Pactiv Evergreen is a major player in the packaging industry, providing essential packaging solutions across multiple sectors. Over the past few years, the company has reported steady revenue growth until embarking on a transformational journey that involved significant restructuring actions.
Despite facing a challenging year in 2023 with declines in net revenue and net income, Pactiv Evergreen has maintained a strong track record of adjusted EBITDA and free cash flow. The company has also been diligently working to reduce its net leverage and debt.
If the ongoing restructuring delivers the intended results, there could be further margin expansion and potential upside in share price.
Historical Financial Analysis
Pactiv Evergreen showed strong revenue growth in FY21 and FY22 but had a disappointing year in FY23 due to lower volume and the Beverage Merchandising restructuring. Net sales fell by 11%, from $6,220 million to $5,510 million.
The reduction in sales volume, the closure of the Canton, North Carolina Mill, and the sale of Beverage Merchandising Asia contributed to this decline. Excluding the impacts from these events, net revenue was down 4%, mainly due to inflationary pressures on consumer spending and the company’s value over volume strategy.
FY22’s revenue growth was up 14%, driven by favorable pricing actions that passed higher costs to consumers. Although there was a decline in sales volume in FY22 due to strong volume in the prior year, the acquisition of Fabri-Kal offset this decline.
Pactiv Evergreen has demonstrated a healthy track record of strong adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA increased to $840 million in FY23 from $785 million in the previous year, with the adjusted EBITDA margin expanding from 12.6% to 15.2%.
For FY24, management projects adjusted EBITDA to be in the range of $850 million to $870 million, anticipating margin expansion from ongoing restructuring initiatives.
Free Cash Flow and Debt Reduction
In FY23, Pactiv Evergreen generated approximately $249 million in free cash flow, slightly below their guidance of $250 million. Despite incurring significant restructuring costs of nearly $170 million, the company maintained robust cash-generating ability.
For FY24, the company expects to generate at least $200 million in free cash flow, accounting for higher cash tax rates and lower working capital benefits compared to FY23. This projection considers reduced interest expenses upon debt repayments and lower restructuring charges.
The company has focused on deleveraging its balance sheet, utilizing divestitures and cash flows. In FY22 and FY23, Pactiv Evergreen repaid a total of $659 million in long-term debt, with $547 million repaid on U.S. term loans in FY23 and $22 million in FY22.
The sale of Beverage Merchandising Asia for approximately $335 million in FY22 funded the majority of the debt repayment. The company’s net leverage ratio has fallen from 7.63x to 4.07x, with management targeting a low 3s ratio by FY24.
Restructuring Initiatives
In 2023, Pactiv Evergreen focused on restructuring its Beverage Merchandising Business to enhance efficiencies and generate cost savings. The company shut down its Canton, North Carolina Mill and a converting facility in Olmsted Falls, Ohio.
For 2024, the company has announced a “Footprint Optimization” initiative, expected to cost $40–45 million, aimed at rationalizing 10% of its physical footprint to cut annual operating costs by $35 million by 2026.
These strategic initiatives are designed to improve utilization levels, network productivity, and cost savings in 2025 and beyond.
Revenue Segments
Pactiv Evergreen is a leading manufacturer and distributor of packaging for Fresh Foodservice and Food & Beverages Merchandising (F&B) in North America. The business is divided into two segments: Foodservice and F&B Merchandising.
Foodservice accounted for 46% of the revenue in FY23, with F&B Merchandising making up the remaining 54%. The Foodservice segment’s customer base includes chain restaurants, distributors, institutional food services, and convenience stores, offering a diverse range of packaging products.
F&B Merchandising includes grocers, meat processors, dairy, and juice companies, providing products that protect, preserve freshness, and display food.
1Q24 Earnings Analysis
In 1Q24, Pactiv Evergreen’s net sales fell by 13% compared to 1Q23, and by 2% compared to 4Q23. This decrease was primarily due to the closure of the Canton Mill, lower volume, and lower pricing from reduced pass-through material costs.
Excluding the impact of the closure, net sales were down by 7%. The company has shifted its focus to value over volume to mitigate the impact of market softness in an inflationary environment.
Relative Valuation and Future Outlook
Pactiv Evergreen’s forward revenue growth rate of -4.11% is the weakest among its peers, but the company’s operational efficiency is strong, with the highest EBITDA margin TTM at 20.39%. The company is trading at a relatively lower P/E ratio of 10.05x compared to peers, reflecting its underperformance.
For 2024 and 2025, market revenue estimates are $5.32 billion and $5.48 billion, respectively, with EPS estimates of $1.32 and $1.46. Management’s guidance for adjusted EBITDA and strategic restructuring plans support these estimates.
Solid Growth Potential
Pactiv Evergreen is undergoing significant restructuring to enhance efficiencies and generate cost savings. While there are risks associated with restructuring, the company has demonstrated strong adjusted EBITDA and free cash flow.
With ongoing initiatives to reduce debt and improve operational efficiency, Pactiv Evergreen has the potential for future growth and profitability.
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