Pactiv Evergreen: Changes Are Set In Motion

Investment Rundown

Pactiv Evergreen Inc. (NASDAQ:PTVE) has grown into a strong dividend-distributing business that is leveraging the market position they have. However, the last quarter seemed to offer some difficulties for the business as the bottom line came in negative. With the last 12 months having dividend payments of $71 million, regaining a positive bottom line is a key priority for the company in my opinion as otherwise, the investment case could quickly turn into a sell.

There are significant returning efforts going into the business right now as PTVE aims to restructure the legacy Beverage Merchandising operations and ultimately drive higher earnings growth and margin expansion. We are left to see how this plays out and I want to play it a little bit safer here and issue a hold rather than a buy for PTVE. The company has a good amount of potential but the bottom line can't be turned around there is too much risk here.

Company Segments

PTVE is a leading provider of innovative packaging solutions. Formed through the merger of two renowned brands, Evergreen and Pactiv, it operates as a subsidiary of Packaging Finance Limited. The company's operations encompass paper mills dedicated to the production of cardboard boxes, serving various industries. PTVE organizes its business into three distinct segments: Foodservice, Food Merchandising, and Beverage Merchandising.

The largest segment of the business is the food and beverage merchandising segment which brought in $3.5 billion in net revenues for 2022. This showcased a YoY growth rate of 13.5%. The products that the company has here are varied and can weather through inflations and periods of higher expense. Its staple goods are hard to replace in the stores and supermarkets.

Management has made the decision to halt production at both the Canton, North Carolina mill and the Olmsted Falls, Ohio converting facility during the second quarter of 2023. Additionally, they are actively evaluating their options for the Pine Bluff, AR mill, and the Waynesville, NC plant. This strategic move reflects the company's commitment to optimizing its operations and ensuring long-term sustainability in a changing market landscape. The company has a significant market position and this plan will hopefully let them maintain this and not fall behind competitors.

The estimate for 2023 is that PTVE will post an EPS of $0.68. The estimates I have to say are quite hard to predict for 2023 given the fact they are going with this restructuring plan. There is a risk that if the plant ends up costing a significant amount of capital obscures the margins and doesn't produce the desired outcome the market will cut the valuation of the company. With a discount to the sector based on earnings, I think there is some cushion though so holding shares still seems like the best decision in my opinion to get the best possible risk/reward scenario.

Earnings Highlights

Looking at the income statement for the company we can see a clear shift in the bottom line as it went from $0.4 in Q2 FY2022 to negative $0.78 in the last quarter. This came from the rising cost of sales and an increase in the selling, general, and administrative expenses of the business. The restructuring of the company is also taking a significant toll on the earnings. For the last quarter, it was $32 million, and in Q1 $73 million. Management anticipates reaping the rewards of their efforts starting in 2024, with anticipated annual cost savings of $50 million and a reduction of $30 million in capital expenditures (CapEx). These cost-saving initiatives are part of the company's strategic plans to enhance efficiency and bolster its financial position for the years ahead. There might be some short-term pain in the bottom line for now, but I still see the outlook as quite positive for PTVE, and maintaining the hold rating seems like the best move forward.

Risks

The recent trend of a negative bottom line in the last quarter raises concerns about PTVE's ability to meet its debt repayment obligations. While PTVE has a solid track record of debt reduction, any interruption in this positive trajectory could potentially lead to a downturn in market sentiment toward the company. Maintaining a strong financial position remains crucial to instilling confidence among investors and stakeholders.

The debt levels sit at $3.8 billion as of the last report for the company. A reduction of $400 million since the last year's report. This means that the verge ratio for the company is around 3.8 right now in comparison to the EBITDA of $1 billion. That is quite high for my liking and I would prefer something under 3 instead. I think it is quite unlikely that the company will be able to raise the EBITDA so significantly to make that a reality, which is why I am looking at debt repayments instead for the business. So far it's trending in the right way, but a slowdown would turn my sentiment sour as well on PTVE.

Final Words

PTVE has had some struggles in growing the business rapidly and the fear that some of the segments are falling behind competitors is real which triggered the restructuring program the management set in motion earlier this year. The last 2 reports have shown the impacts of this and I think it will continue to negatively impact the bottom line. However, the softer net revenues are also a concern and possibly the reason for the softer valuation the company is receiving. I like the long-term outlook of the business though and will be rating PTVE a hold. I want to see clear improvements from the restructuring program like expanding margins, but I don't think that will be visible until late 2024 and beyond.