Pactiv Evergreen Inc (PTVE) 2021 Q3 法說會逐字稿

Good day, and welcome to the Pactiv Evergreen Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Dhaval Patel, Senior Vice President of IR and Strategy. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our Third Quarter 2021 Earnings Call. With me on the call today, we have Michael King, Chief Executive Officer; and Michael Ragen, Chief Financial Officer. Before we begin, please visit the Events section of the company's Investor Relations website at www.pactivevergreen.com and access the company's supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin for our formal remarks, I would like to remind everyone that our discussions today may include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results in financial condition. Lastly, during today's call, we will discuss Non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP, and reconciliation to comparable GAAP measures are available in our earnings release and the appendix of today's presentation.

With that, let me turn the call over to Michael King. Mike?

Thank you, Dhaval. Good morning, everyone, and welcome. Yesterday after market close, Pactiv Evergreen released its third-quarter 2021 results that were broadly in line with the update we provided you on September 8. Our quarterly results demonstrated the resiliency of our products and our portfolio. Demand recovery remained on track and total volume improvement was 3% in the quarter. Price mix was up 14% in the quarter, in addition to ongoing contractual pass-through of cost increases, we took additional pricing actions across both our contracted and street customers. These pricing actions were necessary because of continued inflationary pressures across not just materials, but also conversion costs and higher rates of transportation.

In addition to pricing actions, we are addressing the labor challenges by continuing to focus on recruiting efforts, along with the retention bonuses and wage increases to address the shortage. We are making continued progress and expect a more normal labor market by late next year. We are also mitigating logistic cost pressures through a more focused approach on optimizing inventories and maximizing lane and truck usage. While EBITDA and EBITDA margins remain muted in Q3, we believe they are on track for recovery over the coming quarters.

Please now turn to Slide 4. During this presentation, we will discuss key business takeaways in 3Q 2021 highlights, provide a business update, go through our third quarter financial performance and discuss our near-term outlook. We will conclude with questions and answers. Please now turn to Slide 6. Net sales in the quarter were up 17% due to continued volume recovery and strong price mix. Customer and consumer demand remained strong across our end markets, with total volume up 3%, as we have discussed before. EBITDA margins remain pressured because of the continuation of higher raw material, labor, and supply chain costs. In the face of this inflationary pressure, we remain focused on managing the variables that are in our control. Throughout our manufacturing and supply chains, we remain aggressively focused on productivity and efficiency. In addition to the ongoing contractual pass-through of increased cost, we took additional pricing actions in our portfolio. The combination of these factors contribute to price mix being up 14% across the system for the quarter.

We may continue to see significant inflationary pressure in the near term. If we do, as others expect, we will have to pass-through these cost increases through additional pricing as we remain committed to maintaining margins and profitability. While we have made some early strides, there is still some work to be done. Fortunately, I have the team in place to help position the company to manage any challenges while we focus on growth in the future. Byron Racki has been with us for over 2 months as the President of the beverage merchandising business who is already helping drive a culture of change in urgency. I'm also happy to tell you that the closure of the coated Groundwood business is ahead of schedule, and the majority of the work was completed by October 31. Byron remains focused on improving the pricing and profitability of the business unit, while also continuing to lead the business review of beverage merchandising. Doug Owenby, our new COO, has been with us for a little over 6 weeks. He's hit the ground running and is focused on improving productivity and reliability, driving new and better standards across the operations. He will also be focused on employment retention and automation opportunities. In addition, we announced a number of actions to better position the company for future growth.

On September 8, we announced our plans to acquire Fabri-Kal, and the acquisition was completed on October 1. I'm excited to have Fabri-Kal join the team, and welcome them to the Pactiv Evergreen family. A month into the acquisition, I would like to share that we have internally already laid out our integration strategy. We have begun to execute on that plan and remain on track to deliver synergies. Now that we have closed on the transaction and further analyzed the business, we are even more confident and excited about the combined company's breadth of sustainable product offerings, market reach and the synergies potential. We will provide more information on this transaction in the coming quarters. In Q3, we also announced the pending sale of beverage merchandising's Middle East business in order to remain focused on growth in our core business. If I could turn your attention to Slide 7.

Let's move to Q3 2021 highlights. Net revenue of $1.394 billion was up 17% from Q3 of 2020 as we saw continued volume recovery from the prior year and strong price mix improvement of up 14%. Net income from continuing operations was $2 million and earnings per share from continuing operations was $0.01. Adjusted EBITDA was $119 million for the quarter as raw materials and logistics inflation, along with labor challenges continue to impact the pace of the EBITDA recovery. Free cash flow, defined as adjusted EBITDA less CapEx was $51 million. Finally, we announced and closed our acquisition of Fabri-Kal.

Turning to Slide 8. Turning to our year-to-date highlights. Net revenue was up 11% to $3.91 billion due to increased pricing and strong volume recovery. Year-to-date, adjusted EBITDA was $326 million, which includes a $50 million one-time impact from motor store muri. Please now turn to Page 9.

2 years ago, we created a path for the company that included ambitious and measurable ESG commitments. This plan built on our long history of supplying sustainable products and developing responsible manufacturing processes. In 2020, we announced the goal of 100% of our products to be made with recyclable and renewable materials by 2030. This year, we are specifically focused on gathering internal data and organizing our reporting on operational metrics related to greenhouse gas emissions, energy, water, and waste. Sustainable innovation is a top priority at Pactiv Evergreen to support our customers' goals and our own. Since 2019, the company has introduced over 100 new sustainable products that are specifically designed to improve our customers and our consumers' experience while reducing the post-use impact on the environment. A major part of this effort is a focus on sustainable material research. Additionally, our commitment to integrity translates to continued improved communications around sustainable claims for packaging. This includes systematic, on product labeling for third-party certified compostable products, we believe it will contribute to reinforce trust in our company and our industry. From a manufacturing perspective, we are looking to reduce water and energy consumption. We recently undertook a water stress analysis for all company locations. The results indicated that 97% of our water use is in areas with low water stress. We continue to strive to reduce our overall water usage. We also initiated greenhouse gas emissions analysis for our paper mills, our largest source of emissions, to identify improvement opportunities, using these learnings will be incorporated into our goal setting exercise. Transparency is how we know we are doing what's right. This summer, we published our first public CDP disclosures on climate change and water security, and we are planning on releasing the SaaS meet and GRI disclosures in the coming months. More details on these and other activities may be found at investors.pactive.com in the ESG section.

I will now turn it over to Mike Ragen for a detailed financial review.

Thanks, Mike. Moving to Slide 11. Looking at our third quarter 2021 financial performance, net revenue was $1.394 billion versus $1.195 billion in the same period last year, an increase of 17%. The increase was primarily due to favorable pricing from raw material pass-through and price initiatives, along with higher sales volume. Adjusted EBITDA was $119 million versus $173 million in the same period last year. The decrease was primarily due to higher raw material and logistics costs and labor challenges constraining production and increasing costs, partially offset by higher sales volume and favorable pricing. Free cash flow, defined as adjusted EBITDA less CapEx was unfavorable to the same period last year due to lower adjusted EBITDA.

Moving to Slide 12. Looking at our year-to-date 2021 financial performance, net revenue was $3.91 billion versus $3.514 billion in the same period last year, an increase of 11%. The increase was primarily due to higher sales volume, largely due to higher demand as the economy recovers from the COVID-19 pandemic as well as favorable pricing. Adjusted EBITDA was $326 million versus $445 million in the same period last year. The decrease was primarily due to higher manufacturing, logistics, and material costs, net of price increases, and the impact of winter storm Uri. Free cash flow, defined as adjusted EBITDA less CapEx was unfavorable to the same period last year due to lower adjusted EBITDA.

Moving to Slide 13. This slide helps to bridge Q3 year-on-year revenue and EBITDA. Looking at revenue, when comparing to Q3 last year, we saw some volume favorability of $32 million, was the key driver of our revenue growth being price increases of $169 million. For adjusted EBITDA, whilst volume was marginally favorable given labor-related production constraints, pricing was favorable by $176 million, but this was more than offset by $231 million of higher costs. It is important to note that in Q4, we expect that year-on-year, our increase in price will be approximately $40 million higher than the increase in COGS, reversing the Q3 negative.

Moving to Slide 14 and our results by segment for Q3. Our foodservice segment saw net revenues up 26%, driven by higher pricing to recover cost increases and steady volume recovery. Foodservice volumes for the quarter were up 5% on 2020 and down 7% on 2019 volumes. Demand in food service is strong. However, labor constraints are impacting our ability to meet demand. Adjusted EBITDA for the segment was down 21% versus same period last year due to higher manufacturing, logistics, and material costs, partially offset by favorable price and higher sales volume. Our Food merchandising segment saw net revenues up 10%, driven by favorable pricing, partially offset by lower volume. Food merchandising volumes for the quarter were down 6% on 2020 and down 8% on 2019 volumes. As with our foodservice segment, demand is strong. However, labor constraints are impacting our ability to meet demand. Adjusted EBITDA for the segment was down 32% versus same period last year due to higher COGS and lower sales volumes, partially offset by favorable price. Our beverage merchandising segment saw net revenues up 12%, driven by strong volume recovery. Adjusted EBITDA for the segment was down $8 million versus same period last year. The key drivers being higher COGS, partially offset by higher sales volume and favorable pricing and customer mix. And additional costs related to Tropical Storm Fred.

Moving to Slide 16. We are maintaining our full year adjusted EBITDA guidance at $550 million. We are holding this guidance despite the anticipation of continued inflationary pressures and with the expectation that resin prices will remain flat in Q4 compared to Q3. All of our segments are seeing strong demand with our ability to meet demand being dependent upon increasing labor levels in our manufacturing facilities. Our efforts to increase labor are helping to lift our production output, and we expect to see this improve in Q4 and into 2022. We expect a strong year-on-year lift in pricing of around $200 million in Q4. As mentioned previously, we expect year-on-year price increases to exceed COGS increases by approximately $40 million in Q4. Also, the integration of Fabri-Kal is ongoing, and the business review of beverage merchandising remains on track. Thank you for your time. As an appendix to the presentation, we have included Q3 year-to-date highlights by segment, Q3 year-to-date revenue and adjusted EBITDA bridges versus same period last year consolidated statements of income and loss. A reconciliation of net income and loss to adjusted EBITDA and free cash flow and a summary of progress in our strategic investment program.

I'll now pass it back to Mike King for closing comments.

Thank you, Mike. In closing, while the third quarter was in line with our September update, we continue to believe we are in a transitionary environment, and our results do not reflect our true potential. While we still face a number of challenges in the near term, I am confident our team and employees are up to the task, and we'll continue to take actions to improve our performance. We continue to believe that if and when raw material input costs moderate, our contracted pricing actions will catch up and lead the improved margins. In addition, we have closed the acquisition of Fabri-Kal and began its integration and remain on track on the business review of the beverage merchandising segment. We will provide further updates on these initiatives in the near future.

Finally, I would like to thank all of the Pactiv Evergreen workforce for their continued hard work to serve our customers and to enhance the value of the company to all of our stakeholders. With that, we will now open it up for your questions. Operator?

(Operator Instructions) And the first question comes from Ghansham Panjabi with Baird.

I guess, first off, on the 3Q to 4Q sort of EBITDA bridge, over $100 million. There's a lot going on with Fabri-Kal, price cost, volume, labor shortages, et cetera. Can you just help us bridge that differential on a sequential basis for us?

Yes. This is Mike Ragen. On Slide 13 of the presentation, you would have seen that essentially, price is up by -- this is for Q3, price is up $176 million. The COGS were up $231 million, so a negative of $55 million there. The expectation is for Q4 that price will be up some over $230 million, whilst this is year-on-year whilst COGS will be up around $190 million. So there's sort of a $90 million to $100 million swing in the price COGS dynamic between the quarters. And then over and above that, Fabri-Kal adds about -- it's around $10 million into the quarter. Volumes quarter-on-quarter, no major change. We're expecting labor challenges to continue, but they're improving. We're getting better. We're getting more people into the plant, but it does take a little bit of time to train them up and make them effective.

Sure. And then in terms of food merchandising, the volume decline, I know you called out labor challenges there, but is there some degree of just mean reversion where mobility is boosting food service, but coming at the expense of grocery stores, et cetera? Or is it just purely the constraints that you cited there?

It's -- so the biggest thing here in food merchandising is, to your point, a little bit of that. And what I'll point to is that egg sales are down versus 2020, they're down 15% to 20% in the quarter. As you know, we're the sort of leading packager in egg cartons. And so that's a key driver there. And over and above that egg trade volumes are down somewhat, both of those surged in 2020 because more people are eating at home. And so there is a bit of a reversion there. Most of the other areas are pretty much flat year-on-year.

The next question comes from Chris Parkinson with Mizuho.

You've recently made a few new hires on your team and are still assessing several strategic initiatives or opportunities across both your cost structure as well as the portfolio. Can you simply give us a quick update what's been potentially a pleasant surprise thus far? What's kind of kind of the incremental opportunity? And/or potentially, there are other things you believe are going to be more challenging? Just anything that you could give us for '22 or '23 would be appreciated.

So I am -- as I mentioned in the call here, I am pleasantly surprised with the adds to the team. Specific to Byron Racki, the President of our Beverage merch business. I think bringing in an experienced guy that knows the paper-making and tin board making world has been beneficial. Certainly, no secret that our mills have been challenged, getting velocity and turning around those mills while we take the time to strategically review our product portfolio, our operations, our footprint, all those things. He brings a lot to the table there, and we're hardly seeing the green shoots from his short tenure. As it relates to operations, getting some velocity on positioning our operations to be world-class in terms of digital enablement, automation, things that we see ongoing headwinds in the markets around labor. Our goal there being to insulate ourselves and frankly, position ourselves to win on the back end of the current supply chain. Doug Owenby brings a lot to the table there. As we get fitness around what we're considering a new labor force and a very dynamic labor force. We don't expect that to change insulating our factories from the variables that come with that and really have an optionality around automation is where I've seen progress in the last kind of 2 months that as we position the business to win there, Doug brings a lot to the table. And yes, I'm excited about that. We've had a handful of others, really all the other ads on the team and visibly and behind the scenes have all been to get velocity, not just on productivity, but really, as you started to see our acquisition activity and strategic looks at product mix and positioning the business, not just for a good next 12 months, but a good next 5 years and beyond has become a focus. So getting proactive with all elements of the strategies of the business is really, I would tell you, generally, where I've seen progress in the last 6 months is whether it be how we procure products, position our supply chain, go after strategic and tactical productivity items. And frankly, just get on our front foot with the realities of what mother nature and some of the macro microeconomic challenges at the basis. Those things don't slow down. So having the bandwidth to proactively manage that. I can tell you that we're in a better position today than we were 6 months ago. And that's largely because of the ads and the team I have in place.

That's helpful color. And just as a quick follow-up, can you just give us, let's say, 2 points on volume trends for each segment as we head into 2022? And then hopefully, your improving ability to meet that demand post '21 supply chain, disruptions, and labor headwinds. Just any color on that would be very helpful.

Yes. Mike, do you want to do that? Or are you -- I'm happy to either way?

Yes. Up to you, Mike.

Yes, go ahead, and I'll fill in that place.

Okay. Sure. I think in food service, we've continued to see strong volumes around containers. And as the economy opens up and people start to go back to work, we're seeing strong demand in cups as well. And that ties closely to the sort of noncommercial sector opening up again, things like schools and universities and ballparks and things like that. So we're seeing strong demand there. In food merchandising, I mentioned before that protein and egg sales are down a little bit, which is the inverse of the fruit service trends. But overall, we'll expect to see those runs normalize, but everything else should continue to be strong. And then in beverage merchandising, we're seeing school milk come back, which is great to see. That drives both our carton sales and our external board sales. And as foodservice cups come back, paper cups specifically, we see better board sales as well. Not to mention that we're also seeing for uncoated free sheet, we're seeing some stronger demand there as well. So that would more or less summarize by segment what we're seeing.

The next question comes from George Staphos with Bank of America.

I wanted to first hit a little bit on operations and segue to Fabri-Kal. So Mike and Mike, can you talk a little bit about how you will and how we should try to observe and measure your ability to improve on the labor situation. I think you'd said you hope it normalizes, and you're not alone here, so we're not blaming you guys at any stretch by later in 2022. And I noticed that, Mike, you said, Mike Ragen that Fabri-Kal will be roughly about $10 million in EBITDA in the quarter. I seem to remember that the LTM for Fabri-Kal, you announced you lose somewhere in the mid-50s. So maybe that's just operating friction when you're first bringing in the business, but is there any labor issue there that also needs to be normalized for Fabri-Kal looking out to 2022?

Yes. So I'll give the color on labor, and then I'll let Mike talk to the Fabri-Kal question in terms of earnings. So Fabri-Kal is no different. They're faced with the same challenges as I think everybody who's in manufacturing in the country right now. So we didn't get a larger-than-expected surprise on labor. What I can tell you is the green shoots we're seeing headed into Q4 and the progress we're making adding humans to both businesses is positive. We're not seeing a regression in terms of labor. We're seeing it go the other way. I think the -- what you heard me say on the call, and I certainly welcome more clarity as we move into 2022.but it doesn't feel like the controllable elements aside, it doesn't feel like things are going to slow down in a meaningful way. And even if they did in terms of unemployment and bringing people back to manufacturing jobs, I think we're all chasing the curve still. Our modeling and what we see based on the progress here headed into Q4, we do anticipate getting whole in 2022. When that is whether it's Q3 or Q4, there's a lot of things we don't control that will dictate that.

What do you think your labor inflation might look like year-on-year '22 versus '21 including -- if you normalize for Fabri-Kal, obviously.

Well, there's 2 -- so that's a tough one, but I'll take a run at it. We've added a lot of labor inflation in here, frankly. So we've taken a lot of that pain this year. In a normal year, I think our labor inflation is between 2% and 3%. And we're going to be in order of magnitude twice, maybe 3x that, if you add to the 2021 moves we've made and what we need to do to position ourselves to keep humans in 2022.

Yes, George, I'll just weigh in a little bit on that, give you -- and Mike directionally is right. Depending on where we are in the country, depending on which plant, 7% to 10% is what we're expecting year-on-year increase in labor.

Makes sense. And that -- I appreciate that. I just want to hit one more question on growth, and I'll turn it over. So I wouldn't have expected you to continue at the fantastic growth that you saw. Obviously, comps were easier in 2Q for food service, where you're up over 30%. This quarter, Europe, I think the volume was 5%. Are there any things in your view that would trouble you about the 5%? Are you happy with that? Are you seeing any signs that the pricing that you need to put into the market, we totally understand is having any kind of demand destruction in your business or not. Relatedly, Mike and Mike, can you tell us where the cup and lid businesses versus 2019, you're obviously up a lot versus last year. And if you could give us any kind of view on plastic versus fiber-based in food service, is there one sector that's growing paper versus plastic more than the other? And if you could quantify, that would be great. And have a great quarter.

Yes. Thanks, George. So on the pricing or the commercial elements of demand, we could sell every container and cup and item we can make. So the pricing action we've had to take has curbed demand. We're constraining our demand through our ability to make product at the moment. And we're moderating that based on keeping stable inventory. So truthfully, it's -- demand is not a concern. The concern is making sure we're positioned to meet and recover inventories and demand heading into the next Qs.

George, versus 2019, our cup lid volumes are about 9% down in the quarter. And most of that is driven by fiber cups. And that's a lot to do with the number of people that are going to work and picking up a coffee on the way to work. We'll start to see that sort of pick up a little bit, we think, in the near future, but plastic cups are very strong.

The next question comes from Adam Samuelson with Goldman Sachs.

So, I guess my first question is it's thinking about this price cost balance in the third quarter and then kind of the flipped that you're expecting to positive in the fourth quarter. In 3Q, you talked about COGS being a $231 million year-on-year headwind. Can you break that down a little bit into whether the peer raw materials, supply chain logistics, kind of where can help us think about the different buckets of that COGS inflation and how you would think about that tracking in the fourth quarter?

So, few raw materials are around $180 million of that. And then the remaining piece is -- of $50 million is higher manufacturing and logistics costs.

And how would that look in 4Q?

In 4Q, it's -- hang on a second. It's mostly materials year-on-year.

And why would the supply chain, the supply chain logistics on a year-on-year basis, not still be a headwind. I'm just not sure I'm clear on that.

Because in the last year, we had a mill outage in our -- in our Canton, North Carolina facility. And so year-on-year, those costs won't repeat.

Okay. And then just a clarifying point on guidance. I believe when you had -- when you announced Fabri-Kal in early September and you've taken the full year guidance to $550 million. At that time, the $550 million I didn't believe actually included any contribution from Fabri-Kal because it hasn't closed yet. Now obviously, the $550 million does. I just want to be clear is that true? And if so, just make sure we're clear, just -- is it just more raw material pressure and labor constraints that are in the fourth quarter that are offsetting the incremental Fabri-Kal earnings?

Yes, it does include Fabri-Kal, as I mentioned before, it's circa $10 million for Fabri-Kal. And so we're maintaining our 550 number. And we'd like to be better than that, but we're just sticking with the $550 million.

Okay. And then if I could just squeeze one more. If you think of the labor constraints and the impact that it's had on your volumes, any way to quantify or frame what you think that cost on a volume basis in 3Q? And how much is that still costing you in 4Q from a production perspective?

It's a little bit how long is a piece of string really. We know that the demand is there. We know that our customers want more product. We know that other people out in the market don't -- other customers or potential customers are coming to us, asking for product, particularly in foodservice. And in foodservice, could we see 10% higher. Maybe, it would be a guess.

The next question comes from Mark Wilde with Bank of Montreal.

Mike and Mike, I wonder, first of all, can you give us any help in just thinking about sort of the magnitude of the pricing initiatives that have been announced over in beverage merchandising on both board and paper, and then how you would see that kind of cadencing in over the next few quarters?

Sure. So what I can tell you is that year-on-year, we're expecting pricing in the beverage merchandising segment to be around $30 million favorable in Q4. And so what we've been doing is we've been out pushing price, whether it's -- we've obviously got a lot of contracts in place around our cartons, but we've been taking out of market price increases and pushing those as hard as we possibly can. So quarter-on-quarter, Q4 versus Q3, we're expecting around $60 million of higher pricing in that segment.

Okay. And then how should we think about what is yet to come over the next couple of quarters when we factor in lags? And also, I think you guys were out with more price increases just earlier this week.

Yes. I think in coming quarters, we'll continue to see the full effect of the increases, I think year-on-year if I was looking forward to 2022, I'd expect price to be up over $100 million in that segment.

Okay. All right. Then one, just a kind of broader one for both of you and Mike King. And I'm just curious about what you're actually seeing on the ground there in terms of customer pressure to move out of plastics to other substrates. We hear about all of this potential movement yet a couple of weeks ago, one of your competitors announced that they had picked up a big piece of QSR business that was moving from paper into plastics. So just curious kind of across your portfolio, how much pressure you're really seeing on plastic packaging?

I think -- so I'll take this. I think we're seeing a -- I don't want to call it a pause, but I do see that we're seeing people or customers more interested in getting containers and packaging today given demand. So some of the pressures on, for example, foam, gingelly foam containers, things that we're trending out of service, and we're seeing that kind of rebound, and we've had to bring assets back to life, so to speak, to meet demand or try to meet demand. I don't think we're seeing a big reversion to non-green or non-environmentally friendly substrates, but we certainly are seeing people an acceptance of alternatives to get -- to meet demand. I think that if you just look at the regulatory environment, there's been no slowdown there. So we've had things. We've had to make some moves to different substrates to address that, too, so to keep it balanced. I'd say it's slowed, but I don't think it's gone away. And we certainly expect that those pressures continue, albeit they're a bit curved at the moment being outpaced by the desire for volume. So -- and as far as -- if I take the example you gave there, I think, there's still a victory speech on the environmentally friendly front with the move that was made there. So fiber versus the plastic, it's -- they're both kind of in the same category, if you dig into that one. So that one -- those rooms are happening, and we're benefiting from those moves as well.

Just, Mark, I'll just add one small thing. There is one area that we are seeing a push from retailers, and that's really around egg cartons moving out-of-home into molded fiber and clear PET.

And the last one I had was just understanding you've just gone through a pretty big capital cycle at Pactiv Evergreen. I'm just curious with these tight labor markets and the real escalation in labor costs, does it suggest that there -- you may need to take yet another step-up in terms of capital for plant automation, things like that?

Yes. It's a really good question. And in fact, one of the areas where, as I mentioned with Doug and we are taking a bit of a different look there. Certainly, insulating our factories from the dynamics and the labor force, but also just really positioning our factories to be more efficient. We are looking harder at automation for sure. If you look at the capital intensity that we've had, we had a large portion of our strategic investment program has been around automation. And you could expect that we do look harder at that moving forward.

The next question comes from Arun Viswanathan with RBC Capital Markets.

I guess I just wanted to go through the guidance a little bit. So assuming the midpoint, assuming $550 million for the year, that implies kind of a $224 million number for Q4. If I take off $10 million from Fabri-Kal, we're still at $214 million, which is up about $100 million from the Q3 number. So how are you thinking about that $100 million sequential improvement? Is that kind of food service getting closer to about $100 million itself? I think you did that number in Q2 of '19 and then maybe a doubling of beverage to the $30 million to $35 million level. And that, again, would imply kind of a closer to $100 million number for food merch, which is a doubling. So I just -- it seems quite a large magnitude of an increase sequentially. So maybe you could just help us understand that bridge a little bit.

So, if you think about each of the segments, I'll give you a steer on that. Foodservice will be over $100 million and again, a lot of that's driven by the higher pricing net of some COGS increase. Food merchandising, I'm expecting that to be in the -- like somewhere between 65 and $75 million. And then beverage merchandising is a large lift, between 50 and $60 million. And so -- and why the big lift, it's predominantly price increases and price actions, partially offset by higher COGs in that segment. So it's a decent lift in that segment, but a lot of those price actions are contractual. And we're fully expecting that segment to hit their numbers.

Great. And as a follow-up, maybe we can just kind of extend that into '22. So given that you're going to be exiting the year at, say, a $225 million run rate, and then maybe assume a little bit more synergy capture, maybe some progress on restructuring and price cost. Is $225 million kind of the right quarterly run rate that we should think about from here on and improvements to that, and that would kind of imply kind of a longer-term, $900 million annualized EBITDA level. Is that kind of what you're headed towards are already there? Or is that -- is there something specific that jumps to the Q4 number above that level?

Yes. There's a bit of a tailwind in Q4. So no, I wouldn't just multiply it by 4. But getting to a normalized number, we'll see margins starting to get back to normal in Q4. And -- but there is a bit of a margin tailwind in that quarter that won't -- isn't necessarily indicative of ongoing.

And then just lastly, if I could. On Bev merch, you laid out some of the issues that you were facing there in the past within the mills and noted that maybe progress needed to be made in each of the 8 states in the production process. Could you provide an update on where you stand maybe in that evolution?

Yes. So yes, just for those who maybe refresh, we look at our mills as kind of 8 or 9 sub factories. Each one of those sub factories that has had and faced need for efficiency and productivity gains and reliability gains. I would tell you that we have made progress in all phases of those sub factories. We've also faced some challenges with flooding and lagging effects of a winter storm. So those things have hampered some of those sub factories. But I can tell you from a decluttering of our focus, exiting the coated groundwood business and pine bluff, shutting that complex down has been beneficial. We've been able to displace humans into open positions and fully staff the mill. That's been a big win for us. And then in Canton, recovering from the flood that we had in Q3 as well as be able to address some of the reliability, the brake, fix, tape items. We've gotten after the spending. That's why some of the excitement you'll hear in our voices around Q4 are there. We're seeing better days. So we have made progress on all fronts, and we have a lot to do still. And we'll keep doing that. But yes, we've made progress despite some of the challenges in each one of those kind of sub factories.

The next question comes from Kyle White with Deutsche Bank.

I wanted to follow-up on Arun's first question, but asking in a little bit different way. The fourth quarter outlook implies kind of an increase of $54 million year-over-year on EBITDA. Your price cost is expected to be up $40 million, and then you have fabric CAL of $10 million coming in. That makes up almost entirety of the increase. I guess why shouldn't we see a stronger fourth quarter than the outlook implies considering expected volume growth? Is it just some conservatism in the guide or is volume contribution expected to be kind of impacted by the supply chain environment?

Yes. That's correct. The supply chain challenges will mute volume, at least that's what we forecast. We're pushing to produce as much as we possibly can. But we do expect the challenges are there. They're there today. We're 1-month into the quarter already, and they're still there, but it is getting better.

Got it. And on price cost, as we look to 2022, a lot of moving parts considering you should be catching up on resin and you have some paperboard price increases rolling through. Are you able to give us a sense as to what you expect price cost to be next year in total, either using today's kind of current pricing environment or however you want to phrase it?

Yes. We are expecting -- I think we talked about this. I think it was when we revised guidance, we're expecting to have a little bit of a tailwind into 2022, because pricing lags, it's probably $50 million to $60 million.

The next question comes from Andy Scheffer with Onex Credit Partners.

Can you give us an expectation on CapEx for the fourth quarter?

What I can tell you for the full year will be between 275 and $285 million.

Okay. And then, as it relates to the labor inflation that you were discussing earlier, 7% to 10%, is that in total? And should we think about that as it's a 7% to 10% increase on a -- call it 95% of full staff?

That's the pure inflation. As we add people in, we get additional output. So that gets factored into the COGS, the marginal increase in COGS.

Okay. And then, the neuro pack beverage, what will the cash proceeds be for that?

I'm sorry, what did you say?

The joint venture that you're selling, the beverage packaging business in the Middle East, what will the cash proceeds be for that?

It's $40 million to $50 million.

And then, can you sort of walk us through the labor issues just in terms of how the journey has been and where you stand now and describe for us how we get to that normalization in the third and fourth quarter. Just in terms of magnitude of headcount and what you think the drivers are? And maybe what may be working for you in terms of success in bringing people back?

Sure. We're short, probably 1,500 people in our plants. Our total population of people is around 15,000, so circa 10%. It's -- in terms of what you do to get that back, we have what -- like the, I guess, swap teams that go around to each plant, they deep dive the data. They go through to work out what the issues are with getting people in that particular area. They come up with detailed solutions, detailed tracking and then go through an execution phase.

On-boarding, training and then embedding people into the plant. Now it's not a one-and-done thing. It's something that we have to do, is an ongoing process, because people leave all the time. Someone opens a new Amazon facility down the road or someone else reacts to what we're doing. So it's a bit of a nice fight, and it's different in every single area.

And then, is there any overriding reason that -- that's the one thing that you see in the press? Is it -- there's no good explanation as to -- or maybe it's not -- maybe it's that there's not a one size fits all. But what has been driving it? And what's caused it to last so long?

I'd be speculating. Yes, the recipe is different everywhere. I mean that's why what works in one region isn't working in other regions. So there's a host of ways to address it. We know it's bigger than just wages and money. So there's definitely a work-life balance element. So being flexible with people's had to be a big part of our recipe for success, retaining people -- getting people is one thing, retaining them is the other.

So I don't want to overlook the fact that curbing vacancy is one thing, but curbing people walking out after you invest in training. So having retention elements in our approach has been a win for us in all areas. But people have -- there's a work-life balance element that we can't overlap when it comes to making a place people want to work in manufacturing versus other sectors, I think, are particularly pressured in that regard.

Okay. And then, my last question is you were discussing, answering some questions regarding the fourth quarter. And I just want to make sure what I took away was accurate. It's -- volumes will still be up, but they will be up less, obviously, because of labor, raw material sourcing and whatnot. And that it's -- the increased cost in addition is offsetting some of that volume increase. It's not that the supply chain and other issues are creating a situation, where volumes will not increase. They're just not increasing at the same rate, one. And then, there's a cost pressure that's continuing.

Yes, that's correct.

(Operator Instructions) Your next question is a follow-up from George Staphos with Bank of America.

I'll try to be quick about it. First of all, you showed good progress on SIP, both in the quarter and the year. As we look out to '22, will you keep updating us on SAP? How are you going to continue to communicate the productivity and the return on the investments that you're making relative to what you've said in the past, that's question number one. My question number 2, recognizing that you're catching up now on price cost. Which of your resins are still the most problematic in terms of obtaining supply for us, so that for your converting operations? And then, last question, I just want to come back to the growth of plastic versus paper recognizing, as you pointed out, with that QSR example, you can have a plastic package that is as sustainable as a paper-based one. But what are you seeing in aggregate in your portfolio, year-on-year growth, either in the quarter or year-to-date, plastic versus paper? And if there are any highlights that you would point to, I think prior, you were just talking to the cups piece.

I think, George, and with regard to the SAP, you can see there that in the update that in the sort of revenue-generating areas at the top -- at the top of the table, we've spent most of the money there. And so, we're almost through that. Automation, we're going to continue to do that where we're not doing so much of the spend is in the areas that are a lower payback around cost reduction at the bottom of the table. In terms of keeping updated, I think what we'd like to do is to now incorporate this into our ongoing just our ongoing way of life, right?

We're going to have CapEx. We're going to be looking at CapEx from the point of view of what's profit-generating and what's maintenance. And then, talking about that moving forward. And well, obviously, there's some trailing benefits to come, but that's probably the best way for us to talk about this because it will get into mixed and in dispersed with new investments next year. In terms of resin supply, at the moment, in terms of supply itself, nothing for us is really overly problematic. We get issues here and there.

Price is more our issue right now. And occasionally, you get something like last week, getting benzene to one of the big converters was -- or the conversion sites to polystyrene was a problem, and this and the other. But overall, it's not as big an issue.

And then, in terms of the paper piece, year-on-year, obviously, we're seeing our cartons in beverage merchandising coming back in school. So that's positive. In terms of -- I talked about the drink containers, but also a lot of the -- there's a lot of growth in other containers like food containers in paper as well. But no more so than what we're seeing in plastic and in fact, plastic is -- continues to be more favorable when carrying food or hot food in particular. And then, in things like meat trades and egg cartons and things like that, egg cartons, we are seeing a trend towards fiber meat trades.

We're not really seeing much going out of plastics. And any other sort of containers that are in supermarkets, I think plastics are still leading. So we're not seeing trends away from that at the moment.

This concludes our question-and-answer session. I will now turn the conference back over to Michael King for any closing remarks.

Yes. I'll just close by saying thank you, everyone for your interest in our company and following us and joining us on the journey here. We look forward to brighter quarters as we close out 2021 and head into 2022. With that, we'll talk to you in another quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.