PACTIV EVERGREEN INC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Pactiv Evergreen Inc. is a leading manufacturer and distributor of fresh foodservice and food merchandising products and fresh beverage cartons in North America, with a focus on sustainability, quality, and efficiency.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Pactiv Evergreen operates a massive-scale manufacturing and distribution business, primarily serving the North American markets with a broad range of products in food, beverage, and packaging.

  • Revenues Distribution: The company’s revenues are segmented into three primary segments:
    • Foodservice: This segment focuses on products for restaurants, cafeterias, and other foodservice providers, including containers, tableware, and cutlery.
    • Food Merchandising: This segment includes products used for packaging and merchandising food items in grocery and other retail settings, such as wraps, trays, and cartons.
    • Beverage Merchandising: This segment is dedicated to producing beverage cartons and related packaging solutions, mainly for beverages that are not fresh.
  • Industry Trends:
    • The markets for food packaging, especially recyclable and compostable options, are becoming more and more attractive as environmental regulations become stricter.
    • There is a gradual shift towards more sustainable materials for packaging, including recycled and renewable resources.
    • E-commerce is reshaping packaging needs as companies require innovative and convenient options for shipping foods.
    • The pandemic increased the demand for take-out and delivery packaging, providing a unique opportunity for Pactiv Evergreen to expand its products in that area, although recent trends have caused a reduction in that market.
  • Competitive Landscape: Pactiv Evergreen operates in a highly competitive market. Competitors include:
    • Large packaging manufacturers, such as Sealed Air Corporation and Amcor, which command significant market share due to their broad product portfolios and brand recognition.
      • Smaller players and private companies, such as Winpak and Graphic Packaging, that compete for regional or niche positions.
      • Retailers with private-label operations which compete on price and availability.
  • What Makes Pactiv Evergreen Different?: Pactiv Evergreen differentiates itself through a strong emphasis on sustainability, developing new packaging materials with reduced plastic content and having strong operational experience. For example, they are investing a lot into “next generation” products in the form of a polyethylene terephthalate (PET) rigid package. That will allow the company to be a leader in the rigid packaging space. Also, their focus on operational excellence has allowed them to keep costs down.

Financials Analysis

  • Revenues and Profitability: In its latest quarterly report (3Q 2023), Pactiv Evergreen has noted that the total revenue was $1.4 billion, which was a decrease of 15% compared to the $1.7 billion revenue recorded in the same period of last year. The decline was primarily driven by lower volumes and unfavorable pricing. Adjusted EBITDA was 10.6%, or $166 million. In the same period, the company has reported a net loss of $282 million.

The revenue decrease was partially due to lower volumes and unfavorable pricing environment across a number of their product lines.

*   **Revenue by segment (3Q 2023):** 
    * Foodservice: $841 million (down by 13%)
    * Food Merchandising: $489 million (down by 16%)
    * Beverage Merchandising: $93 million (down by 21%)

  • Margins: Adjusted EBITDA margins continue to be challenged by increasing costs and reduced volumes across their business units. Management expects a slight improvement in EBITDA margins for 2024, especially in the second half of the year, as inflation starts to abate and pricing starts to catch up with costs. However, they still expect pressure from high operating expenses. * Recent Trends: During the earnings call, management noted several times that they expect improvement in pricing and in operational efficiency in the second half of the year. This is due to improving supply chains and more efficient energy procurement practices.

    • Acquisitions: Pactiv acquired the assets of Fabri-Kal in 2021. They are implementing some synergies and improvements. The company has also acquired several smaller companies, but the results are still in the integration phase.
      • The management is also looking at optimizing its current product portfolio, and is in the process of divesting or exiting some product lines that may not be as profitable as the others.
    • Debt
    • The overall debt is relatively high, and the company has seen a reduction of the total leverage recently.
      • Cash flow is still being used more toward reducing the debt instead of reinvesting it back into the company.

Moat Analysis

  • Moat Rating: 2 / 5

Pactiv Evergreen exhibits a narrow moat, primarily due to some economies of scale and certain customer lock-in, but faces competition that limits its pricing power and hence ROIC.

*   **Economies of Scale:** Pactiv Evergreen benefits from economies of scale in its production and distribution networks. This allows it to offer products at lower prices and increase profitability. However, because the market is not highly consolidated and there are many other suppliers, their scale advantage is not very significant.
*   **Customer Lock-in**: Pactiv Evergreen often operates under long-term contracts and relationships with major food service and retail chains. This provides some stickiness, as customers may incur switching costs in finding new suppliers. However, switching costs are not high in the industry, leading to a relatively weak moat.
  • Legitimate Risks to the Moat:
    • Commoditization of Products: The industry is vulnerable to commoditization, where many players offer very similar products with little differentiation. In such scenarios, price competitiveness is the only factor, and firms will have difficulty maintaining margins and earning excess profits.
    • Raw Material Costs: Volatility in the prices of raw materials like resin and paper can impact profitability, especially because the company does not have much power in controlling its costs. Pactiv’s results are vulnerable to supply chain disruptions and market price volatility.
    • Competition: The market is crowded, especially among the food and beverage packaging players. Existing firms and new entrants will limit pricing power.
  • Business Resilience:
    • Pactiv Evergreen has demonstrated some resilience to inflationary pressures by increasing prices and cutting costs. However, the large number of competitors will reduce the company’s ability to raise prices without losing volume.
    • The company has been investing in more innovative materials and designs to meet new consumer trends. This will help the firm to better face future challenges.

Understandability Rating

  • Understandability Rating: 3 / 5
    • Pactiv Evergreen operates in an industry that is not very difficult to understand, because the operations and the products are straightforward. However, its sheer scale makes financial statements fairly complex and hence the operations are not that easy to comprehend. Additionally, the company is also affected by a myriad of other factors such as inflation and supply chains, thus making the whole thing a bit more complicated.

Balance Sheet Health

  • Balance Sheet Health: 3 / 5
    • The balance sheet has seen some improvements since the last few years. However, the total debt is still higher than the company’s total equity.
    • The company has enough cash on hand to cover their short-term liabilities and it is also seeing some increase in cash flow.

Conclusion

Pactiv Evergreen is a significant player in the packaging industry but has relatively limited moats. The emphasis on sustainable materials and the huge operational scale can provide competitive advantages in the future, but the company still needs to work on its high debt burden.