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About a year ago, I wrote a cautious initiation article on Pactiv Evergreen (NASDAQ:PTVE), noting that it was a heavily indebted company with half of its debt being floating rate term loans, which was not ideal in a rising interest rate environment. Since my article, PTVE’s stock has delivered -15% total return, justifying my caution (Figure 1).
Figure 1 – PTVE has been a poor performer (Seeking Alpha)
With the passage of time, has Pactiv Evergreen been able to improve its financial position and overcome the challenges I identified in my last article? Is the stock attractive at current valuations?
Brief Company Overview
For those new to the PTVE story, Pactiv Evergreen is a leading manufacturer and distributor of food packaging products for the Foodservice and Food & Beverage Merchandising industries. The company had $6.2 billion in revenues for 2022 with almost 90% of revenues coming from the United States (Figure 2).
Figure 2 – PTVE overview (PTVE investor presentation)
Pactiv Evergreen is majority controlled by New Zealand paper and packaging billionaire, Graeme Hart, who owns 77% of the shares of PTVE.
PTVE came to the public markets via an Initial Public Offering (“IPO”) in 2020, although the company’s stock has not performed well since going public. PTVE debuted at $14, and today, its shares change hands at around $8 per share, or approximately 40% below the IPO price (Figure 3).
Figure 3 – PTVE has been a poor performer (stockcharts.com)
The biggest issue so far for Pactiv’s stock price is that the company’s earnings have not lived up to initial expectations. For example, Figure 4 shows consensus analyst EPS estimates for PTVE, which shows analysts have had to dramatically ratchet down their earnings estimates for the company, from $2.77/$2.92 for 2023E/2024E when the company first went public to $0.68/$0.94 recently.
Figure 4 – PTVE expectations keep getting lowered (Seeking Alpha)
2023 Marred By Restructuring Expenses
In March, following the release of its fiscal 2022 results, Pactiv announced a major restructuring of its Beverage Merchandising business, closing down its Canton North Carolina mill and its Olmsted Falls, Ohio converting facility. The company also announced layoffs of approximately 1,300 workers as it looked to cut costs and capital expenditures.
Overall, Pactiv estimated the restructuring plan will save $30 million in annual expenses and $50 million in capital expenditures beginning in 2024. However, the company will have to incur non-cash (accelerated depreciation of plant and equipment) and cash charges (severance and exit costs) as part of the restructuring process.
To date, Pactiv has recorded $310 million in non-cash charges (with an expected range of $325-330 total) and $93 million in cash charges ($130-160 range) in the first two quarters of fiscal 2023, with the majority of the remaining expenses expected to be incurred in fiscal 2023 (Figure 5).
Figure 5 – PTVE restructuring costs (PTVE 10Q report)
The restructuring charges have marred Pactiv’s financial performance in 2023, with the company reporting an operating loss of $168 million in H1/2023 compared to a $289 million operating profit in H1/2022 (Figure 6).
Figure 6 – PTVE financial performance have been marred by restructuring costs (PTVE 10Q report)
Furthermore, Pactiv also faced additional headwinds, as net revenues for H1/2023 declined by 9% YoY to $2.86 billion, primarily due to the disposition of its Beverage Merchandising Asia business in August 2022. The Beverage Merchandising Asia business contributed 7% to a 13% YoY decline in Q2/23 revenues while volume declines were the other main contributor to lowered YoY revenues.
Figure 7 – PTVE Q2 revenues declined 13% YoY (PTVE investor presentation)
Price Actions Coming Home To Roost
In my prior article, I noted that Pactiv had raised prices aggressively in 2022, trading volumes to maintain margin:
Although the Q2 earnings were a welcome surprise, I see several issues with PTVE’s business that could explain investors’ hesitancy to embrace the positive fundamentals.
First, if we look at the second quarter highlights, we can see that PTVE took a lot of price action in order to drive the revenue and earnings surprise. Foodservice revenues were up 39% YoY on the back of an acquisition and a 27% increase in price/mix, but volumes were down 9% YoY. Similarly, Food Merchandising price/mix was up 20%, but volumes were down 6%. Beverage price/mix was up 19% but volumes were down 9% (Figure 6). While price actions are necessary to maintain profit margins, they may be coming at the expense of volumes, as customers could be seeking out alternative suppliers.
My worry was that Pactiv was being too aggressive in its pricing strategy and that customers may defect to other suppliers since the packaging products Pactiv manufactured are fairly commoditized. That appears to have been the case, as Pactiv was not able to take price in the latest quarter while YoY volumes declined by 6%. In fact, Pactiv has experienced 6 consecutive quarters of YoY volume declines as the company has raised prices to maintain its product margins. Unfortunately, management appears unable or unwilling to take further price actions, which has led to YoY declines in revenues.
Slowly Paying Down Debt But Interest Burdens Have Increased On Rising Interest Rates
My other main concern with Pactiv was its heavy debt load, as the company had over $4.2 billion in debt while generating ~$750 million in annual adj. EBITDA for over 5.5x Debt/EBITDA. Fortunately, management understood the urgency of the debt problem and has been aggressively using available free cash flow to pay down long-term debt. As of June 30, 2023, Pactiv has reduced debt to $3.8 billion, a decrease of almost $300 million YoY (Figure 8).
Figure 8 – PTVE has $3.8 billion of debt outstanding (PTVE 10Q report)
However, Pactiv is not out of the woods yet as half of Pactiv’s debt is floating rate term loans paying SOFR + 3.25%. With 3-month SOFR now at 5.26% (Figure 9), Pactiv’s net interest expenses have actually increased 28% YoY to $127 million in H1/23 despite debt balances decreasing.
Figure 9 – 90D SOFR rate (St. Louis Fed)
Furthermore, Pactiv has a significant amount of debt maturing in the coming 3 years, with $50 million on the revolving credit facility maturing in August 2024, $217 million in 7.95% debentures maturing in 2025 and $935 million in term loans maturing in February 2026 (Figure 10).
Figure 10 – PTVE term loan details (PTVE 10Q report)
Management definitely has their work cut out for them in order to generate sufficient cash flows to repay and/or refinance all of this maturing debt in the next few years.
Valuation Starting To Look Attractive
Valuation-wise, PTVE’s stock decline in the past year has made its shares more attractive. PTVE is now trading at 11.6x Fwd P/E vs. 13.7x for the Materials sector median while on EV/EBITDA, it is trading at 6.6x Fwd EV/EBITDA compared to 7.9x (Figure 11).
Figure 11 – PTVE is starting to look attractive on valuations (Seeking Alpha)
PTVE also pays an attractive 5% dividend yield, more than double the sector median.
Conclusion
Overall, Pactiv Evergreen has been proactively addressing its high debt load, reducing long-term debt outstanding from $4.2 billion YoY to $3.8 billion. However, with rising interest rates and half of its debt being floating rate term loans, PTVE’s interest burden has actually increased YoY.
I believe the company remains in a tough spot, as past pricing actions are now coming home to roost in the form of persistent YoY declines in volumes. With the company unable or unwilling to take any more price in the latest quarter, PTVE saw a steep 13% YoY decline in Q2 revenues driven by lowered volumes and the sale of its Asian business.
Looking forward, I recommend investors stay on the sidelines until the company can return to growth in the topline. Shrinking revenues make it harder to pay off the large debt burden. I rate PTVE a hold.
