Good morning, and welcome to the Pactiv Evergreen, Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded today. I would now like to turn the conference over to Dhaval Patel. Please go ahead..

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen and welcome to our second quarter 2022 earnings call. With me on the call today we have Michael King, Chief Executive Officer; and Jon Bakhst, Chief Financial Officer.

Please visit the Events section on 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, 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 statements. Therefore, you should not put undue reliance on those statements.

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

The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements, except as required by law.

Lastly, during today's call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.

Our non-GAAP measures should not be considered in isolation or as a substitute for the 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 our 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 closed, Pactiv Evergreen released its second quarter 2022 results. I'm pleased to report that we had yet another strong quarter as the team continues to focus on and deliver improving business results.

Revenues continue to benefit from pricing due to lag raw material cost pass-throughs, while adjusted EBITDA benefited from the pricing net of higher costs, as well as the benefit from the Fabri-Kal acquisition. We continue to make steady progress across the organization over the past few quarters.

While COVID is still something we track, it's not impacting our business as significantly as it has in the past. The labor gap that we had highlighted last year and previously this year has narrowed considerably, thanks to the strong efforts across the organization. Finally, our profitability is improving versus last year's depressed levels.

All of this is possible because throughout the organization, we continue to drive and embrace a culture of excellence and continued improvement. We also saw better cube efficiencies, improved productivity and an increase in automation across our warehouses. In general, we are seeing more stable operations across all 3 segments.

At the same time, we are seeing higher raw materials and inflation cost, and we intend to take pricing actions where needed to return profitability to normalized levels. We've also delivered on our broader strategic initiatives as the integration of Fabri-Kal is proceeding ahead of plan.

And earlier this week, we also announced the close of the sale of our Asia-based business. The sale of the Asian business allows us to focus on our strong North American business while also enhancing our balance sheet. Finally, I'd like to take a moment to welcome Jon Baksht, our new Chief Financial Officer, to the team.

Jon, brings with him extensive financial expertise with prior experience as an investment banker as well as a CFO dealing with the public markets. We look forward to working with him and for all of you to get to know Jon. Let me now turn it over to Jon to walk us through a more detailed review of our financials in the second quarter.

Jon?.

Thanks, Mike. Before I begin my discussion of our financial results, I'd like to take a moment and thank Mike and the broader Pactiv Evergreen team for such a warm welcome to the company. It's exciting to be a part of an organization with a strong values and purpose-driven culture.

In my short time at the company, I'm impressed with the strong fundamentals of the business, while at the same time having opportunities to continue to build on the company's recent success. For those of you I haven't had the opportunity to meet yet, I'd like to give you a sense of what drew me to Pactiv Evergreen.

As a company recently taken public, I find the investment case for Pactiv Evergreen to be compelling and potentially overlooked by the broader market.

As most of you on the call today know and bears reinforcing, we are one of the largest producers of fresh food and beverage packaging in North America with scale and a nationwide footprint to provide a compelling value proposition for our customers, which includes leading market share in several product categories.

While we, like everyone, have experienced inflation and supply chain-driven headwinds, the underlying business remains resilient as evidenced by our results this quarter. Our extensive manufacturing, warehousing and distribution footprint positions us for further growth.

We are committed to a more sustainable future with 64% of our revenues in 2021 coming from products made with recycled, recyclable or renewable materials. Financially, we remain committed to our dividend policy, which currently provides a yield around 4%. I'm sure my enthusiasm is evident and I look forward to our continuing dialogue.

I'll now move into our financial results. Moving to Slide 6 and touching on our Q2 2022 highlights. As Mike stated, we continue to make steady progress and delivered another strong quarter. Net revenue was $1.64 billion, up 21% versus prior year. Net income was $74 million with diluted EPS of $0.40.

Adjusted EBITDA was $249 million, up 92% versus the prior year quarter, and our free cash flow for the quarter was negative $18 million. Moving to Slide 7. Looking at our year-to-date 2022 financial performance. Net revenue was $3.135 billion versus $2.516 billion in the same period last year, an increase of 25%.

The increase was primarily due to pricing pass-throughs and the Fabri-Kal acquisition, which offset volumes down 8%, primarily due to strong sales in the prior period as businesses and restaurants reopened post COVID-19 lockdowns, labor shortages and the exit of coated groundwood.

Adjusted EBITDA was $431 million versus $207 million in the same period last year. The improvement in EBITDA was driven by favorable pricing, net of material cost pass-through, improved and more stable operations that Mike referenced earlier as well as the acquisition of Fabri-Kal.

The increase in adjusted EBITDA also includes the benefit related to prior year period costs of $50 million from Winter Storm Uri. Free cash flow was $52 million. Moving to Slide 9 and a deeper discussion of our Q2 2022 performance. Net revenue was $1.64 billion versus $1.352 billion in the same period last year, an increase of 21%.

The increase primarily related to higher price mix due to material cost pass-through to customers and pricing actions plus the acquisition of Fabri-Kal. Volume was down 10%, primarily due to tough comps versus strong sales volume last year, labor challenges and our exit of the coated groundwood paper business.

Adjusted EBITDA was $249 million versus $130 million in the same period last year, an increase of 92%. The increase is primarily due to favorable pricing, net of material cost pass-through and the impact of the Fabri-Kal acquisition, partially offset by higher manufacturing costs, lower sales volume and higher employee-related and logistics costs.

I'd also note that net income benefited from a onetime positive litigation settlement of approximately $15 million in the quarter. This amount is reported in our other income line, but is not included in the calculation of adjusted EBITDA.

Free cash flow, defined as net cash flow provided by operating activities less CapEx, was negative $18 million versus $42 million in the same period last year. The negative cash outflow was largely due to a planned build in inventory of $154 million as a needed replenishment following shortages we experienced last year.

Our inventories are now at more normalized levels, which allows us to provide improved customer service levels. We do not expect significant inventory builds on a volume basis for the remainder of the year. Moving to Slide 10. This slide helps to bridge Q2 year-on-year revenue and adjusted EBITDA.

Looking at revenue when compared to Q2 last year, the key drivers of our revenue growth were price/mix of $309 million and $121 million from the acquisition of Fabri-Kal, offset by lower volume and FX.

For adjusted EBITDA, price/mix favorability and a $34 million benefit from the Fabri-Kal acquisition more than offset higher costs and some volume deterioration. Moving to Slide 11 and our results by segment for Q2.

Our Foodservice segment saw net revenues up 39%, driven by higher pricing to recover COGS increases as well as the impact from the acquisition of Fabri-Kal, which offset volumes down 9% versus strong prior-year sales volume.

Adjusted EBITDA for the segment was up $103 million versus the same period last year, primarily due to favorable pricing, net of material cost pass-through and the impact from the acquisition of Fabri-kal, partially offset by higher manufacturing costs, lower sales volume and higher employee-related costs.

Our Food Merchandising segment saw net revenues up 14%, driven by favorable pricing, primarily due to higher material cost pass-through to customers and pricing actions, partially offset by lower sales volume, primarily due to labor shortages.

Adjusted EBITDA for the segment was up 32% versus the same period last year due primarily to favorable pricing, net of material cost pass-through, partially offset by higher manufacturing costs and lower sales volume.

Our Beverage Merchandising segment saw net revenues up 9%, driven by favorable pricing primarily due to pricing actions, higher material cost pass-through to customers and favorable product mix, partially offset by lower sales volume primarily due to our exit from our coated groundwood business.

Adjusted EBITDA for the segment was $29 million versus $15 million in 2021. The key drivers were higher pricing partially offset by higher material, manufacturing, employee and logistic costs as well as an $11 million cost due to scheduled annual pulp mill outage. Moving to Slide 12.

We ended Q2 with $246 million in cash and $4.2 billion in total outstanding debt. As indicated in our press release earlier in the week, we have closed the sale of the Beverage Merchandising agent business, which will further strengthen our balance sheet.

We expect proceeds of approximately $300 million, net of estimated working capital adjustments and estimated taxes. Our net debt at the end of Q2 was around $4 billion and around $3.7 billion pro forma for the Asia business sale proceeds. We ended Q2 with a net debt to LTM adjusted EBITDA ratio of 5.3, well below the 7.6 at the end of 2021.

We expect our net leverage to be below 5 when we report our third quarter and fourth quarter results. Additionally, we are evaluating other alternatives to further deleverage the balance sheet. I'll now pass it back to Mike for further comments..

Thanks, Jon. If I can turn your attention to Slide 14. I'll provide a brief update on our ESG progress before my closing remarks. This year, we've put a lot of effort and resource on tracking and improving our performance in the ES&G fields. We've implemented a new operational sustainability data management system.

This allows us to analyze, report on and audit our energy, our emissions, our water and our waste data across the entire enterprise. As we finalize our environmental disclosures for 2021, we are proud to report an 18% Scope 1 and Scope 2 greenhouse gas emissions reduction between 2015 and 2021.

At Pactiv Evergreen, we promote responsible forestry, and we are committed to increasing the use of certified wood and promoting forest certifications. We recently published an updated sustainable forestry policy as well as new goals related to sustainable forestry.

As much as we value a sustainable supply chain, we're also committed to support our customers' efforts on their path to a sustainable future. In June, we published our Zero Waste Implementation Guide to provide Foodservice operators like recreational venues, stadiums or colleges a resource to begin their journey to zero waste.

By closing the loop, operators can cut greenhouse gases, manage risk, litter and pollution, reinvest in resources, all while creating value for their operation.

Under our people pillar, we are spending a significant amount of time strengthening our support for our team members' career development, introducing a new tuition assistance program and updated performance management system, both of these programs are bringing our Celebrate People core value to life in ways that are relevant and meaningful for our people.

Finally, I couldn't be prouder to celebrate Pactiv Evergreen's first female Board chair, Leanne Baker. Lean has been a director since our IPO and we're looking forward to benefiting from her leadership and experience in helping to build more gender equality in boardrooms.

To learn more, we invite shareholders to view our latest disclosures and other reports found at investors.pactivevergreen.com in the ESG section. Now if I could turn your attention to Slide 15. As our results indicate, we are making steady progress on returning our profitability to more normalized levels.

As a result of the strong start to the year, we are now expecting our 2022 adjusted EBITDA to be in the $750 million to $770 million range. Additionally, we expect to be free cash flow positive for the remainder of the year following the inventory build in the first half of the year. We continue to see improvements in the labor markets.

We are now focused on employee training and retention while still finishing filling the opening -- the open positions we have. As my opening comments stated, we continue to see improvement across all operations. We are, however, still dealing with broader inflationary pressures as well as volatility linked to the raw material markets.

In addition, we now have the added uncertainty around volume recovery due to the fears of a recession. We believe our portfolio is fairly resilient in recessionary times, but it is prudent to remain cautious in the current environment.

Given the timing lag for inflationary cost pass-through, we anticipate this quarter will represent our peak EBITDA for the year and would expect more normalized results the next 2 quarters, particularly given the lower seasonal demand we typically experience in Q4.

At this time, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. We remain focused on continuing to improve our production capabilities and service to our customers. With that, let us take your questions.

Operator?.

[Operator Instructions] Our first question will come from Arun Viswanathan with RBC Capital Markets..

Congratulations on the progress here and the turnaround. So I guess first question is just on the price cost situation. So as you noted, you are still experiencing some raw material inflation and some inflation across other categories. Yet you are -- kind of have implemented some pretty sizable price increases over the last couple of quarters.

So as we kind of lap those, what kind of pricing should we expect going forward? And have you seen any kind of potential elasticity response from your customers, i.e., pivoting away or trading down? Or what would you kind of describe the environment as?.

Thanks, Arun. So our pricing has two key elements. It's our raw materials, as you know, and then what we're calling our cost of living or other nonmaterial-related costs. I would tell you, we've made a great deal of progress as it relates to getting customer support, both contractually as well as transactionally on our non-raw material recovery.

And so you see that. I expect that that continues throughout the future of this business. Our target is 100% recovery in that regard. And as you can see, we've demonstrated for the first 2 Qs of this year that we've been able to get that kind of support. I'd expect that to continue. On the raw side those are more contractually an index-based recoveries.

And those will also -- while we work to try to tighten loose things up, those things are going to be more what you're used to seeing. Each one of our segments has a different lag. And those lags will dictate how the material falls out.

We will see the same kind of pricing strength, I think, to a lesser degree given what materials are doing -- the raw materials are doing. But on the cost of living side, I expect the strength to continue..

And just as a follow-up then. So you noted some volume softness, but that was mainly tough comps.

Is that how we should read it? And have you seen potentially any areas of softness? Or is it, again, just a comp issue? And do you expect maybe some volume acceleration next year on those easy comps? How should we think about volumes as well?.

Yes, good question. Yes. So we are seeing a moderation in some of our Foodservice business in terms of volumes as we kind of get into Q3 here. And we -- in late Q2, even we saw a little bit. I would tell you, in our Bev Merch business, we can sell every ton we can produce.

The demand is still very strong for fiber products, both our paper and our board products are sold out. So that demand does not seem to be softening. And on the Food Merch side, we've largely constrained our own demand with labor challenges. So it's difficult to say if anything is moderating there.

I will tell you that our assumptions for the back half is we do see some moderation. But most of our products, if not almost all of our segments, are in nondiscretionary products. Our products are the products people need and use every day. So I don't expect a huge falloff in terms of our demand. There will be some moderation in segment shift.

We see that in recessionary periods in the past as mobility shifts, but we're well positioned to handle that..

Our next question will come from Adam Samuelson of Goldman Sachs..

So I guess the first question maybe on the -- continuing on the demand side, and you alluded to some production constraints, and this goes back not just this quarter but going into the year.

What would your -- what could your volumes have been in the second quarter if you didn't have those production constraints? I'm just trying to get a sense of, especially the down 9% in Foodservice, what that could have looked like if we then think about underlying demand slowing in the back half as we think about the external environment versus some of your internal constraints?.

Yes. That's difficult. I mean we made some conscious decisions to exit areas.

I mean you look at the coated groundwood volume, we setting that aside rough numbers, was it 1% or 2% of volume that we missed as an opportunity maybe? But I think the real decision and one of the things that really constrained our demand and try to position us well for the back half and future Qs was the rebuild of our inventory.

And we did that so we weren't constraining the demand. The other thing is it's hard to also give you an answer on that without understanding all our customer inventory levels. And we know that those things remain fragile. Our customers have not fully rebuilt most of their inventories yet either. So it's hard to say.

I'm sorry I don't have a real good answer for that, but I'd be guessing if I tried to say it was more than 1% or 2% maybe..

Okay.

So -- and maybe then you talked about kind of Foodservice demand slowing, I guess, through July and presumably in June and later in the second quarter, any way to dimensionalize kind of the magnitude there? And any specific color by product line or customer type of vertical, whether that's QSR, casual dining, institutional as who, do you have any visibility to that? That would be helpful..

Yes. We're seeing some mobility shift. People are still going to the restaurant, sitting down and eating, taking food out. In fact, we're seeing that kind of trend up a tad. QSR mobility, no secret there. I don't think anybody is missing the plot there that it is slowing. Although for us, it's just been moderate.

And I think that that's probably the likely slightly trend. But outside of that, there's really not been a large scale shift for us. And I think some of that's masked by the fact that we're able to now service customers at a higher level given our inventories. So anything that we were missing, we're kind of getting back through better service..

Okay. And if I could just ask a quick clarifying question. So the total company EBITDA bridge for acquisitions, I presume that contribution is all Fabri-Kal. So I just want to confirm that. And in just the business did -- it would seem 28% EBITDA margins in the quarter, if that's the case.

And just is that just price cost being as favorable in that business as it was in your base business, and so that would moderate because it would look like the 9 months since you've owned it, you've already well exceeded kind of the preceding LTM from when you announced the acquisition last September..

Yes. I think if I understand your question, we are pricing across -- we have pricing responsibility and Fabri-Kal, that business is no different for us. It's representing exactly the same kind of performance that the broader impact of the business has.

And then, yes, I'd say that the strength is we're well ahead of schedule in terms of the synergies we expected in that business. It's largely integrated. We're already on the same ERP systems, all the footprint and asset synergies and the other tertiary things that we planned have largely been executed.

And so that's flowing through and is a big piece of the strength. But I would tell you, price generally across the broader business tick and then absolutely, that acquisition has been a good thing for us..

Our next question will come from Kieran De Brun with Mizuho..

I was just wondering if you could touch a little bit more, and you spoke to it a bit, but on the labor availability and some of those higher manufacturing costs and what you've seen on that front. It seems like you've made a lot of progress, but there's still a little bit of an overhang.

How are you thinking about that in the back half of the year potentially easing?.

Yes. Thanks. Good question. Thanks, Kieran. Yes. So we have made a lot of progress in labor. And I would tell you that largely, our focus is retention and making sure that the investments we're making in our labor force, both to train and retain folks, pays off and that that labor gap doesn't widen. So that's priority one.

Hiring the right kind of folks, the folks that want a long-term path to a better future, all the things that we've done to put in place a stable work environment that people want to walk through the doors every day. We're at a point now where we're actually trying to be a bit more selective.

And we expect that while we made big strides to close that labor gap in Q1 and Q2 largely, that we're really focused on getting the right kind of technical talent in our factories, and that won't be as fast paced as it was in Q1 and Q2.

And largely, where we've constrained only one of our business units, which is our Food Merch business in terms of labor, we've really focused on fixing that from the headcount. But as far as the foot traffic, people are applying for jobs, that's not a problem. It's really for a skilled labor and making sure we do the right thing for the business..

And then just a really quick one on a follow-up.

For the sale of the carton packaging and machinery business in Asia, how should we think about, I guess, the magnitude of that impact on sales and profits in the second half or as it rolls off the business? And I think you alluded to it quickly, the $300 million from the profits of the sale, we should think about that kind of going towards debt pay down.

Is that the right way to be thinking about it?.

Yes. I think generally, that's -- we've been pretty clear that lowering our gearing, upping our leverage is the priority certainly as some presented itself. There are other uses that make better sense that would also be deleveraging or improve our EBITDA. We look at that. But right now, our priority is balance sheet health and paying down the debt..

Our next question will come from Ghansham Panjabi with Baird..

Mike, just going back to your earlier comments on Foodservice and some of the variability there and there's a lot of noise from last year and so on through COVID.

What are we in that segment relative to the pre-COVID baseline from a volume standpoint? And then do you think the weakness that you're seeing is just a comparability issue because last year, things opened up and there was inventory builds and so on? Or is that incremental weakness? Maybe you can just share what customers are sharing with you at this point..

Yes. It's a bit of a mixed bag and a good question, Ghansham. I don't -- comps are certainly -- we did open up strong last year and there was a -- we are feeling a bit of that. But I would tell you, the consumer shift makes it difficult to say for a pre-19. I think there's a bit of a new normal we're starting to see.

And if I look at it on a like-for-like basis to kind of pre-COVID, I think we're now flat. And as a whole, I'd say even across the broader business, we're pretty flat, not just in Foodservice, but Foodservice I'm pretty confident we're flat. There has been a mix shift segment to segment.

But yes, the comps -- the comps like last year weren't representative of a new normal..

And maybe a question for Jon on free cash flow. Jon, can you maybe just update us on some of the cash flow items CapEx, cash tax, cash interest? Just trying to get a sense as to what the cash position looks like coming out of this year..

Sure, happy to. So if you take our EBITDA guidance and then just walk it down. So CapEx, we're seeing in the range, probably in the $260 to $270 million area for the year. Interest, as you know, we do have a fair amount of variable rate debt.

But just looking at the curve and estimate, it's probably around $200 million for the year, somewhere in that area. Taxes, you can have a bit more variability to it. But if you take the first half and just normalize it and annualize it, you're looking in the $160 million area for that.

So that gets you to a free cash flow for the year, somewhere in the $150 million area. And again that's not so much. And then that's not necessarily guiding to working capital in that area. But what I would say is just really focusing on the inventory. What I did say in the prepared remarks, we're not anticipating any further inventory builds.

And so from that perspective, I would take it as that number reflects more of a flat working capital..

Our next question will come from Kyle White with Deutsche Bank..

Welcome, Jon, and looking forward to working more closely with you. Congrats on a really strong quarter, guys. I wanted to focus in on the guidance raise. I appreciate the raise.

I guess I'm trying to understand, is the outlook increase purely driven by the first half performance being better than you expected? And then you kind of kept the second half relatively unchanged from your initial expectations coming into the year? Or just how should we think about that?.

That's exactly how you should think about it..

That's fair..

I guess if I follow up on that, then why shouldn't we expect this kind of price cost that you've been realizing over the first half to continue into the second half, given that from our vantage point it seems like a lot of the input costs have been relatively stable. I mean, obviously energy markets have been a little bit volatile.

I can't imagine that pricing is slowing down at all for you. So you talked about this quarter being peak EBITDA for the year.

Is that just a function of normal seasonality? Or is it because of what you see on the pricing as it relates to demand or inflation on the business?.

Yes. So for us, what you see in raws now largely won't impact, it will be a Q1 dynamic. So we're actually digesting what raws have done in the first half of the year. So with the lags on the material side specifically, you've got falling material costs, for instance on polypropylene.

With that falling, we'd have to pass some of that raw material date back to our customers. So there's a piece of that that's not indicative of current state. The other side of that is you're right, we will continue to price through inflation and cost of living adjustments. And so that will remain like I mentioned earlier.

That also said, we do -- as I mentioned, we do have nondiscretionary products. These are products people are going to use every day. We do expect some continued moderation there. And so I think we're just bringing a balanced look at the forecast. You're right, pricing, we do expect to take the same approach.

But that seasonality in the back half of this year and kind of the uncertainty around what's going on economically, we just feel like we've taken the right look at volumes, and we know we've got some pricing givebacks coming on material..

[Operator Instructions] Our next question will come from Anthony Pettinari with Citi..

This is actually Bryan Burgmeier sitting in for Anthony. If you back out the mill outage, beverage merchandising EBITDA would have been pretty close to 2019 levels.

Do you think that the segment can get back to that $45 million, $50 million EBITDA per quarter range maybe in the second half of '22 or in the front half of '23? Or is that a little bit too aggressive right now?.

I think definitely for '22, that would be too aggressive. Just given what we have planned for back half and the fact that we do have an outage in the back half of the year. I would tell you that I don't think you're off base for that being a future run rate for the business. I'm reluctant to give you kind of a time line on that.

But certainly, we're looking at quarters away, not a year away to get there..

Got it. Understandable. Thanks. And the….

I would underscore -- yes, go ahead..

No, no, no, go ahead..

Yes, I just would say I'd underscore the fact that we are -- with the mill outage, I do believe that we would -- if we set the mill outage aside, which was a benefit for the mills. The mills have -- both of our mills have done very well in terms of making progress. So we are stabilized -- we stabilized there.

So that's why I'm confident to tell you that those are the kind of run rates we are targeting to stabilize the business..

And then last one for me. In the prepared remarks, you mentioned some possible further deleveraging portfolio moves are being considered.

Can you provide any detail on maybe the size or scope of those? Or is it a little bit too early? I'm just trying to think going to be closer in size to the recent Asia Pac sale or something significantly larger or smaller than that? Or maybe it's just too early to tell?.

It's just too early to tell..

Our next question will come from Andy Scheffer with Onex Credit Partners..

Can you describe for us the labor fulfillment levels in each of the 3 business segments, sort of where you've come from, where you are now and how fully staff you typically run?.

Yes. I mean at the height of the pandemic, which was a peak gap in our labor market was north of 20% hourly. On top of that, I would just -- trying to work backwards and give you both pro-post. I would tell you that normalized pre-pandemic levels, we would kind of range in our vacant, what we call our vacancy rate for hourly workers between 5% and 10%.

And today, we sit here between 9% and 10% vacant. And I would tell you, segment-based wise, our largest exposure is our Food Merch space. And then after that, we're pretty healthy in both of the other 2 segments..

And then in terms of the volume, I thought what I heard you say was that your restocking of inventory aid into the volume that you could deliver. So you were purposely dialing it back, but I'm not sure how much that was.

And then was there also some sort of customer optimization anywhere that you were doing in terms of deciding that business didn't make sense and we'd rather just put it into inventory or just move on with various customers.

Was that any part of that volume decline?.

So for us, we constrained our own demand largely due to not having the right products. And so we did not constrain demand to the extent we wanted to rebuild inventory. We rebuilt the inventory, so we're not constraining demand. So we established a healthy inventories in the right products, is a better way to look at that.

So if a customer needed product, then it was there, they got it. We did make a decision not to ship, our customers based on products that were sitting there. Secondly, I don't see inventory levels and customer rationalizations as a -- it wasn't a strategy we implemented to try to rebuild inventory levels.

It was normal course decision-making for us that whether we rationalize SKUs or customers, it was all done in the normal course type decision making, not to reestablish inventories or improve certain strategic customers over others. And we've largely kept that as a strategy as we want to be there for all of our customers..

And was any of that because of lack of material inputs in terms of what products you did not have? Or was it just the world shifted as I think you were alluding to and maybe a new normal, and that's what caused the mismatch of what you had versus demand?.

Yes. There's bits and bobs that continue to pop up, but they didn't constrain our ability to get product. We switch modes. We did things, all heavy lift to get our materials there. I would tell you on the aluminum side, that's one area where our aluminum products are suffering due to material availability.

And that's a widely known dynamic and on a global basis, a pretty good constrained commodity..

Our next question will come from George Staphos with Bank of America..

And congratulations on the performance. Mike, I just want to make sure, just a point of clarification. I apologize, maybe I'm the only person who missed it.

So in the last quarter, did you or did you not constrain your shipments to some customers as you sought to rebuild inventory? Or was your volume, what your volume would have been and you were still able to rebuild your inventories? How should I read that?.

Yes. George, you're absolutely right. We did constrain demand to many of our customers in the first quarter and coming out of Q4, because we couldn't have the right dates of supply and right dates of great products, frankly, on the shelf..

Okay.

So there was a negative effect even if you don't want to necessarily quantify there was some negative effect on your volume that you otherwise would have reported and the results you would have put up because of that strategy, would that be fair?.

Yes..

Okay. If I could, my follow-on question on piggyback a little bit on what Kyle was getting at.

So as you look back over 2Q, what was the 1 or 2 biggest factors that drove performance better than your original expectations? Because I think coming out of 1Q, the guard rails were sort of on, hey, performance, probably wasn't going to be that dissimilar from 1Q. Again, you did very well and much better than we would have modeled.

What were the key factors there that were better than your expectations in 2Q? And as we look out to the second half, sure, perhaps we're in a recession, sure there's inflation, but your pricing givebacks as polypropylene is now getting lower and other [indiscernible] heading lower, usually have a lag, too.

So you're going to have positive spreads for several quarters.

So if you factor all of that together, all the headwinds that you're seeing, where would your run rate sort of EBITDA be? What would the range be for 3Q? Why wouldn't it be very comparable to what we saw in 2Q?.

Yes. Thanks, George. So I would tell you the biggest thing is our contractual pass-throughs are working. And so our ability to get price and support from our customers on inflationary and raw, as you highlighted very correctly. It's one big area where we saw Q2 strength. The second is our labor recovery is ahead of plan.

We expect it to drag well into Q3 and potentially into Q4 before we were able to reestablish inventories. So we are getting the benefits, and we started getting the benefits of some of that constrained demand being unconstrained through mid to late Q2. So we won on that front.

Despite what the volume story says on a moderation segment by segment, you set coated groundwood aside, which is a large chunk of the volume. Many of our subcategories and mix are favorable for us. And so that's Q2 kind of in a nutshell as price and labor recovery, we established inventories to take care of a better mix and demand.

On the back half, with what -- so you highlighted polypropylene, and we can use that polypropylene has been falling, and we are passing those savings back to the customers. Now polypropylene flattens out in the back half, which is the assumption, and we kind of don't see that continued strength. It starts to go the other way.

And we are largely in the mode of passing back versus enjoying the lag, so to speak..

Okay. So how big of a step down right now from what you can see? Do we see 3Q versus 2Q considering the volume you sell, perhaps a narrowing of spreads even though, again, I think there's a lag on when you pass-through.

Is there any way to put a range on that?.

I'll just -- this is Jon. I'll just jump in. Yes, you can put a range of -- you can take a look at our guidance and just back into what the EBITDA is for the back half of the year, if you're looking for a guidance for that.

The only other thing I'd note is that we're expecting Q4 just to be seasonally weak as you look at the remainder of the year forecast for EBITDA. So Q3 should be a bit better than Q4..

There are no remaining questions in queue. And with that, we will conclude our question-and-answer session. I would now like to turn the conference back over to Michael King, for any closing remarks..

I just want to thank everyone for joining us today. I certainly appreciate the conversation and look forward to further discussions in Q3..

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