Jonathan Baksht: And in terms of financial impacts into this year, most of the impact will be felt later this year really into — going into next year. I would tell you that there is — some of the expenses will start incurring the expenses this year. But the way to think about it is really, we won’t see any real financial benefit into Q4 of this year. And benefits are really going to be — are contemplated in our guidance already. But I would tell you that going into 2025, kind of year-end run rate for savings, and this is more of a 2025 item than a 2024 item, we’re probably looking at somewhere around the $10 million to $15 million exit rate at the end of the year in terms of annualized cost savings from that going into 2025, entering 2025.
George Staphos: Okay, thanks.
Operator: One moment for our next question. Our next question comes from Philip Ng with Jefferies. Your line is open.
Philip Ng: Hey guys. The low single-digit volume guidance for this year, how much of that is market growth versus the new business you’ve won that secured? And is the business wins more heavily weighted in one segment versus the other? And Jon, if you have more of a flattish type volume environment this year, do you have enough levers to kind of effectively hit your guidance from an EBITDA standpoint?
Jonathan Baksht: Yes, in terms of — just in terms of the market versus not, it’s really hard for us to break that down as we go into the full year. I would say our general expectations are aligned with what the current macro expectations are. So in terms of soft lending type of environment, kind of low single-digit GDP growth etcetera. If that’s really the guidance. If the environment is better or weaker, our results will likely have some effects of that. We do track the consumer. And so we really think about the business in that sense. In terms of if the market gets weaker and as volumes come in a bit short of that low single-digit guidance expectations, would we have some additional levers to pull, we would. We are very focused on delivering sustainable results and we have scalability with the business to flex up and flex down.
And frankly, that’s part of this footprint optimization effort as well to help remove some of the fixed costs from the business to help us be more adaptable to the market environment.
Philip Ng: Okay. That’s helpful. Margins were up pretty nicely in 2023 with your value over volume approach along with reduction in COGS and SG&A. Can you kind of help us parse out how much of that is some of the hard work you guys are doing on the cost out efforts and restructuring rather than just call it deflation? And do you still have a lot in tap in 2024. The reason why I asked is because from an absolute price cost inflation standpoint, it sounds like it’s going to be a little negative at the start of the year. So when do you kind of expect that to get back to neutral, just from the inflation piece in price cost contractual dynamic. And do you expect that spread to be the mutual deposit this year as well?
Michael King: I think thematically, Jon alluded to inflation to start the year and if you just look at your prior in 2023, a lot of our colder adjustments — cost of living adjustments happened in Q1. I think the differences in — throughout — it will ramp up throughout the year here for us is those cold adjustments are spread out for us this year. So where we’ve been successful at getting customer support on those, the cadence of that is more quarterly than it is a point in time in Q1. And so while we feel that inflation, predominantly in the labor space and the variable space when it comes to things like electricity, energy, diesel fuel, transit costs, all those things hit us in Q1 and they are muted as the year goes on and as we recover those costs. So just from a kind of a high-level view of how this year and last year are a little different, I think it’s important to understand that. Jon, anything you want to add to that?
Jonathan Baksht: Yes. And I think, Phil, just to kind of give you a sense of what’s driving our margin enhancement, which is the heart of your question. Back to the strategic initiatives that Mike touched on, and we’re really operating here. Value over volume was a big initiative last year. We were very much focused on do we have the right book of business and aligning our business with strategic customers that really value — the value proposition, the differentiated value proposition that we provide. And so there was probably, I’d say, 2023, there was probably more of that last year. And clearly, a big piece of that was the beverage merchandising and restructuring, which is a cost-out initiative and just broadly restructuring our business model to help lower our fixed cost through a reduction of a high-cost paper mill, high capital-intensive paper mill.
So that was part of it. And then the other cost initiatives, clearly, the PEPS program, the continuous improvement that we’re doing as Mike said, we’re still in the early innings of those initiatives really starting to really recognize themselves in our margins. We are facing inflation challenges that right now we are keeping up with and offsetting through either colas or through cost reduction initiatives. But as you note in our guidance for this year, as those cost initiatives start taking hold, I think this year, year 2024, you’ll see that the cost reduction initiatives probably start outpacing the value over volume that you saw last year, particularly going into the back half of the year. And then bringing back to the other point, we mentioned in foodservice, specifically, the value over volume is really — we’re really past that.
Food and beverage merchandising, we still have some room to go there. But as we come out of the value over volume in foodservice, it’s the cost reduction initiatives that are going to help the margin enhancement going into the back part of 2024.
Philip Ng: Appreciate the color guys.
Operator: One moment for our next question. Our next question comes from Curt Woodworth with UBS. Your line is open.
Curt Woodworth: Yes. Good morning, thanks for squeezing me in. So just wanted to kind of understand maybe operating leverage within the model. You’re guiding to low single-digit unit growth for this year, but the EBITDA guide is up only 2%. And you talked about you’re going to get incremental productivity if you look at the slide deck the last two quarters, you’ve had over $90 million of year-on-year improvement in your COGS basis. So is the right way to think about the operating leverage component that basically price cost and COGS are kind of offsetting. So the unit growth is kind of netting out to an equivalent EBITDA growth? Or what’s the right way to think about that?
Michael King: I actually think you’re real close. I mean no secret. We keep hitting the inflation for us is a real the labor side. So our productivity where we sit today in our operating leverage early — the early days in past, we’ve been able to battle that back. I think the fruit — there was lower hanging fruit, lower hanging fruit in the last quarters. And so you’ve seen that come through. I think as we improve as we ramp up see that we start to outpace that inflation recovery. And you’ll see that, that plus the support we get from our customers and that becomes less of a variable. And to the extent you see unit growth, you’re seeing that come through kind of pretty close to 1:1 in our EBITDA. And so I think you’ve characterized it well.
It’s not perfectly clean, and certainly, times are friend and times are enemy, no longer we have to implement more facilities and get after some of the footprint works. I think it’s why we’re excited it definitely improves our operating leverage.
Curt Woodworth: Okay. And then I guess just thinking longer term about capital spending requirements for the business, I mean given kind of this transition to a more asset-light model and a lot of the restructuring footprint actions you’re taking. How should we think about what that means to either go forward maintenance CapEx or kind of future CapEx? I know you called out sort of more of a maybe a pro forma number around $250 million ex Pine Bluff and some of the capital spending for footprint, but how do you see that going forward? Thank you.
Jonathan Baksht: Yes, sure. It’s a good question. From a — we’re not providing longer-term capital guidance on this call, but to give you a sense of the composition of the 2024 capital plan. And one of the reasons we did bridge to that $250 million reprieve in this year, which is give a sense of net of the Pine Bluff paper mill and the footprint optimization, $250 million is more of a normalized number. In terms of kind of the geography of that capital. So to give you a sense, this year, 2024, about half of the $250 million, so about $120 million will be sustaining capital in that plan. We’ve got probably $50 million of capital that’s really investment to offset changes in customer mix or — changes in the customers, products, mix, etcetera, and then the remainder, about $100 million is return yielding growth, automation, cost savings, etcetera.
And to the extent that going into future years, it’s the growth part that we can really flex. We’re going to be disciplined in how we think about growth, but when we find opportunities to drive value for investors and shareholder value through capital, we’re certainly evaluating that consistent all the time.
Operator: And I’m not showing any further questions at this time. I’d like to turn the call back over to Mike for any closing remarks.
Michael King: Yes. Thank you, operator. As we close today, I want to thank you again on behalf of the entire Pactiv Evergreen team for joining. I also want to thank the entire Pactiv Evergreen team for delivering an outstanding result in 2023. We are executing on our strategy, and we continue to progress on our transformational journey. We look forward to updating you during the first quarter conference call, and I want to thank you again.
Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.
