Pactiv(PTVE) - 2021 Q4 - Annual Report

PART I Item 1. Business Pactiv Evergreen Inc. is a leading North American manufacturer and distributor of fresh foodservice, food merchandising, and fresh beverage carton products - Pactiv Evergreen is a leading manufacturer and distributor of fresh foodservice and food merchandising products and fresh beverage cartons in North America, supplying a broad and diversified mix of companies including restaurants, distributors, supermarkets, and food producers[11] - The company's strategic initiatives are grouped into six key areas: growth, value-added customer service, profitable innovation, cost reduction, integration of the Beverage Merchandising segment and Fabri-Kal acquisition, and sustainability[15][16] - No single customer accounted for 10% or more of net revenues in 2021, with the ten largest customers accounted for 38% of net revenues[20] General Segment Overview - The company operates through three reportable segments: Foodservice, Food Merchandising, and Beverage Merchandising[12] - Foodservice: Manufactures food containers, drinkware, tableware, and serviceware for chain restaurants, QSRs, distributors, and institutional foodservice[13] - Food Merchandising: Produces clear rigid-display containers, prepared food containers, meat/poultry trays, and molded fiber egg cartons for supermarkets, grocery retailers, and food processors[13] - Beverage Merchandising: Manufactures cartons for fresh refrigerated beverages (dairy, juice) and integrated fresh carton systems, including liquid packaging board and paper-based products[13] Strategy - Growth: Focus on product growth, quality, reliability, service, and safety[16] - Value-added customer service: Proactively implement new service methods and refine customer value proposition[16] - Profitable innovation: Introduce new and on-trend products to reinforce the existing portfolio[16] - Cost reduction: Optimize processes through automation, digital transformation, and supply chain streamlining[16] - Integration: Continue integrating Beverage Merchandising with Foodservice and Food Merchandising, capitalizing on synergies from the Fabri-Kal acquisition[16] - Sustainability: Maintain and grow the broadest sustainable product offering and operate in an environmentally responsible manner[16] - In October 2021, Pactiv Evergreen acquired Fabri-Kal, a manufacturer of thermoformed plastic packaging, to expand its product portfolio and manufacturing capabilities[18] - The company has divested non-core businesses, including a 50% joint venture in Naturepak Beverage Packaging Co. Ltd. and carton packaging/filling machinery businesses in China, Korea, and Taiwan, to focus on core North American operations[19] Customers Seasonality - The business does not experience high seasonality due to complementary seasonal effects across segments[21] - Foodservice and Food Merchandising: Peak during summer and fall months in North America due to increased consumption from favorable weather, harvest, and holiday seasons (Q2 and Q3)[21] - Beverage Merchandising: Experiences some seasonality with increased carton product sales in Q1 and Q4 due to higher milk consumption by school children during the academic year[21] Competition - The markets are highly competitive, with competition based on service, innovation, quality, sustainability, and price[22] - Competitors include Dart Container Corporation, Huhtamäki Oyj, Berry Global Group, Inc., Genpak, Sonoco, Paper Excellence Group, Stora Enso Oyj, Tekni-Plex, Sealed Air Corporation, Silgan Holdings, SIG Combibloc, and Elopak[22] Distribution and Marketing - The company leverages a large, well-invested manufacturing base and a hub-and-spoke distribution network primarily in the United States, providing a competitive advantage[23] - Manufacturing flexibility is a priority, with approximately 1,100 production lines manufacturing about 129 billion units annually, allowing for scalable production and adaptation to market needs[24] - Foodservice: 22 manufacturing plants, sharing 32 warehouses and 8 regional mixing centers with Food Merchandising[25] - Food Merchandising: 24 manufacturing plants, sharing 32 warehouses and 8 regional mixing centers with Foodservice[25] - Beverage Merchandising: 6 U.S. beverage carton manufacturing plants, 7 international plants, 2 filling machinery plants, 3 extrusion plants, 2 integrated liquid packaging board and paper mills, and 3 chip mills[25] Raw Materials - Primary raw materials include plastic resins, fiber (raw wood, wood chips, recycled newsprint), paperboard (cartonboard, cupstock), and aluminum, along with commodity chemicals, steel, and energy[26] - Raw material prices, especially resin, fluctuate based on supply, demand, crude oil, and monomer prices, and are influenced by external conditions like weather, scarcity, and governmental policies[27] - The company mitigates increased commodity costs through higher product pricing (often with a 3-4 month lead-lag effect), manufacturing/overhead cost control, and hedging arrangements, though not fully[28] Intellectual Property and Research and Development - Innovation is a core capability, with over 400 patents related to product design, utility, and material formulations[30][31] - Primary innovation areas include packaging with new features, improved material performance, and environmentally-friendly packaging, driven by evolving consumer preferences and customer requirements[32] Research and Development Expenses | Year | R&D Expenses (Millions USD) | | :--- | :--- | | 2021 | $22 | | 2020 | $20 | | 2019 | $22 | Regulation - The business is subject to regulations governing food-contact products, environmental, health, and safety laws, and permits in all operating countries[36][37] - Governmental authorities are considering legislation to reduce plastic waste, including product bans, recycling mandates, fees/taxes on packaging, and take-back requirements, which could increase compliance costs[38] - Increased legislation and regulation related to environmental issues like climate change and greenhouse gas emissions could lead to additional direct and indirect compliance costs[39] Environmental, Social and Governance Sustainable Products - The company offers sustainable products made from plant-based bio-resin and fiber-based materials, with its EarthChoice brand being a major sustainable foodservice packaging brand in North America[43] - In fiscal year 2021, approximately 64% of net revenue came from products made from recycled, recyclable, or renewable materials, with a goal to reach 100% by 2030[44] - Pactiv Evergreen is a founding member of several recycling and composting initiatives, including the Carton Council and the Foam Recycling Coalition, demonstrating commitment to expanding recycling opportunities[46] Sustainable Operations - The company is working to limit its environmental impact by reducing greenhouse gas emissions, energy consumption, water use, and waste to landfills[47] - Combined Scope 1 and 2 greenhouse gas emissions decreased by 3% between 2015 and 2020, and approximately half of annual energy consumption comes from renewable sources[47][48] - Efforts include reusing plastic and paper scrap in manufacturing and ensuring paper and paperboard are sourced from certified sustainable forests[50][51] Social and Human Capital Resources - As of December 31, 2021, the company employed approximately 16,200 people globally, with 31% represented by labor unions or workers' councils[54] - Safety is a core value, with manufacturing facilities achieving safety metrics approximately 2.5 times better than the industry average in 2021[55] Corporate Culture Diversity, Inclusion and Talent Development - The company focuses on attracting and retaining a diverse workforce; as of December 31, 2021, nearly 50% of U.S.-based employees were Black, Indigenous, or People of Color, including 19% in senior/mid-level leadership[57] - Talent development programs, such as