Release Date: May 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted EBITDA for Q1 2024 was $168 million, at the high end of guidance, demonstrating strong financial management.
- Strategic focus on value over volume helped mitigate the impact of reduced restaurant foot traffic and inflationary pressures on the Food & Beverage Merchandising segment.
- Successful cost management initiatives, including manufacturing cost reductions and logistics improvements, are expected to drive sequential improvements and earnings momentum into the second half of 2024.
- Entered into agreements with new and existing customers across business segments, expected to ramp up in the second half of 2024, showcasing strong market execution and customer trust.
- Reiterated full-year outlook with anticipation of volume improvement and cost-saving actions to generate year-over-year adjusted EBITDA growth.
Negative Points
- Net revenues of $1.3 billion for the quarter represent a 13% decrease compared to last year, primarily due to the closure of the Canton North Carolina mill and lower pricing.
- Overall volumes were down 3% in the quarter, reflecting market softness and strategic decisions to focus on value over volume.
- The consumer financial health remains strained with high inflation impacting spending habits, which could continue to affect sales volumes.
- Recent increases in oil prices introduced more volatility in resin prices, potentially affecting future cost structures despite current pass-through mechanisms.
- Free cash flow was negative $74 million, influenced by seasonal inventory builds and lower profitability, highlighting challenges in cash flow management.
Q & A Highlights
Q: Can you help us understand the magnitude of the ongoing inflation impact? Is it greater on the top line from consumer spending and volumes, or on the bottom line from rising costs? Which segment is seeing the greater impact right now?
A: (Michael King - President, CEO) We reiterated our guidance, not revised it. The second half improvement is expected to be 30% year-over-year from an EBITDA perspective, with about 50% coming from Pine Bluff operations improving post-outage. The majority of the remainder is driven by volume, some of which is due to seasonality and general market improvements, as well as key customer wins ramping up.
Q: Regarding the new business wins mentioned, which end market is winning the most? Are there any trends in customer preferences for paper or plastic in products like cups or trays?
A: (Michael King - President, CEO) The wins are spread across all end markets, reflecting our strong partnerships in both Beverage and Food Merchandising as well as foodservice. There is no major shift in substrate preference currently; it's quite mixed between fiber-based and poly products.
Q: How do you reconcile the assumption that foodservice might get tougher as the year progresses with your strategy?
A: (Michael King - President, CEO) Q1 indicators show foodservice foot traffic down nearly 4%, but our performance was less affected at low single-digit declines. We anticipate a recovery in the back half of the year with low single-digit improvements, driven by promotional activities and healthier inventories at our customers.
Q: Can you expand on how the focus on value menus by foodservice customers is impacting you?
A: (Michael King - President, CEO) The shift towards value is creating pressure across the cost structure, impacting us as well. We're working with our customers to find ways to create value within their portfolios, which continues to ramp up pressure on costs, expected to persist into Q2.
Q: What are your expectations for the food and beverage merchandising segment given the restructuring and improvements seen?
A: (Michael King - President, CEO) The segment is showing mixed results but is ahead of last year due to better pricing fidelity and operational improvements from our PEPS program. We're seeing benefits in areas like protein and produce due to seasonal trends, although discretionary food products like bakery items are still under pressure.
Q: How are you managing potential volatility in margin due to rising resin prices and transportation costs?
A: (Jonathan Baksht - CFO) We have robust pass-through mechanisms for resin costs, which should shield us from short-term impacts. Any significant spikes might affect annual results if they occur late in the year. For transportation, we're seeing flat costs, with increases managed through efficiency improvements and cost-saving initiatives.
Q: What is your long-term target for leverage, and how do you plan to achieve it?
A: (Michael King - President, CEO) We aim to reduce leverage substantially beyond the high threes where we expect to end this year. We've also increased our borrowing capacity significantly, enhancing our liquidity and overall credit profile as part of our broader strategy to improve financial health.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
