Good day, and welcome to the Pactiv Evergreen, Inc. First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would like to turn the conference over to Dhaval Patel, Head 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 2022 earnings call. With me on the call today we have Michael King, Chief Executive Officer; and Michael Ragen, 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 will include forward-looking statements and including statements regarding our guidance for 2022.

These forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by our forward-looking statement. Therefore, you should not put undue reliance on those statements.

These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings including our most recent Annual Report on Form 10-K and our upcoming quarterly report on Form 10-Q for more detailed discussion on these 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 Pactiv Evergreen's, CEO Michael King.

Mike?.

Thanks, Dhaval. Good morning, everyone and welcome. Yesterday after the market close Pactiv Evergreen released its first quarter 2022 results. I'm pleased to report that we have started the year building off the momentum we saw late last year and realized strong year-over-year performance in the quarter.

Revenues were up due to strong pricing, while adjusted EBITDA benefited from the strong pricing net of higher cost as well as the benefit from the Fabri-Kal acquisition and the benefit from Winter Storm Uri and the scheduled cold mill outage, which did not reoccur this year.

In general, we are seeing more stability in our mill and converting operations and improved profitability in the business which is helping us start the year well.

It is also helping us to demonstrate our ability to deleverage the business as our LTM net debt to adjusted EBITDA ratio improved from 7.6 times at the end of 2021 to 6.2 times at the end of the first quarter and remains on track to be in the low-5s by year end, as we stated in the last quarter.

Let me now turn it over to Mike Ragen to walk us through some more detailed financials for our first quarter.

Mike?.

Thanks, Mike. Moving to slide 6 and touching on our Q1 2022 highlights. We are encouraged by what we see in our Q1 results this following a strong Q4 2021. Net revenue was $1.495 billion up 28% on prior year. Net income was $43 million with diluted EPS $0.24. And adjusted EBITDA was $182 million up 136% on prior year.

Moving to slide 8 and a deeper discussion of our Q1 2022 performance. Net revenue was $1.495 billion versus $1.164 billion in the same period last year, an increase of 28%. The increase primarily related to higher material costs passed through to customers and pricing actions plus the acquisition of Fabri-Kal.

Volume was down 5% primarily due to labor challenges and our exit of the coated groundwood paper business. Adjusted EBITDA was $182 million versus $77 million in the same period last year an increase of 136%.

The increase was primarily due to favorable pricing, the benefit from Winter Storm Uri and scheduled cold mill outage costs in Q1 2021 that did not recur and the impact of the Fabri-Kal acquisition partially offset by higher material, logistics and manufacturing costs.

Free cash flow defined as net cash flow provided by operating activities less CapEx was $70 million versus negative $51 million in the same period last year. Please note that we have updated how we define and discuss free cash flow.

We now define it as net cash flow provided by operating activities less CapEx versus previously defining it as adjusted EBITDA less CapEx. We believe the new definition is a more accurate proxy for our cash generation activities and is a definition that more closely aligns with our peers. Moving to Slide 9.

This slide helps to bridge Q1 year-on-year revenue and adjusted EBITDA. Looking at revenue, when compared to Q1 last year, the key drivers of our revenue growth were price/mix of $304 million and $93 million from the acquisition of Fabri-Kal net of a disposition, offset by lower volume.

For adjusted EBITDA, price/mix favorability more than offset higher costs. Also benefit of the Fabri-Kal acquisition added $22 million. Moving to Slide 10 and our results by segment for Q1. Our Foodservice segment saw net revenues up 54%, driven by higher pricing to recover COGS increases as well as the impact from the acquisition of Fabri-Kal.

Adjusted EBITDA for the segment was up 90% versus the same period last year, primarily due to favorable pricing and the impact from the acquisition of Fabri-Kal, partially offset by higher material manufacturing and logistics costs.

Our Food Merchandising segment saw net revenues up 18%, driven by favorable pricing, primarily due to higher material costs passed through to customers and pricing actions, partially offset by lower sales volume primarily due to labor shortages.

Adjusted EBITDA for the segment was up 9% versus the same period last year, due primarily to favorable pricing partially offset by higher material and manufacturing costs, lower sales volume and logistics costs.

Our Beverage Merchandising segment saw net revenues up 13%, driven by favorable pricing, primarily due to pricing actions and higher material costs passed through to customers and favorable product mix, partially offset by lower sales volume due to our exit from the coated groundwood business.

Adjusted EBITDA for the segment was $24 million versus negative $32 million in 2021.

The key drivers were higher pricing, the benefit related to $34 million of winter storm Uri costs and $16 million of scheduled cold mill outage costs in Q1 2021 that did not recur, partially offset by higher material, manufacturing and logistics costs I'll now pass it back to Mike King for further comments. .

Thanks, Mike. If I could have you please turn to Slide 12, I'll provide a brief update on our ESG progress before my closing remarks. When it comes to environmental, social and governance initiatives, we continue to make progress on our journey.

A highlight from the first quarter was our participation in the launch of McDonald's new circular clear cups sourced from equal parts of post-consumer recycled and biobased materials. What's particularly exciting is that the bio-based material is crafted in part from McDonald's used cooking oil.

These cups currently being trialed in 28 McDonald's stores in Georgia can also be recycled along with other polypropylene items.

In addition, an important highlight to mention is that we undertook an analysis of our climate-related risks and opportunities as well as examined scenarios to test our resilience in the face of physical and transitional risks. We expect this work will form the basis of future climate-related reports and other disclosures that we make.

To learn more, we invite shareholders to view our disclosures and other reports found at investors.pactivevergreen.com in the ESG section. Now please turn to Slide 13. While we're off to a good start for 2022, we are maintaining our adjusted EBITDA guidance of $705 million at this time.

We are seeing conditions in the labor markets start to improve and believe we remain on track to see those challenges moderate in the second half of 2022. At the height of our labor challenge, we had an over 10% vacancy rate across our enterprise but believe we are seeing the light at the end of the tunnel.

The next challenge we are working on is training up all of our new staff. And again, we are making good progress and believe we are on track to see the labor no longer be a drag on the business; again all by the second half of 2022.

We are also seeing continued progress on our mill operations and reliability in general for our operations across the enterprise but there also remains broad challenges and uncertainty in the market. Global energy prices have been significantly volatile due to the conflict in Europe.

While we have no direct operational impact from the conflict, the volatility in the global energy markets can impact our raw materials energy and logistics costs. The general inflationary pressures also remain elevated so we believe it is more prudent to maintain our guidance at $705 million for the full year.

At this time, I'd like to thank all of the Pactiv Evergreen workforce for their commitment and continued hard work to serve our customers and enhance the value of the company for all of our stakeholders. We remain focused on continuing to improve our production capabilities and service our customers to the best of our ability.

With that let us take your questions.

Operator?.

We will now begin the question-and-answer session [Operator Instructions] The first question is from Ghansham Panjabi with Baird. Please go ahead..

Thank you, Good morning, everybody. Michael, as you zoom out on the Foodservice segment the last couple of quarters Q4 up 4% and then down a little bit in the first quarter.

Was there any impact from prebuys, as customers try to adjust to resin variability during the quarter? I guess, I'm just trying to understand why that segment declined with relatively easy comps from a year ago first quarter. .

Yes, good question. So I think we were open as we -- actually Q4 and earlier as well, our goal is to also reestablish service levels and inventory. Our -- I wouldn't say that we've seen any demand changes. So to answer your question, no our customers would buy just about every unit we make still.

So the decline you see in our Foodservice segment specifically was really around our strategy to reestablish inventories on our C D and E items as well as we had a slow start to Q1 with Omicron. So our ability to service that January and up until late February was slowed by our own ability to deliver. .

Got you. And then for my second question, in terms of your embedded resin assumptions for the rest of the year obviously, there's a big spike in energy cost, natural gas is starting to blow out to the upside in the US as well and that's clearly a raw material for resin both of them are.

Just curious as to what your specific guidance is embedding at this point. .

Yes. Good morning, Ghansham. It's Mike Ragen here..

Good morning..

So we've assumed continued increases in resin as forecast in the curves. And also at the moment there are a number of force majeure events that we're seeing as well.

And this is one of the reasons why our guidance is -- we haven't raised the guidance, given the uncertainty around the resin markets just to give you a feel for -- through the end of the year what we're expecting to see in overall COGS.

Our year-on-year COGS increase just pure inflation will be over -- last year's COGS was around $4.9 billion $5 billion. Will be up over 10% 12% in aggregate COGS. And that's changed since we did our plan substantially.

So it's gone up by a couple of hundred million dollars, which is why we're very cautious about the back end of the year and that forecast. So our assumptions are to continue to trail up as per all of the various forecasts that are out there but we're also a little bit more pessimistic than what the forecast would say. .

Very clear. Thank you..

The next question is from Chris Parkinson with Mizuho. Please go ahead..

Great. Thank you, so much. You've made a very conscientious effort to improve the operations of various assets throughout your portfolio including the mills. And it feels that our effort has really taken hold especially over the last six to nine months, including some new managers.

Can you just give us a quick update on your let's say, near intermediate and perhaps even longer-term thoughts of those efforts and how do you assess your current performance? Thank you..

Yes. So we completely agree. I'd say the horizon you gave over the last six to nine months, we have started to see a shift in a few things at all of our operations. Not just our mills, have seen the benefit of us being able to fill more of our hourly workforce.

And so I think I had mentioned that during the height of the labor challenges, we were seeing near 10% if not just a little over 10% vacancy rate. Taking new approaches to get those seats filled has been a big help.

I think year-on-year across our enterprise, our OE our throughput rates have seen double-digit improvement and that's allowed us to start to reestablish inventories and service levels. The strong demand helped pull through some of that.

But at the same time, we've been able to be in a position for the first time in a long time to moderate how we want to -- we're not shipping everything we make anymore. We're reestablishing health and I expect that to continue. We've seen -- Q1 has been indicative of the same results both in our mills and in our converting operations.

And that fitness is benefiting our warehouse and distribution networks as well. And so that part -- the controllable part so to speak of our operations is on track and that plan is coming together. And some of the results, while we're going to talk a lot about our price/cost dynamic.

That's also enabled by just what you mentioned there and our ability to get after it in our operations. .

That's very helpful. And just as a quick follow-up.

Can you just give us a quick update on the Fabri-Kal acquisition, how that's going versus the original plan? And just given all the moving parts since the deal's closed what the rough EBIT contribution would be for this year versus let's say your initial assessment? Just any broad color would be greatly appreciated? Thank you very much..

I'll give a couple comments and then I'll let Mike give you the numbers. We're very -- we continue to be very pleased with our ability to get after synergies.

And that integration of that Fabri-Kal business I would say we're ahead of plan and have continued to find new ways to create values in both our historic Pactiv Evergreen businesses as well as in the Fabri-Kal business. So I would say generally we're very pleased. I'll let Mike speak to the numbers..

Yeah. Hi, Chris, it's Mike here. So the -- yeah, I would just reiterate what Mike said, we're going a lot faster. We'd expected the synergies to run over three to four years and we're hoping to have most of them done within two.

In terms of what the contribution this year will be we would expect somewhere between $60 million to $70 million for the full year. So we are really getting after the original synergies and we're looking to build on top of those as well..

Thank you as always..

The next question is from Arun Viswanathan with RBC Capital Markets. Please go ahead..

Great. Thanks for taking my question. Yeah, I guess, I just wanted to revisit the guidance. So a very nice beat in Foodservice so congrats on that, and looks like the pricing is really taking hold there. I understand that Bev Merch maybe still a work in progress.

But is it possible that your guidance is just conservative? I understand that the resin prices are still somewhat uncertain and we do see some increases for Q2.

But does it also assume that you give back some pricing as you move through the year, or I guess are you building in some conservatism when you think about the full-year outlook? And could it actually be better than what you're thinking?.

I would say we certainly are optimistic that it could be a little better. I would tell you that when we look at the uncertainty around oil and resin, the history is our teacher. Mike had mentioned the other several force majeures are already created some choppiness if you will in the supply chain of our major raw materials.

That's -- I would say it's us being realistic and not conservative. Secondly, the global supply chain currently is very choppy whether it's capital projects or machine purchases or imports on materials both from an inflationary and the cost and timing perspective it's certainly something that we've got to keep our eye on.

And I would say more back-half related for us. It's just Q2, I would say we feel we have pretty good visibility and I would say are very optimistic similar to this Q, but it's the back half of this year where the things I just mentioned are why we're maintaining our guidance. We've said all along….

On Bev Merch, I mean, is there a possibility that Bev Merch gets into the $30 million-plus range I guess with the work that you've completed in the mills and maybe some recovery on reopening?.

Well, I missed the front-end of your question I'm sorry..

I was just saying do you think that Bev Merch could get into the $30 million-plus range on EBITDA per quarter given a lot of the work that you've completed and some of the progress within the mills?.

Yeah. I don't think that -- I'll let Mike Ragen speak to the quarterly run rate, but $30 million a Q I think is within reach for sure..

Yeah. Arun, I think that $30 million a quarter absolutely is within reach or Beverage Merchandising. And we -- obviously there can be large costs with mill outages that swing that around quarter-on-quarter. But on average $30 million is -- we would in the future be hoping for a lot more than that. But this year that's a reasonable run rate.

I think just talking to and following on to what Mike said, I'd said to the earlier question from Ghansham that between when we did our budget or plan for this year, our COGS have increased a couple of hundred million dollars in terms of the full year forecast. So you talk about pricing coming down, we don't expect that.

Obviously, the market will do what it's going to do, but we've got to go and get another couple of hundred million dollars in pricing to cover that. So we see it the other way that with costs going up, we've got to go and get after price even more so than what we have. We saw the good results in the quarter and we are doing that.

But we -- as inflation keeps ticking up, we have to keep chasing this. So, that's where a lot of the risk is. Over and above that, with interest rates going up and all of these other different things going on in markets, demand may soften. So we're just looking at the full year in a pragmatic way.

We don't want to get ahead of ourselves even though we had a good Q1..

Thanks..

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

Hi, guys. Thanks for taking my question and congratulations on the quarter. And a couple of things too. One, it's a busy earnings day. Really appreciate you keeping the remarks short. Putting the release out last night helps the analyst. And congratulations on changing the FCF format as well to be in line with everybody else.

My question is guys one can you give us a bit more on the McDonald's cup number, one? Number 2, as you are restricting to some degree your shipments to rebuild inventories which is what you said last quarter so that's not a change, is that helping you at all in terms of being able to get more pricing which you need obviously given the inflation? And then lastly, as we look at the 2Q, I'm not trying to go too much quarter-by-quarter but I guess, I am to some degree, you're up against some tougher comps in Foodservice versus last year as I recall.

What's the outlook for volume growth for the Foodservice segment in 2Q? Thanks a lot and good luck on the quarter..

I'll jump on the McDonald's cup here. It's one of many streams we've got going from an innovation standpoint where we're partnering with our customers. Certainly, as we look for new ways to be sustainable to do -- to be a leader in the space of social responsibility, it's just one of the many things we've got going.

Specific to that, it was a collaboration really between McDonald's and our technical teams to bring something forward that no one had done really before using a circular approach. So we are excited to do it. We are optimistic that the 28 locations that are currently selling those cups, expands to something bigger.

And I think it's indicative of what you should expect from us in the future in terms of bringing interesting new and innovative sustainable approaches to the market..

Okay. And with regard to your other two questions there, George, in terms of restricting shipments and helping price, that's certainly not our intent at all. For us, it's all around getting service back to the levels -- the historical levels that our key customers expect of us and continuing to maintain those.

And we are seeing good progress in that regard. In terms of the tougher comps for Q2, in terms of Foodservice, we would say that we will be up year-on-year in Q2 when backing out the effect of Fabri-Kal 1% or 2%. Essentially, we have restored the inventory levels to where we want them to be for Foodservice.

And so, we would expect a normal flow of inventory out in Foodservice. So, we don't see any issues with Q2 year-on-year comps in terms of expected growth..

Thanks, Michael. I'll turn it over..

The next question is from Adam Samuelson with Goldman Sachs. Please go ahead..

Yes. Thank you. Good morning, everyone. I guess the first question is around the Food Merchandising outlook.

I'm just trying to get a sense of volumes in the period and the outlook going forward and maybe disaggregating the impact you've had around lower inventories and some of the conscious decisions you've made around rebuilding your own stocks versus lower end market demands.

And then, how do we think about those volume trends moving forward? And any specific categories or parts of the store that you would call out as being particularly, maybe stronger or weaker would be helpful. Thank you..

Yes. So our Food Merchandising business is -- from a segmentation standpoint, it includes our ag business, our egg business, our protein business and as well as some of our consumer business. So it's several channels. And it's -- there's not a one-size-fits-all answer.

But what I can tell you is similar to what you -- we've commented on Foodservice our approach is the same in terms of inventories. What we've noticed is between seasonality and some events like the avian influenza that we've seen with the poultry, it does have an impact on product availability which does impact demand.

So, we have seen some softening, but we do believe it's seasonal on products like egg. Conversely, we see demand rapidly increasing, given seasonality in demand on areas like our agriculture or our produce business. So it's a moving target in some of the channels.

So we're adapting and the goal to reestablish inventories and allow us to improve service levels is where we continue to see ourselves be strong. And that's what our plan is, is to win despite those one-off challenges in each of our segments. We're watching our consumer channels closely for demand.

Right now, through Q2, things seem to be fairly stable. But, again, with things we talked about in terms of this back half are something that specific to our Food Merch business, we're watching closely. .

Okay. All right. That's helpful. And then maybe following -- I think it was Chris' question earlier on Fabri-Kal, it seemed like the EBITDA framing for that business for this year was maybe higher than you would have said at the time of the acquisition.

What's that business growing organic volumes? And is that outlook improved, because that's going to start rolling into your base later in the year. So I'm just trying to think about how that starts to layer in..

Mike, do you want to take that one?.

Yes, sure. The business itself is growing in line with Foodservice volumes in -- particularly around the ESG-type products. The cups that Fabri-Kal sells are very much the recycled PET and other ESG-considered products. So we're seeing good growth there, in terms of those volumes.

In terms of the outlook in the latter part of the year, yes, we do expect as the synergies start to kick in, that we will see a lift from Fabri-Kal through the back half of the year..

Okay. And if I could just take a quick modeling question at the end. The corporate unallocated in the period was up pretty notably year-on-year.

And is there a cadence or anything noisy in there? And what should we think about for corporate unallocated for all of 2022?.

I'm expecting that, it will be reasonably consistent with the in-quarter results. So it will be up a little bit. We have added headcount. We've got higher personnel costs. And then over and above that, we're spending a lot more money on things like cybersecurity and those sorts of things. So we do expect it to be up and to continue to trend up..

Okay. I appreciate all that color. I'll pass it on. Thank you..

Okay..

The next question is from Anthony Pettinari with Citi. Please, go ahead..

Hi. This is actually Bryan Burgmeier sitting in for Anthony. I understand, Pactiv doesn't provide free cash flow guidance.

But is it possible to provide some context around free cash flow conversion for the year, with raw material costs rising, some other producers are citing a working capital headwind despite improved earnings, so I'm just trying to gauge that impact to Pactiv and if that could potentially impact deleveraging..

So we -- when we talked last quarter, I said that one of the headwinds in terms of free cash flow would be, that we'd be building working capital during the year. And so, I estimated a circa $100 million headwind on cash flow conversion, because we're building inventories.

The good news is that, we have been able to offset some of that in terms of improving our receivables and payables. And so, what I'd expect to see is that rather than that being $100 million it will be probably on an annual basis, December to December, probably more like $50 million increase.

So -- and what I mean by that is, inventory will continue to come -- to go up, but based off strong cash collections and other efforts around payables will offset some of that headwind on inventory..

Got it. Thanks for the color there. And on your full year EBITDA guidance, Foodservice was obviously really strong in 1Q. So I'm just trying to think about the different segments -- the level of year-over-year growth for the different segments for the full year.

Do you expect Foodservice to see the largest portion of that growth? Obviously, Beverage Merchandising was up quite a bit as well. I'm just trying to think about the year-over-year EBITDA growth and how that could layer into each segment..

Yeah sure. No doubt the Foodservice will see a lot of growth year-on-year. That's driven by the Fabri-Kal acquisition and then, natural growth as we've come back from COVID. And so, I guess in terms of where we're seeing it, we'd expect Foodservice to grow from last year slightly below $300 million to more like 400-ish.

And then, Beverage Merchandising, when I think about that segment, last year it had some big hits in terms of winter storm Uri and the flood in Canton. And so those are natural tailwinds for that segment of let's call it $50 million round numbers.

And then, over and above that we'll see improvement because of the closure of the coated groundwood complex at Pine Bluff and then, some other improvement there. So roughly speaking, we'd be going from the 40-odd million dollar sort of number last year to somewhere between $115 million and $130 million.

So -- and then the remainder would be in Food Merchandising potentially..

Got it. Thanks. Thanks Mike. Good luck in the quarter..

Thank you..

The next question is from Anojja Shah with BMO Capital Markets. Please go ahead..

Hi. Good morning everyone. I'm just thinking about the fact that consumers have been eating and cooking at home a lot more over the past two years.

Do you think some of that behavior is sticky? And then, medium-term demand, do you think demand for Foodservice might shake out lower than it was pre-pandemic?.

I think it will be more of a personal view than anything.

But in terms of people wanting to stay home and cook, I think there's some people would have -- I think what we're seeing is that people have started doing that, but people really want to get out and spend money and get out and go to restaurants, having said that, in this economic environment it's a little difficult to tell.

That was certainly what we had been seeing but what will happen in the future. I'm just not sure..

The thing I would add to that Mike is what we've seen with the home delivery. So where people are home that's correct, we've seen a significant shift in the consumers' behavior to the likes of a DoorDash or home delivery model which is from a takeout foodservice container standpoint additive to growth.

So, it's -- yeah, they're home, but they're buying in their food. Sorry..

No problem. All right makes sense. Okay. And then just one follow-up question, we've been hearing quite a bit recently about PFAS chemicals particularly -- in food packaging, but particularly in the QSR channel.

Do you have any comments or views on that?.

Not particularly. For our chemicals is something that's a challenge we're all faced with. And certainly, we're partnering with our customers to address the challenge that we all face. So is there a specific to that? It's something we're certainly aware of and taking it serious. Outside of that....

Yes, just if you're seeing any impacts like significant impact then?.

I wouldn't say significant impacts at this time..

Great. Thank you very much..

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

Hi. Good morning. Thanks for taking my question. Just wondering, if you could update us on your labor levels and where you're at relative to where you'd like to be? What's the current vacancy rate? And also on this do you have a sense of the headwind you're carrying from the -- I imagine the increased training that's going on as well? Thank you..

Yeah. I'll take this one Mike..

Sure..

So we -- in terms of where we are versus where we expected to be just as a bit of color we came into the year behind in terms of our labor levels as to what we planned. But now we're on track and actually slightly ahead. In terms of the vacancy rate Mike King had spoken before about being -- in the past we've been over 10% vacancy.

And then when you add over and above that, COVID-related absences we could see up to 15% vacancies at any point in time between the sickness absence and the actual shortage of labor employees. So now we're down at the circa 5% levels. And we're continuing to trend favorably there.

In terms of the headwind around training look we are spending whatever it takes to get people into our plants and trained up safely and to get them through our system to retain them. We are seeing a lot of turnover still. In terms of aggregate costs around that, our labor inflation in total is up over the 10% levels but mostly driven by our plants.

In terms of the training itself the costs associated with that are probably in the – somewhere around $30 million per annum. It's a difficult one to actually quantify because a lot of it is internal training. It's just stuff that our plant leadership does on a day-to-day basis.

Every single day they're out they're teaching people, but the direct cost would be around $20 million to $30 million increase year-on-year..

Got it. Thank you. And then you made a number of strategic decisions and divestments over the past year. You pruned the portfolio a little bit. You had the strategic review in the Beverage Merchandising segment.

Are you happy and content with the current portfolio now? Are you happy with the path forward that you see for that segment with the improved mill performance that you've talked about, or is anything in terms of the return threshold of that those mills make you more content to be the owners of that business or is it something to where maybe you're not the logical strategic owner of those two mills? Thanks..

Yeah. So what I'll say is our strategic review as I've mentioned in prior Qs is an ongoing iterative process. So both – all of our businesses as a part of our internal process, we continue to look at the portfolio and what makes sense and what might not.

In terms of Beverage Merch, I would say for where we are – we are pleased with our ability to improve our mill performance. And certainly, our converting operations continue to deliver and do well. I would say that, it would be irresponsible of us not to continue to move forward in the strategic review process.

We are looking at ways to further improve and enhance our portfolio. So it's still too early to say – to answer the latter part of your question – your line of questions there, but I would just say that our process continues. And as we make decisions, we will be very forthcoming with those decisions..

Got it. Thank you. Congrats on the strong quarter..

Thank you..

The next question is from Ed Brucker with Barclays. Please go ahead..

Hi. Thanks for taking the question, and congrats on the strong quarter, again. I just wanted to get your – or see if you're able to share the use of proceeds for the carton packaging machinery business in Asia. I think it was $335 million. Just wanted to see what you're planning to do with that..

Yeah. Good morning. At this stage, we'd be planning to pay down debt with that..

Got it. And then just from a capital allocation perspective and given that commentary, you're looking to pay down debt, you're looking to deleverage, but I just wanted to get your priority list, I guess, for how you view shareholder returns, how you view debt reduction, and then how you view potential M&A in the future as well..

Yeah. I don't think anything has changed there for us. We do want to deleverage. That's first and foremost what we want to do. In terms of paying the dividend, we do want to continue to do that. We think it's a good practice for us.

In terms of capital investment, we still think we're pushing ahead with our capital programs and investing into our business. We talked in the past of being somewhere around $290 million, $295 million this year in those investments. In terms of acquisitions, similar to Fabri-Kal, we are out hunting. We aren't doing anything like that.

But if the right thing comes along, we'd consider it. But that's nothing new there. So I think our priorities remain the same..

Yeah..

The last question is from Andy Scheffer with Onex Credit Partners. Please go ahead..

Hi. Good morning. Thanks for taking my question.

Regarding your comments on inflation in the back half of the year, is the hesitancy any concern about the ability to ultimately pass it through and customer pushback, or is it purely a timing issue?.

I would say the –.

It's the timing..

Yes, timing for sure..

It's a timing issue..

Okay. And then your comments on force majeures.

Can you expand a little bit upon that in terms of how – the size of them how often and the circumstances surrounding them?.

Yes. So the last 24 months seems to be a bit of a new normal when it comes to force majeure. And so whether it's chemical facilities, constituent factories or even some of our – the cracker facilities for these large resin companies, there's just events that are continuing to expose weakness all throughout the tiered supply chain.

And whether it's aluminum or it's styrene monomer, there seems to be a new weather event or a breakdown, equipment reliability concerns whether in the supply chain or even what's happening across the world have all led to just choppiness I would call it more than significant and it's put pressure and allocations on several of the constituent parts of our supply chain.

And that's something we've been faced with for the better part of the last 36 months and hasn't really slowed down..

Are you seeing the timing to work through those issues decline?.

I would say we're seeing – and as soon as I say this I'll regret it but the severity of some of these things has gotten better. The ability of our supply chain frankly to address them yes is improving albeit there's new and interesting ways that continue to pop up to have a force majeure..

Thank you.

We have one more question from James Finnerty with Citigroup. Please go ahead..

Thanks for taking my question. I hopped on late. I apologize if this has been answered already.

Just on the leverage side, what is the leverage goals over the longer term? And what debt should we expect you to be paying down as you look to delever the balance sheet?.

I think we – nothing has really changed in terms of where we want to be. Around three to four times would be a good target. And then in terms of what debt we have a 2025 maturity. We have term loans. Whatever makes sense at the time is really the answer I can give in terms of what we'll pay down..

Great. Thank you.

And then on the reiterated EBITDA guidance for the full year just given post first quarter, would you say you're more confident in that number today than you were as when you reported fourth quarter results?.

I think we – and I think we were confident in the number before and we're confident in it now. When we talked last quarter we discussed that we want to absolutely put a number out there that we can hit and that's what we're aiming to do. So we're confident – and we were confident then and are confident now..

Great. Thank you very much..

This concludes our Q&A session. I would like to turn the conference back over to Mike King for any closing remarks..

Thank you. Yes I would just like to say thank you for joining us here at the end of Q1. We look forward to another successful quarter and getting back to you guys at the next earnings. Thank you. This concludes our call. .

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