slide 6. Our second quarter results saw a material improvement to the top-line when compared to the peak impact of the pandemic in 2Q, 2020.

In Foodservice, the segment most acutely impacted by COVID-19 in the second quarter of 2020, we saw a healthy recovery with volumes up 33% year-over-year, and within 1% of the second quarter 2019 levels. In Food Merchandising, we saw volumes improve by 4%, and they were within 1% of the second quarter of 2019 levels.

The Beverage Merchandising segment saw a volume improvement of 13%, with volumes now reaching above what we saw in the second quarter of 2019 by 3%. As we had indicated on the last earnings call, despite the volume improvement, EBITDA margins were pressured in the quarter due to the impacts of inflation and higher material and logistics costs.

We increased prices in Q2 to offset some of these cost increases. We will continue to monitor inflation carefully, take further price actions as appropriate. We anticipate margin recovery through the remainder of 2021 and beyond.

We are encouraged by the healthy recovery and continued improvement in volumes, and are taking the appropriate steps to navigate the labor shortages, continued escalations in raw material costs, and a possible uncertainty due to the Delta variant around COVID-19. In the past few weeks, we have also made some important announcements.

We have provided our first update and plan of action from our Beverage Merchandising operational review, with the decision to exit the coated ground wood paper business by the end of 2021. It was a difficult decision, but necessary to help us focus more on our core competency.

We also announced the execution of an agreement that will reduce our gross pension liabilities by $950 million. We funded this transaction using existing plan assets. We believe these actions are in the best long-term interest of the company. Please now turn your attention to Slide 7. Now, let's move to Q2, 2021 highlights.

Net revenue of $1.352 billion was up 22% from Q2 of 2020, as we saw a strong volume recovery from the prior year when we experienced the biggest negative impact from COVID-19. Net income from continuing operations was $8 million, and earnings per share from continuing operations was $0.05 per share.

Adjusted EBITDA was $130 million for the quarter, up 2% from Q2 of 2020 due to strong volume recovery and better pricing. The quarter was impacted by $11 million from Winter Storm Uri. Free cash flow, defined as adjusted EBITDA less CapEx was $59 million.

Finally, our strategic investment program is on track and delivered $14 million of additional annualized adjusted EBITDA benefit in the second quarter. If I could turn your attention to Slide 8. Turning to our year-to-date highlights, net revenue was up 8% to $2.516 billion due to strong volume recovery and increased pricing.

Year-to-date adjusted EBITDA was $207 million, which includes a $50 million one-time impact from Winter Storm Uri, an estimated $43 million impact from COVID-19, and a $16 million impact from a planned cold mill outage. Please now turn to Slide 10.

As we have previously discussed, Pactiv Evergreen continues to have many EBITDA growth levers that will deliver benefits in 2021 and beyond. We're starting to see the impact from some of these levers as we see strong year-over-year volumes as the economy recovers.

We believe that in addition to the economic recovery, the secular themes around sustainability, shift to more online ordering, delivery, and takeout will also help drive our volume growth. We also remain focused on cost reduction initiatives and optimization, especially in the current environment of higher raw materials and logistics costs.

If I could turn your attention to Slide 11, we are continuing on our ESG journey and remain focused on initiatives around the planet, products, people, and governance. When it comes to essential metrics like greenhouse gas emissions, energy, water, and waste, we know we can't manage what we don't measure.

For that reason, we have identified a best-in-class platform that will allow us to better track these key metrics at all of our 60 plus facilities. After this robust data gathering exercise, we plan to be able to set performance targets at both the facility and corporate levels.

Related to our products pillar, we continue to build 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. Our long standing commitment to the environment and customer choice continued during the second quarter.

We launched 13 new product SKUs, which included first-to-market, tamper-evident French fry cartons and tamper-evident take-out containers, both made of paperboard and support today's growing delivery market. Additionally, we have expanded our meat tray offering with a new version made from recyclable PET.

That brings the total number of new items we've introduced to 97 in the last year and a half. Diversity, equity, and inclusion is top of mind for Pactiv Evergreen, as it is for a growing number of companies. We have created a new internal DEI team and are undergoing a diversity spend analysis of our suppliers.

This will inform our future policy and help us to understand where we can make improvements. Finally, we recognize the critical role our board plays in overseeing our ESG initiatives. The directors recently formalized their responsibilities as they relate to ESG, and we'll continue to receive quarterly updates from our Chief Sustainability Officer.

More details on these and other activities may be found at our investors.pactivevergreen.com in the ESG section. If I could turn your attention to Slide 12, we shared this slide in the last quarter to provide an overview of our strategy to return to a more profitable Pactiv Evergreen.

As an update, we remain on track to complete our strategic investment program in 2021. We've announced our first steps in the Beverage Merchandising operational review with the exiting of the coated ground wood business. We also remain on track with the planning of our next generation Pactiv Evergreen waste elimination program.

There will be more to come on these programs later in the year. With that, I'll now turn it over to Mike Ragen for a detailed financial review..

Thanks, Mike. Moving to Slide 14, looking at our second quarter 2021 financial performance, net revenue was $1.352 billion versus $1.107 billion in the same period last year, an increase of 22%.

The increase was primarily due to higher sales volume largely due to higher demand as the economy recovers from the COVID-19 pandemic, as well as favorable pricing. Adjusted EBITDA was $130 million versus $127 million in the same period last year.

The increase was primarily due to higher sales volume and favorable pricing, mostly offset by material costs net of higher costs passed through to customers, higher logistics costs, and higher manufacturing costs in our Beverage Merchandising segment.

Free cash flow, defined as adjusted EBITDA less CapEx was unfavorable to the same period last year due to higher capital expenditures. Moving to Slide 15, looking at our year-to-date 2021 financial performance, net revenue was $2.516 billion versus $2.319 billion in the same period last year, an increase of 8%.

The increase was primarily due to higher sales volume largely due to the higher demand as the economy recovers from the COVID-19 pandemic, as well as favorable pricing. Adjusted EBITDA was $207 million versus $272 million in the same period last year.

The decrease was primarily due to the impact of Winter Storm Uri, the continued impact from COVID-19, and incremental costs from a cold mill outage. Free cash flow, defined as adjusted EBITDA less CapEx was unfavorable to the same period last year due to lower adjusted EBITDA. Moving to Slide 16, and our results by segment for Q2.

Our Foodservice segment saw net revenues up 41%, driven by strong volume recovery and higher pricing to recover raw material cost increases. Foodservice volumes for the quarter were up 33% on 2020, and within 1% of 2019 volumes.

Adjusted EBITDA for the segment was up 88% versus same period last year due to strong sales volumes, partially offset by higher logistics costs and higher material costs. Our Food Merchandising segment saw net revenues up 11%, driven by favorable pricing and volume.

Food Merchandising volumes for the quarter were up 4% on 2020, and within 1% of 2019 volumes. The slight decrease in adjusted EBITDA was due to higher logistics and manufacturing costs, mostly offset by higher sales volume. Our Beverage Merchandising segment saw net revenues up 11%, driven by strong volume recovery.

Adjusted EBITDA for the segment was down $23 million versus same period last year. The key drivers being higher manufacturing costs, higher material and logistics costs, and unfavorable pricing and customer mix, partially offset by higher sales volume. Moving to Slide 17, here, we estimate the impact of COVID-19 and Winter Storm Uri to our business.

The year-to-date adjusted EBITDA impact of COVID-19 was $43 million, mostly driven by volume, price, and higher manufacturing costs, most notably in our Foodservice and Beverage Merchandising segments. In Q1, Winter Storm Uri impacted our business.

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. The year-to-date adjusted EBITDA impact is $50 million. We do not expect any further impact.

Moving to Slide 19, looking at our outlook for 2021, the ultimate impact of the COVID-19 pandemic to Pactiv Evergreen remains uncertain. In our forecast, 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 eventuate.

We've been neither conservative nor aggressive in these assumptions. We are maintaining our full year adjusted EBITDA guidance at $630 million to $645 million. We expect the volume recovery to continue through the second-half of the year, with key risks to our forecast being material cost pressures and labor shortages.

We continue to push price to recover these cost increases. Thank you for your time.

As an appendix to the presentation, we have included Q2 year-to-date highlights by segment, Q2 and Q2 year-to-date revenue and adjusted EBITDA bridges versus same period last year, consolidated statements of income loss, a reconciliation of net income loss through 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, the second quarter came in consistent with our expectations and the guidance we provided at the end of Q1. As consumers return to pre-pandemic activities, we anticipate continued increases in volume in the second-half of 2021.

If raw material input costs moderate, our contracted pricing actions will catch up and lead to improved margins. Long-term, we remain committed to the plans we have in place to improve our Beverage Merchandizing business. We took an important step by exiting the coated ground wood segment and are very pleased to have Byron Racki joining our team.

Across the business, we are intensively focused on increasing productivity, reducing costs, and taking steps to maximize our cash balances. We will monitor closely the rate of inflation and price our products appropriately in the marketplace.

Finally, I'm confident that the people of Pactiv Evergreen will work hard every day to serve our customers and enhance the value of the company to all of our stakeholders. With that, we will now open it up for questions.

Operator?.

Thank you. [Operator Instructions] And our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question..

Hey, guys. Good morning.

On the Foodservice improvement, which is quite significant in 2Q versus the 1Q run rate, do you think there was any sort of benefit from inventory restocking as mobility increases and channels get sort of normalized? And then also, was there any prebuy ahead of pretty significant resin cost and ahead of your own price increases? Or, was that not the case?.

So, hi, Ghansham. This is Mike Ragen. So what I'll tell you is I can't be 100% certain on either of those things. Having said that, we have been working hard to service every single customer. We've been very measured in what we've pushed out, because labor challenges continue to be a major problem in plants, and we're working hard on those.

And where we would see that, where we would see any prebuy prior to price increases or restocks, we would have held back, not because we don't want to fulfill those orders.

It's simply because the stress on the whole supply chain, whether it's the inward raw materials all the way through to our own manufacturing, our own inventory levels, et cetera, et cetera, plus the tightness of the logistics market, has meant that we've been servicing people to what we think is really they're out the door.

And I think a lot of that, we see some of our key customers, we see their out-the-door sales and they're flying as well. So we're not really seeing that. But I can't say with 100% certainty that there isn't pockets of it..

Got it. And then for my second question, I mean, obviously, $207 million of EBITDA for the first half and a pretty significant step-up in the back half.

A, can you sort of give us a breakdown between the weighting between 3Q and 4Q? And then second, what was unfavorable price cost do you think for 2Q? And then what do you think a realistic number is for 3Q based on what you know at this point?.

Yeah. So the unfavorable price cost in Q2 was around $52 million. So it hit us hard. Just taking a step back in terms of the halves, I just want to give a bit of background because I know that this is going to be something that people are going to ask me.

So look, when we did our last forecast, we would have expected a pretty even balance between the two - the third and the fourth quarter. And you guys can infer from our guidance what those numbers would be. As to our year-to-date numbers, we kind of have come in where we said we'd be.

And we would have expected third and fourth quarter to be approximately half each of the remainder of the year. When we did our Q1 guidance, we were expecting year-on-year around $300 million in raw material cost increases due to rates. That's gone up to $400 million. And as you know, we chase price. We have a circa four and a half month lag.

And so what I'll tell you is, while we've maintained our guidance, Mike highlighted some risks and so did I when I talked to the guidance, there's been a push of the EBITDA from Q3 into Q4 to the extent of sort of $40 million to $50 million.

So where I would have thought that Q3 and Q4 would have been the same or similar sort of EBITDAs, now there's been a sort of a push of that out into Q4.

Does that answer your question, Ghansham?.

It does. Thank you so much..

Thanks..

And our next question comes from the line of Kyle White with Deutsche Bank. Please proceed with your question..

Hey, good morning. Thanks for taking the question. I wanted to follow up on the price-cost that you just laid out. I guess I'm a little confused if I look at Slide 23, the kind of the year-over-year bridge that you have, you have a pricing mix of $50 million and then a material headwind of $70 million.

One, can you break out the parts of the material headwind? How much was driven by kind of lag in the pass-through of resin? And then does that mean mix was roughly a $32 million benefit based on what you just said price cost was? Thanks..

Sorry. So you said that quite quickly, sorry.

So Slide 23, did you say?.

Yes. Just at the end where you have the kind of the bridge on EBITDA year-over-year..

Got it. Yeah. So what I'll tell you is the, what I'd call, spread, price mix, and material, you can see there, that's negative $20 million. And you can also see that there's higher logistics costs of around $17 million and higher manufacturing costs there. Those higher manufacturing and logistics costs are mostly driven by rate.

And so when I look at this, that bridge, the price mix, we are pushing price to recover not only the materials but also higher labor costs and higher logistics costs.

And so the net debt is really the number that you should really be looking at, not just the price mix versus material because we try to cover off the whole inflation rather than just materials only.

Does that answer your question, Kyle?.

Yes, that does. That makes sense. I see how you get to the $52 million now on that.

Could I just follow up? How much of the material was driven by the lag in the pass-through of resin, though?.

In terms of the difference there, it's about $30 million..

Got it. That's helpful.

And then my second question, could you just kind of discuss the rationale for exiting the kind of the coated ground wood market? And then what kind of financial implications should we expect from this decision?.

Yeah. Okay. So I'll - because I'm answering questions at the moment, I'll answer that, and then Mike can come in after me. That's sort of a high level. So in terms of the coated ground wood market, I don't think anyone - it's no surprise to anyone that magazines are - have gone down even worse through the pandemic.

And so for us, that's meant an obvious reduction in volume and reduction in price. So not to mention that this is in a - we produce this in a plant where we also produce liquid packaging board, which is our most important product, which goes into our cartons and that we sell on the open market.

And in that facility, we have challenges around labor, and we're constantly investing. So first and foremost, there's a financial implication here. In terms of last year's sort of EBITDA numbers, look - and obviously, with price and volumes changing all the time, I'll just talk to last year.

Look, it would be probably a positive EBITDA benefit of around $10-ish million by closing this down. But more importantly, we're going to be avoiding $15 million to $20 million of CapEx on a line of product that is in decline, and that's per annum, $15 million to $20 million per annum. It's a dying market. We don't need to be in it.

And oh, by the way, what we can do is we can protect our profitable core business better in the Pine Bluff mill. We can focus on producing liquid packaging board. We can concentrate the expertise in people in that mill on producing our most profitable product.

So it's very much cash flow positive and also allows us to concentrate more on our core business.

Mike, do you have anything to add?.

No, Mike, I think you said it well. I would say summarizing what you said, it's better financially for us on a lot of fronts. But bigger picture, it declutters our mill and lets us get back to the basics..

Got it. Sounds good. Appreciate all the details..

And our next question comes from the line of Anojja Shah with BMO Capital Markets. Please proceed with your question..

Hi. Good morning, everyone. I just wanted to go back to the inflation pressure since it's such a big issue. You managed to hold guidance constant for the full year, as you said, which is quite an achievement given that inflation.

What are the offsetting factors? Are you getting help from, I guess, rising paper, rising SBS prices? Can you just walk us through the offsets there?.

So it's - Anojja, how are you? It's Mike Ragen again. It's a bit of a nice fight at the moment let me tell you about that. First of all, we're out getting price, that obviously lags. I think you can obviously see the volume tailwinds that we're getting. We have upped our procurement efforts.

Our team is working hard to try and find offsets to hold back on inflation where we can. And we continue to drive our strategic investment program to realize savings out of that. And in all the other programs we have on the go in every single plant. So there's a lot going on. Those are the key things that we're doing.

I think the price increases are pretty much - we're just pushing price everywhere that we possibly can..

Okay. Thank you. And I just wanted to go back to that pension transfer that you announced.

Does that mean - can you just talk through any financial implications? And does it mean you will no longer have an underfunded position in your pension once it's done?.

So at the moment, the pension liability or the net position is - and this changes on a daily basis, but it's circa 99% funded. So somewhere between 98% and 99%. What we've done is we have effectively transferred both assets and liabilities to an external insurer. There's no detriment to pensioners, but it reduces that risk on our balance sheet.

So where we had circa $4.2 billion of liabilities in the past, we now have $1 billion less, round numbers, and we have $1 billion less assets, round numbers. You can see in the announcement, that there was - or there will be a profit recognized from that, which would mean that by a small margin, we transferred less assets than liabilities across.

The whole idea of this is as the pension gets more and more funded to reduce the risk to our business, to reduce the risk to future cash flows, and we've taken, let's call it, 25% of our liabilities out. So it's a really good result for us with no detriment to pensioners..

Yeah. Got it. That's clear. Thank you very much..

The only other add, Mike, I would say is we didn't use any of our cash to do this. This was all done with assets, just to be clear..

Yeah. That's correct..

And our next question comes from the line of Anthony Pettinari with Citigroup. Please proceed with your question..

Hi. This is Asher Sohnen standing in for Anthony. Around the time of the IPO, I think there was a view that company EBITDA margins could ultimately get back to more historical levels. I think you did around 17% margins in 2016, 2017. And there's obviously a lot of moving pieces with inflation, COVID, and the beverage review.

But looking longer-term, do you see any structural reason that you can't ultimately get back to the sort of mid- to high-teen EBITDA margins? Maybe anything structurally changed for either the three businesses?.

I'll answer that, and then Mike, you can weigh in as you want. Short answer is no. I don't see any - well, I do see hard work ahead of us, absolutely. But I think we can get there. If I look at our Foodservice business over the last couple of years, we were hit by inflation pressures. And we were obviously hit by COVID.

However, we're continuing to push price. Our margins are coming back. And we would expect to see improvement through all of the various programs we have, most notably the Strategic Investment Program. And so I think we can get back to historical levels there.

In terms of Food Merchandising, Food Merchandising has historically been above that sort of the average of the business. And so similarly, they should see tailwinds on cost as the Strategic Investment Program rolls in. And I guess then when we look at the Beverage Merchandising business, it's been suffering. And it's been suffering for a few reasons.

COVID has impacted it. We had Winter Storm Uri. We've had a lot of investment in our mills and downtime associated with that. In terms of getting back to those historical margins, well, you heard me talk about coated ground wood. While negative EBITDA margins, we'll lose sales, but ordinarily, that's going to help.

In terms of if you've got negative EBITDA margins as a result of a product in your portfolio and you discontinue it, well, that will be accretive to the margins. And then it comes down to returning the mills to somewhere near to where they've historically run.

So from our perspective, the ongoing business pieces in the Beverage Merchandising segment, they can absolutely, on a weighted-average basis, get back up to historical levels. So I mean, it's a long-winded way of me going back to my initial point, which is yes, I think we can get back there..

Thanks. That's very helpful.

Is it just possible to talk about the performance of the first choice portfolio and your other sustainability products? Are they growing faster than company average? And then just from a broader ESG perspective, are you seeing any particular consumer preferences within substrates, for example, a faster growth in paper versus plastic or metal?.

Okay. In terms -.

Do you want, Mike? Yes. I think right now, we're in an environment where people will take any substrate they can get. So it's tough to answer that. There's no preference per se, and we have shifted customers to our more earth choice and environmentally friendly substrates.

But we've actually, if anything, seen an acceptance of any substrate, particularly when you look at our protein tray or meat business or protein businesses where we saw a large transfer to other substrates that we've had to rebirth some of the less earth friendly assets to meet demand.

So it's a difficult way of saying that right now, demand is outpacing, I think, the priority on some of the substrates. And I think it will be that way until inventories and the supply chain pressures reduce..

Thanks. I'll turn it over..

And our next question comes from the line of George Staphos with Bank of America Securities. Please proceed with your question..

Hi. This is [indiscernible] sitting in on behalf of George today. Just looking at your Strategic Investment Program, it appears that there was a bit of a shift in spending from automation to combined digital transformation, supply chain, and cost reduction.

What was the main driver behind this?.

So in terms of - so your question really goes to the total spend on the digital transformation, integrated supply chain, and cost reduction.

Is that what you're asking, sorry?.

Correct. And kind of just the split between those and kind of why there may have been a shift from automation to the others..

Yeah. So I think automation, we've already spent the full program. However, we're continuing on with that. And we'll continue to push automation. And not only because - we're doing it more because now we're shifting our focus from pure cost out to we need to service our customers and there's a war for people out there at the moment.

We just can't get enough people into plants. So we're going to have to automate positions out. So our automation program continues at pace.

In terms of the digital transformation piece and the integrated supply chain piece, other areas where we're sort of doubling down, I think it's fair to say on our integrated supply chain piece, we started the journey on a five-level journey, we were probably a one. I would say we're a four. We're continuing to invest.

We're continuing to invest in people, into systems. And we want to get to a five. And so we're continuing to invest there. In terms of digital transformation, we've done a lot, but I would say we can do a lot more. So again, we're continuing to invest there. So in terms of that shift, numbers on a page may look like we're shifting.

Like it's almost like we're doubling down, in my opinion, on all of those categories..

The thing I would add, Mike, is just you shouldn't think of these things mutually exclusive. Digital enablement enables automation. I mean, there's a lot of cross-pollination. It's hard to draw the line. So we haven't changed the geography of our spend. We may bucket it or label it different, but it is interlinked.

Digital enablement does enable some of the automation, and there is some cross pollination. So I wouldn't take any of the bucketing as us backing off one or the other. And to Mike's point, it's actually us leaning in much smarter with cross pollinated initiatives..

Great. That's helpful. And then I guess just going back to the reduction of the pension liability.

Will this impact earnings in any way with regards to pension income going away?.

Yeah. I think pension income, it's adjusted out of EBITDA, but it's obvious a net income benefit at the moment where we're earning money off the assets. So if we have less assets, arguably, we'll earn less off that. But to us, earning money off a pension is not really where we're focused.

What we're focused on is reducing risk and making sure that the pensioners are looked after and reducing the risk of having to pay out large amounts in the future. And to us, that's far more important than the - almost a noncash profit number that's shown in our P&L for pension income..

Great. Thanks..

Thanks..

And our next question comes from the line of Sam McGovern with Credit Suisse. Please proceed with your question..

Hi, guys. Good morning. Just with regard to the working capital line, when I look year over year, obviously, it's sort of breakeven in the first six months of this year versus a significant use of cash a year ago.

How should we look at what that looks like in the back half of this year and what we should expect going forward?.

number one, being the demand and the snapback; and number two, because of our integrated supply chain program, we've been working toward optimizing our inventory levels. And so what we would expect to see in the second half of the year is as raw materials stabilize, we wouldn't expect to see a use of cash from that.

However, our physical inventory levels will probably increase a bit as we get our feet underneath us in our plants and the snapback becomes more normalized..

Got it. That's helpful. And hopefully, my audio is a little better now. Getting back to Ghansham's question earlier about prebuying and sort of the restocking ahead of reopening. I mean, it sounds like you feel like that really hasn't been the case.

I mean, in terms of what you guys are seeing week by week or the conversations you're having with your customer base, I mean, what are they seeing in terms of a return to normal? Are they seeing changed consumer behaviors? Or, is there anything that makes you feel like the business looks different a year or two from now versus what it was pre-COVID?.

I can take a run at that, Mike, and then you can fill in..

Okay. Good..

Yeah. I mean, there's certainly some shifting in the consumer. Obviously, as mobility increases, I think the buy-in of home delivery and takeout, there's going to be - all signs point to a new normal. And so the shift in categories for us, there's things we're tracking that you look at people's return to work.

Largely, people aren't coming into the office. So the shift from a hot cup of coffee in the morning, like a Starbucks or something like that, they're getting up in the middle of the day and getting a cold cup. And so shifts from hot cups to cold cups is something that is putting pressure on the cold cup category or the poly cups.

We're seeing that on the takeout side with our takeout to go containers. I think of the numbers in the mid-40% of the meals now are in the home but in a takeout or delivery fashion. And that's a big shift. And as those things stick and consumer behavior moderates, who knows what happens two years from now.

But what we can say is the pressure it's putting on the supply chain, not just with our customers, but on the manufacturing side, even outside of our business, I'm not sure that until those capacities and those categories catch up, that that pressure goes away. And so in terms of rebuilds of inventories, I would say it's slim.

I don't think anybody is getting out in front of that yet based on our customer discussions. And largely, the snapback specific to categories, I think that's a - if somebody had a crystal ball, we'd love to see it.

But it's, like Mike said, a nice light in terms of our ability to address that shift in consumer demand and where the categories that will win and lose end up. And so when I said sustainability being a focus, the question around where our ESG-friendly product set, people are taking any product they can get right now still.

And so until that moderates, I think this pressure is here to stay a bit. And we're going to see that pressure on the supply chain. And our customers are feeling it just like we are..

Okay, great. Thank you very much. I'll pass on..

[Operator Instructions] Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question..

Great. Thanks for taking my questions. Yeah. I guess congrats on the turnaround in a couple of those businesses there and especially Bev Merch. So I just wanted to, I guess, get an update on your thoughts here.

As you kind of now turn the corner here or at least kind of look at the operations a little bit more, would you say that you're well on your way to some of the improvements in Bev Merch in the mill operations? And then similarly, with Foodservice, I guess, maybe you can just characterize as to if there's any specifics that you're looking forward to signal that the business is kind of back to a full recovery.

What should we be kind of thinking of in that vein? Thanks..

Yeah. So I'll just say that nobody has declared victory on the Beverage Merch business within our team here. I think we're still largely in recovery mode and while we've done a lot to diagnose the business, we still have a lot to do to bring our mills back to what I consider standard and best practice. And in our food, it's really a tale of two cities.

So controllable elements of the Beverage Merch, we feel like we've got a handle on the fundamentals in the business. We've got a handle on, and we've made some decisions around strategic product as we've shared on the coated ground wood. And the teams are focused on the right stuff. So time is our friend and time is our enemy there.

On the food - in our food businesses, I think it's largely volumes are recovering nicely. If things continue the way we anticipate and we're able to see the input cost and the input supplies moderate, we're well-positioned to see the - I feel really good about where we are in terms of our ability to perform.

And our supply chain engine will function, and we have every reason to win in that space controllably. And certainly, the manageable elements are what we're focused on there. So controllable elements of the beverage business well into uncontrollable elements or the manageable elements of our foodservice business are understood and we're tracking..

Understood. And just as a follow-up, when you think about price-cost, obviously, you've taken some action here and you continue to take action to offset the inflation.

Do you usually hold on to those price increases, I guess, when raw materials recede? Maybe you can just discuss how we should think about '22, assuming raw materials are stable from here..

So in terms of whether or not we hold on to price increases, look, most of our business is contracted. And if raw material goes up, then we follow on price. So essentially, if raw materials go down, prices will go down, but there will be a lag to that, similarly to when the raw materials go up.

In terms of where we're not contracted, we would aim to, as most people do, hold on to price if we can. Ultimately, I guess there's going to be pressure on those prices depending on what happens with raw materials. It's a competitive market. We'd expect competitors to - as materials go down, to take prices down.

But we would logically try to hold on to price, but there's no guarantees there. So next year - we have been lagging in terms of cost inflation and getting price back. And so there might be a little bit of a tailwind next year. But that all depends on what happens with raw materials..

Okay. Great. Thanks..

And our next question comes from the line of Andy Scheffer with Onex Credit Partners. Please proceed with your question..

Good morning. Thanks for taking my question.

In terms of exiting the coated ground wood, can you describe for us what the cash costs might be and then the CapEx for converting that over to coated carton? And then how does the timing work in terms of you exit by the end of the year? Does that mean that you fully converted that line by the end of the year? Or is that - does that go into 2022?.

So I'll just speak to the fact that there is no planned conversion. I just want to be clear. This isn't a product shift. This is a takeout of capacity. I don't want to miss-set the table that this is a shift of our resource or our assets. So there's no strategic element of that. No addition of capacities. I'll let you talk to the numbers, Mike..

In terms of the costs, you know, we recognized in the quarter some costs around severance. It was circa $7 million. And then there will be some CapEx spend over the next few years that is really around reconfiguring various pieces of the mill. And it will be in the realm of $14 million, $15 million..

Okay. Thank you. And then if you could give us any insight in terms of what you're seeing currently on the raw material front in terms of - or are they leveling off abating, maddeningly holding steady, not going down? Just what you're seeing because prices that we as investors may see don't always correlate exactly on the timing front.

And any discussion there would be helpful..

So at the moment, in terms of raw materials, it's a week-to-week proposition, I'll say. And supply chains are tight. It varies by the type of raw material, whether it's polyethylene, polystyrene, polypropylene, PET, board. All of those things have different dynamics in the market.

What we are seeing, though, is that material costs are not really abating at the moment. There has been some ups, some downs, but they're not coming off. So without getting into specific substrates, it's a little - I've sort of got to answer in a very general way like that..

Thank you..

And we have no further questions over the phone lines at this time. Please continue with your presentation or closing remarks..

Great. Thank you, operator. Thank you, everyone, for your time today, and we look forward to catching up with you later. If you have any further questions, please feel free to reach out to me. Thanks..

Thank you..

Thank you..

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line..