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Operator
Good day and welcome to the PACT of Evergreen third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask questions, you may press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Deval Patel, Senior Vice President of IR and Strategy. Please go ahead.
Deval Patel
Thank you, Operator, and good morning, everyone. Thank you for your interest in Pact of 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 Reagan, Chief Financial Officer. Before we begin, please visit the events section of the company's investor relations website at www.pactofevergreen.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 can impact our future operating results and 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 gap 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?
Michael King
Michael King Thank you, Davil. Good morning, everyone, and welcome. Yesterday, after market closed, PactiveEvergreen released its third quarter 2021 results that were broadly in line with the update we provided you on September 8th. 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 margins remain muted in Q3, We believe they are on track for recovery over the coming quarters. Please now turn to slide four. During this presentation, we will discuss key business takeaways in three Q2021 highlights, provide a business update, go through our third quarter financial performance, and discuss our near-turnout look. We will conclude with questions and answers. Please now turn to slide six. Net sales in the quarter were up 17% due to continued volume recovery and strong price mix. Customer and consumer demand remain 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 costs, we took additional pricing actions in our portfolio. The combination of these factors contribute to price mix being up 14 percent 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 of 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 Racky has been with us for over two months as the president of the beverage merchandising business and is already helping drive a culture of change and 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 31st. 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 Olmby, our new COO, has been with us for a little over six 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 an employment retention, and automation opportunities. In addition, we announced a number of actions to better position the company for future growth. On September 8th, we announced our plans to acquire Fabrikal, and the acquisition was completed on October 1st. I'm excited to have Fabrikal join the team and welcome them to the Pact of 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 Fabrikil. Turning to slide eight, 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 winter storm URI. Please now turn to page 9. Two 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 a goal of 100% of our products to be made with recycled, 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 PACT of 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 SASB and GRI disclosures in the coming months. More details on these and other activities may be found at investors.pactiv.com in the ESG section. I will now turn it over to Mike Reagan for a detailed financial review.
Michael King
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 in EBITDA. Looking at revenue, When comparing to Q3 last year, we saw some volume favorability of $32 million, with the key driver of our revenue growth being price increases of $169 million. For adjusted EBITDA, while 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 COGS. 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 food service segment saw net revenues up 26% driven by higher pricing to recover COGS increases and steady volume recovery. Food service volumes for the quarter were up 5% on 2020 and down 7% on 2019 volumes. Demand in food service is strong. However, labour 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 favourable 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 food service 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 favourable 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 favourable 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 Fabrikal 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 averages 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.
Michael King
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 will 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 FabriCal 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 PACT of 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
We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star then 2. And the first question comes from Gansham, Punjabi with Baird. Please go ahead.
Gansham
Thank you. Hey guys, good morning. I guess first off on the 3Q to 4Q sort of EBITDA bridge, you know, over 100 million, you know, there's a lot going on with Fabrikal, price cost, you know, volumes, labor shortages, et cetera. Can you just help us bridge that differential on a sequential basis for us?
Michael King
Yeah, good morning, Gansham. This is Mike Reagan. How are you?
Gansham
Good, thank you.
Michael King
Yeah, good. So if, you know, 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, so a negative of 55 there. The expectation is for Q4 that price will be up, you know, 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 to $100 million swing in the price cogs dynamic between the quarters. And then over and above that, Fabrikal 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 plants, but it does take a little bit of time to train them up and make them effective.
Gansham
Sure. Thank you for that. And then in terms of food merchandising, the volume decline, I know you call that 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?
Michael King
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, meat tray volumes are down somewhat. Both of those surged in 2020 because more people were eating at home. And so, you know, there is a bit of a reversion there. Most of the other areas are pretty much flat year on year. Okay, thank you very much. No problem.
Operator
The next question comes from Chris Parkinson with Mizuho. Please go ahead.
Chris
Great, thank you very much. Good morning. 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 the incremental opportunity? And are potentially there other things you believe are going to be more challenging? Just anything you could give us for 22 or 23 would be appreciated. Thank you.
Michael King
Thanks, Chris. Yeah, so I am, as I mentioned on the call here, I am pleasantly surprised with the ads to the team. Specific to Byron Racky, the president of our beverage merch business. You know, I think bringing in an experienced guy that, you know, knows the paper making and 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 already 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 Olinby 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, you know, have an optionality around automation is where I've seen progress in the last kind of two months that as we position the business to win there, Doug brings a lot to the table. Yeah, I'm excited about that. We've had a handful of others, really all the other ads on the team and, you know, visibly and behind the scenes have all been to get velocity, not just on productivity, but really as you started to see, you know, our acquisition activity and strategic looks at product mix and positioning the business, not just for, you know, a good next 12 months but a good next five years. and beyond has become a focus. So, you know, getting proactive with, you know, all elements of the strategies of the business is really, I would tell you generally where I've seen progress in the last six months is whether it be how we procure product, position our supply chain, you know, go after strategic and tactical productivity items, and frankly just get on our front foot with the the realities of what Mother Nature and some of the macro and microeconomic challenges that face us. 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 six months ago. And that's largely because of the ads and the team I have in place.
Chris
That's helpful, Collar. And just as a quick follow-up, can you just give us, let's say, two 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. Thank you.
Michael King
Yeah, Mike, you want to do that, or are you unhappy to either way?
Michael King
Yeah, up to you, Mike.
Michael King
Yeah, go ahead, and I'll fill in if I...
Michael King
okay sure I think in food service you know we've continued to see strong volumes around containers and and as the as the economy opens up and people start to go back to work we're seeing strong demand in in cups as well and that that ties closely to the sort of non-commercial 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 food service trends. But, you know, Overall, we'll expect to see those ones 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 food service cups come back, paper cups specifically, we see better board sales as well. Not to mention that we're also seeing for uncoded free sheet, we're seeing some stronger demand there as well. So that would more or less summarize by segment what we're seeing.
Overall
Thank you very much.
Operator
The next question comes from George Staffos with Bank of America. Please go ahead.
George Staffos
Thanks. Hi, guys. Good morning. Thanks for taking my questions. Hope you're doing well, and thanks for the details. I wanted to first hit a little bit on operations and segue to Fabrikal. 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 by any stretch, by later in 2022. And I noticed that, Mike, you said, Mike Reagan, that Fabricow will be roughly about $10 million in EBITDA in the quarter. I seem to remember that the LTM for Fabricow when you announced the deal was 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 Fabrikal looking out to 2022?
Michael King
Yeah, so I'll give the color on labor, and then I'll let Mike talk to the Fabrikal question in terms of earnings. So Fabrikal is in 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 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 gonna slow down in a meaningful way. And even if they did in terms of unemployment and unemployment you know, bringing people back to manufacturing jobs, you know, I think we're all chasing the curve still. You know, our modeling and what we see based on the progress here headed into Q4, you know, we do anticipate getting whole in 2022. When that is, you know, whether it's Q3 or Q4, you know, there's a lot of things we don't control that will dictate that.
George Staffos
Michael? What do you think your labor inflation might look like year on year 22 versus 21, including if you normalize for fabric?
Michael King
Well, there's two, so that's a tough one, but, uh, I'll take a run at it. We've added a lot of labor inflation in year, um, frankly. So we've taken a lot of that pain this year. Um, and in a normal year, I think our labor inflation. you know, is between 2% and 3%. And, you know, we're going to be in order of magnitude twice, maybe three times that if you add to, you know, the 2021 moves we've made and what we need to do to position ourselves to keep humans in 2022.
Michael King
Yeah, George, I'll just weigh in a little bit on that. 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.
George Staffos
Makes sense. I appreciate that. I just want to hit one more question on growth, and I'll turn it over. 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, you're up, 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, can you tell us where the cup and lid business is 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. Thanks, I'll turn it over and have a great quarter.
Michael King
Yeah, thanks, George. So on the pricing or the commercial elements of, you know, demand, you know, we could sell every container and cup and item we can make. So, you know, the pricing action we've had to take hasn't curbed demand. Got it. We're constraining our demand through our ability to make product at the moment. And we're moderating that based on keeping stable inventory. you know, truthfully, it's demands, not the concern. Uh, the concern is, you know, making sure we're positioned to meet and recover inventories and demand heading into the next queues.
Michael King
Yeah.
Michael King
Go ahead.
Michael King
George versus 2019. Um, our, our cup lid, um, volumes are about 9% down in the quarter. Um, and, 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.
Overall
All right. Thanks, guys. I'll turn it over.
Operator
The next question comes from Adam Samuelson with Goldman Sachs.
Adam Samuelson
Please go ahead. Thank you. Good morning, everyone. So I guess my first question is thinking about this price-cost balance in the third quarter and then kind of the flip that you're expecting to a positive in the fourth quarter. In 3Q, you talk about COGS being a $231 million year-on-year headwind. Can you break that down a little bit into whether the pure 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?
Michael King
So pure raw materials are around $180 million of that. And then the remaining piece is, you know, $50 million is higher. manufacturing and logistics costs.
Overall
And how would that look in 4Q?
Michael King
In 4Q, it's mostly materials, year-on-year fire.
Adam Samuelson
And why would the... supply chain logistics on a year-on-year basis not still be a headwind? I'm just trying to make sure I'm clear on that.
Michael King
Because in the last year, we had a mill outage in our Canton, North Carolina facility. And so year-on-year, those costs won't repeat. Okay.
Adam Samuelson
And then just a clarifying point on guidance. I believe when you announced Fabrikal in early September and you'd taken the full year guidance to $550 million, at that time, the $550 million, I didn't believe, actually included any contribution from Fabrikal because it hadn't closed yet. Now, obviously, the $550 million does. I just want to make sure that's true. And if so, just make sure we're clear. Is it just more raw material pressure and labor constraints that are in the
Michael King
in the fourth quarter that are offsetting the incremental fabric out right yeah it does it does include fabric galas I mentioned before it's circa 10 million dollars for fabric al and so you know we're maintaining our 550 number and you know we'd like to be better than that but but you know we're just sticking with the 550 okay and then if I could just squeeze one more the
Adam Samuelson
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?
Michael King
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, you know, particularly in food service. And, you know, in food service could we see 10% higher? Maybe. It would be a guess.
Overall
Okay. Okay. All right. I appreciate the call. I'll pass it along. Thanks.
Operator
The next question comes from Mark Wild with Bank of Montreal. Please go ahead.
Mark Wild
Thanks, and good morning. Mike and Mike, I wonder, first of all, can you give us any help in just thinking about sort of the magnitude of all 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?
Overall
Sure.
Michael King
So what I can tell you is that year on year, we're expecting, you know, pricing in the beverage merchandising segment to be, you know, around $30 million favorable in Q4. And so, you know, what we've been doing is we've been out pushing price, whether it's, you know, 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, you know, Q4 versus Q3, we're expecting around $60 million of higher pricing in that segment.
Mark Wild
Okay, and then, you know, 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 earlier this week.
Michael King
Yeah, I think in coming quarters, you know, we'll continue to see, you know, the full effect of the, of, you know, our increases. I think year on year, you know, you know, if I was looking forward to 2022, I'd expect, you know, price to be up over $100 million in that segment.
Mark Wild
Okay. All right. Then one just kind of broader one for both you and Mike King, and I'm just curious about, you know, what you're actually seeing on the ground there in terms of customer pressure to move out of plastics to other substrates. You know, we 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 are you really seeing on plastic packaging?
Michael King
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, congelated foam containers, you know, things that were trending, you know, 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 in acceptance of alternatives 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. And as far as you know, if I take the example you gave there, you know, I think, yeah, you know, there's still a victory speech on the, on the, uh, environmental finally front with the move that was made there. So fiber versus the plastic, you know, it's, you know, they're both kind of in the same category if you, if you dig into that one. So that one, those moves are, are happening and we're, we're benefiting from those moves as well.
Michael King
I've just Mark, I'll just add one, 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 foam into molded fiber and clear PET.
Mark Wild
Okay. The last one I had was just understanding you've just gone through a pretty big capital cycle at Pack of Evergreen. I'm just curious with these tight labor markets and the real escalation in labor costs, does it suggest that you may need to take yet another step up in terms of capital for plant automation, things like that?
Michael King
Yeah, it's a really good question. And in fact, one of the areas where, as I mentioned with Doug Olinby, we are taking a bit of a different look there. Certainly insulating our factories from the 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 that capital intensity that we've had, we had a large portion of our strategic investment program has been around automation, and you can expect that we do look harder at that moving forward.
Overall
Okay, very good. I'll turn it over. Thank you.
Operator
The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.
COGS
Great. Thanks for taking my question. I guess I just wanted to go through the guidance a little bit. So, you know, assuming the midpoint, assuming 550 for the year, you know, that implies kind of a $224 million number for Q4. if I take off 10 from fabric hall, we're still at two 14, which is up about a hundred from, uh, the Q3 number. So, um, how are you thinking about that a hundred sequential improvement? Is that, um, you know, kind of food service getting closer to about a hundred million itself. Um, I think he did that number in Q2 of 19, um, excuse me, and then maybe a doubling of beverage to, to the 30 or $35 million level. And that again would imply kind of a, know closer to 100 million dollar number for food merch which um is a doubling so just just uh it seems quite a quite a large magnitude of an increase sequentially so maybe you can just help us understand that bridge a little bit thanks yeah sure uh thanks aaron um so if you think about each of the segments i'll i'll give you a steer on that uh food service will be over 100 million dollars um
Michael King
And again, a lot of that's driven by the higher pricing and net of some COGS increase. Food merchandising, I'm expecting that to be somewhere between 65 and 75. And then beverage merchandising is a large lift, between 50 and $60 million. And so 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.
COGS
Great. Thanks for that. 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 run rate, you know, and then maybe assume a little bit more synergy capture, maybe some progress on restructuring and price cost, is 225 kind of the right quarterly run rate that we should think about? from here on and improvements to that. And that, that would kind of imply kind of a, uh, a longer term $900 million annualized EBITDA level is, is that kind of what you're headed towards or already there? Or is that, um, is there something specific that jumps, uh, uh, the Q4 number above that level?
Michael King
Yeah, there's, there's a bit of a tailwind, uh, in Q4. So no, I wouldn't just multiply it by four. Um, but, but, you know, um, Getting to a normalized number, we'll see margins starting to get back to normal in Q4. But there is a bit of a margin tailwind in that quarter that isn't necessarily indicative of ongoing.
COGS
And then just lastly, if I could, on Bev Merch, you laid out some of the issues that that you were facing there in the past within the mills and noted that maybe progress needed to be made in each of the eight stages in the production process. Could you provide an update on where you stand maybe in that evolution? Thanks.
Michael King
Yeah. So yeah, just for those who maybe need a refresh, we look at our mills as kind of eight or nine sub-factories Each one of those sub factories 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 Dakota groundwood business in Pine Bluff, shutting that complex down has been beneficial. We've been able to displace humans into open positions and fully staffed 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 being able to address some of the reliability, the break-fix type 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, yeah, we've made progress despite some of the challenges in each one of those kind of sub-factories.
Overall
Thanks.
Operator
The next question comes from Kyle White with Deutsche Bank. Please go ahead.
Kyle White
Hey, good morning. Thanks for taking the questions. I wanted to follow up on Arun's first question, but ask it 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 Fabrikal of $10 million coming in. That makes up almost the 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? Yeah, that's correct.
Michael King
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 you know, one month into the quarter already, and they're still there, but, you know, it is getting better.
Kyle White
Got it. And on price costs, as we look to 2022, a lot of moving parts considering you should be catching up on resin and you have some paper board price increases rolling through. Are you able to give us a sense as to what you expect price costs to be next year in total, either using today's kind of current pricing environment or however you want to phrase it?
Michael King
Yeah, we are expecting, you know, I think we talked about this. I think it was, you know, when we revised guidance, you know, we were expecting to have a little bit of a tailwind into 2022 because, you know, pricing lags, you know, it's probably, you know, $50 to $60 million.
Overall
Perfect. I'll turn it over. Thanks.
Operator
The next question comes from Andy Sheffer with Onyx Credit Partners. Please go ahead.
Andy Sheffer
Good morning. Thanks for taking my questions. Can you give us an expectation on CapEx for the fourth quarter?
Michael King
What I can tell you for the full year will be between 275 and 285. Okay.
Andy Sheffer
As it relates to the labor inflation that you were discussing earlier, you know, 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 a 95% of full staff? Yeah. In other words –
Michael King
As we add people in, you know, we get additional output. So, you know, that gets factored into, you know, the COGS, you know, the marginal increase in COGS.
Andy Sheffer
Okay. And then the Neuropak beverage, what will the cash proceeds be for that?
Michael King
I'm sorry, what did you say?
Andy Sheffer
The joint venture that you're selling, the beverage packaging business in the Middle East, what will the cash proceeds be for that?
Michael King
It's $40 million to $50 million.
Andy Sheffer
And then can you sort of walk us through the labor issues just in terms of how the journey's been? you know, and where you stand now and, you know, describe for us how we get to that normalization in the third and fourth quarter, you know, just in terms of magnitude of headcount and what you think the drivers are and, you know, maybe what may be working for you in terms of success in bringing people back.
Michael King
Sure. We're short probably 1,500 people in our plants. Our total population of people is around 15,000, so circa 10%. In terms of what you do to get that back, we have SWAT teams that go around to each plant. They deep dive the data. They go through to work out what the 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, onboarding, 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 as an ongoing process because people leave all the time. You know, someone opens a new Amazon facility down the road or, you know, someone else reacts to what we're doing. So, you know, it's a bit of a knife fight and it's different in every single area.
Andy Sheffer
And then is there any overriding reason that, you know, 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 you know, what has been driving it and what's caused it to last so long?
Michael King
I'd be speculating.
Michael King
Yeah. The recipe is different everywhere. I mean, that's why, you know, what works in one region isn't working in other regions. So, you know, there's a host of 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 has had to be a big part of our recipe for success. Retaining people. Getting people is one thing. Retaining them is the other. So, you know, 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, you know, there's a work-life balance element that we can't overlook when it comes to, you know, making it a place people want to work. And manufacturing versus other sectors, I think, are particularly pressured in that regard. Okay.
Andy Sheffer
And then my last question is you were discussing answering some questions regarding the fourth quarter. I just want to make sure what I took away was accurate. Volumes will still be up, but they will be up less, obviously, because of labor, raw materials, sourcing, and whatnot. 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 added cost pressure that's continuing.
Overall
Yeah, that's correct. Thank you.
Operator
Again, it is star than one if you would like to join the question queue. The next question is a follow-up from George Staffos with Bank of America. Please go ahead.
George Staffos
Hi, guys. Thanks for taking the follow-ons. 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 SIP? 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. Mike, question number two, recognizing that you're catching up now on price costs, which of your resins are still the most problematic in terms of obtaining supply 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. Thanks, guys, and good luck in the quarter.
Michael King
I think, George, with regard to the SIP, you can see there that, you know, in the update that, you know, in the sort of revenue-generating areas 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 is to now incorporate this into our ongoing, you know, 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, you know, what's profit generating and what's maintenance. And then, you know, talking about that, you know, moving forward. And, you know, 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 all get intermixed and interspersed 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. Occasionally, you get know something like last week you know getting benzene to one of the big converters was all the conversion sites you know to polystyrene was a problem and this that the other but overall it's it's it's not as big an issue and then in terms of the paper piece year-on-year you know of the obviously we're seeing you know our cartons and you know, in beverage merchandising coming back in schools. So that's positive. You know, in terms of, you know, I talked about the drink containers, but also a lot of the, you know, 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, you know, continues to be more favorable when carrying food or hot food in particular. And then in things like meat trays and egg cartons and things like that, egg cartons, we are seeing a trend towards fibre. Meat trays, 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.
Operator
This concludes our question and answer session. I will now turn the conference back over to Michael King for any closing remarks.
Michael King
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. 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.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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