Sonoco Products Company

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Sunoco earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Roger Shrum, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Josh, and good morning, everyone, and welcome to Sunoco's third quarter investor conference call. Joining me today is Howard Coker, President and Chief Executive Officer, Roger Fuller, Executive Vice President, and Julie Albrecht, Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at sunoco.com. In addition, we will reference a presentation on our third quarter results, which also is posted on our website this morning. Before we go further, let me remind you that today's call and presentation contains a number of forward-looking statements based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely related GAAP measure, is also available in the investor relations section of our websites. Now, with that introduction, I'll turn it over to Julie.

Thanks, Roger. I'll begin on slide three, where you see that earlier this morning, we reported third quarter earnings per share on a gap basis of 82 cents and base earnings of 86 cents per share, which is above our guidance range of 73 to 83 cents per share. Due to the negative impact from COVID-19, this 86 cents of base EPS is well below the 97 cents that we delivered in the third quarter of last year. At a high level, our third quarter 2020 earnings reflected mixed demand for our diversified products and negative price costs in our industrial segment. Partially offsetting these headwinds was very strong productivity driven across our business. Our third quarter base earnings were above our expectations primarily due to better operating performance in certain businesses, most notable or integrated industrial North America, as well as our protective solutions and display and packaging segments. I'll highlight that certain important aspects of our business performed in line with our expectations, including our consumer results and the price-cost impact in industrial. In terms of the 4 cent difference between base and GAAP EPS, 18 cents is due to restructuring activities and 6 cents relates to non-operating pension costs. These non-base expenses were partially offset by a non-base income tax gain of 20 cents driven by a deferred tax write-down related to the pending sale of our D&P Europe business. I would like to highlight that of the $24 million of pre-tax restructuring expense, almost $20 million is non-cash and includes nearly $15 million of non-cash charges related to actions we're taking in our perimeter of store business. Howard will be talking more about this during his comments today. I'll add that, as you can see, we did not exclude any COVID-19-related P&L items from our base earnings. During the third quarter, we incurred approximately $3.5 million of costs directly related to coronavirus, including purchasing protective gear, cleaning our facilities, and paying employees who are in quarantine for work-related reasons. Now, looking briefly at our base income statement on slide four, and starting with the top line, you see that sales were $1,312,000,000, down $42 million from the prior year period. I'll review more details about our key sales drivers on that bridge in just a moment. Gross profit was $257 million, $8 million below the prior year period. Despite the reduction in sales, we maintained our gross profit as a percent of sales at 19.6%. SG&A expenses, net of other income, were $126 million in unchanged year-over-year. Lower expenses tied to COVID, such as travel and group medical, were offset by health and safety costs incurred for the pandemic, strategic spend on technology applications, as well as the addition of acquisitions. Also, we had almost $5 million of unique other income items in last year's third quarter, that did not repeat this year, all thus resulting in operating profit of $131 million, which is $8 million below last year. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $19 million was $4 million higher than last year due to the actions we've taken this year to strengthen our liquidity position by temporarily holding more cash in lieu of debt repayment. Income tax expense of $27 million was $1 million lower than last year, driven by a combination of lower pre-tax profits offset with a higher effective tax rate. Our third quarter 2020 effective tax rate of 24.1% was 180 basis points higher than the prior year period prior your quarter, due primarily to various discrete items. So moving down to net income, our third quarter 2020 base earnings were $87 million, or 86 cents per share. And looking at the sales bridge on slide five, you see volume mix was lower by $54 million, or 4% for the company as a whole. I'll highlight that while our third quarter volumes remained challenged due to COVID-19, the year-over-year volume decline was a meaningful improvement from the 6.9% decline in the second quarter. This improvement reflects quarterly sequential demand increases in each of the protective solutions, display and packaging, and industrial segments. Consumer packaging segment quarterly volume was down $1 million from the prior year, or 30 basis points. We did have nice growth in global rigid paper containers, which saw volumes increase by 2.3%, including 3% higher demand in North America. Within plastics, the prepared and specialty foods market had very strong volume growth at almost 16%, but this was offset by significant weakness in the industrial end-use market. Our flexible business saw a continued negative pandemic impact on demand in the confection market due to reduced foot traffic in convenience stores and other venues, as well as lower seasonal Halloween volume. I'll highlight that when we remove the weak volume in our industrial plastics business, our third quarter consumer segment volumes actually grew by 1%. Display and packaging volume was below last year, down $9 million, or 6%, due to lower demand in domestic displays, paper amenities, and retail security packaging. Volume in paper and industrial converted products was down $41 million, or just over 8%. due to weak volumes in our global paper mill network, as well as across our tubes, cores, and cone operations. I'll note that this volume decline, however, was a solid sequential improvement over the 10.4% decline that we had in the second quarter. And finally, sales volume in protective solutions was down nearly $3 million, or almost 2%, driven mostly by virus-related demand weakness. Moving over to price, you see that selling prices were lower year over year by $6 million. This was primarily in our consumer segment, largely driven by resin price declines in our plastics and flexibles businesses. Moving to acquisitions, you see an impact on the top line of $30 million from the tech and canned packaging acquisitions in consumer and the corinzo acquisition in our industrial segment. I'll note that Corinzo is included in the acquisitions category for just over one month of the third quarter, since it was acquired in early August of last year. And finally, foreign exchange and other was negative by $12 million, with the largest driver being a $5 million negative impact from foreign exchange translation due to the stronger dollar. And in addition, this includes about $4 million of lower sales from our exit of certain small operations in the consumer segment. Moving to the operating profit bridge on slide six and starting with volume mix, our lower sales volume combined with the impact of mix had a negative impact on operating profit of $17 million, driven primarily by the industrial segment. Shifting over to price cost, We had $27 million of unfavorable price costs with about half of this due to non-material inflation. Most of the remaining unfavorable change occurred in our industrial segment driven by a combination of higher OCC costs and lower market pricing. As usual, there's a slide in the appendix that shows recent OCC price trends, and you'll see that Southeast OCC prices averaged $70 per ton in the third quarter, which although down from the second quarter of this year, was double the $35 per ton average in last year's third quarter. Moving to acquisitions, you see that our corinzo, tech, and canned packaging acquisitions contributed $2 million to our third quarter earnings. Next is the impact of productivity. where you see that our total productivity was a strong $40 million year over year. We had solid execution across our productivity levers in materials, shop floor execution, as well as fixed costs, all due to a combination of deliberate cost controls and restructuring benefits. And finally, the change in other was unfavorable by $6 million with various moving pieces. Moving to slide seven, you'll find our segment analysis, where you see that consumer packaging sales were up 40 basis points, driven by the addition of tech and canned packaging, partially offset with a slightly weaker demand, lower prices tied to resin, the exit of certain small operations, and negative foreign exchange translation. Consumer segment operating profits increased by almost 20%, primarily driven by strong productivity. Our consumer segment margin increased to 11.6% versus the 9.8% in the third quarter of last year. Display and packaging sales were down almost 5%, mostly due to lower demand. Operating profit, however, was up almost 21%, and margins improved by 170 basis points to 7.8%. The negative earnings impact from the lower demand was more than offset by fixed-cost productivity. Our industrial segment sales fell by over 7%, primarily due to the weak global volumes. Industrial's operating profit declined by 42%. This was a direct result of the significant drop in demand, as well as the much higher OCC market pricing relative to the third quarter of last year. These headwinds were somewhat offset by solid improvements in productivity. The industrial segment's operating profit as a percent of sales was 7.5%, a nice sequential improvement over 6.9% in the second quarter, but lower than the very strong 12% in the third quarter of last year. And finally, although protective solution sales were flat year over year, operating profit increased by 25% due to strong productivity. This segment's margins improved to 13.3% from the prior year's quarter of 10.6%. So for the total company, sales were down approximately 3%, and operating profit margins declined slightly to 9.9%. Moving to cash flow in slide 8, Our year-to-date third quarter 2020 operating cash flow was $490 million, compared with $239 million in the same period of last year, an increase of $251 million. The largest driver to this increase was the $200 million of voluntary pension contributions, which did reduce last year's operating cash flow. Midway down the slide, you see that our current year-to-date increase in net working capital of $16 million was $26 million lower than the increase in the third quarter of last year. Overall, our working capital management has been very solid this year, despite the challenging business environment. Moving on to free cash flow, which we define as operating cash flow less net capex and dividends. Our free cash flow through the first nine months of this year was $252 million, an increase of $284 million over the same period of 2019. Excluding the voluntary pension contributions made last year, free cash flow improved by $84 million year over year. Net CapEx spending was $108 million year-to-date, a reduction of $36 million compared to the same period of last year. And finally, our cash dividends paid year-to-date were $129 million compared to $127 million in the prior year period. On slide nine, you see that our balance sheet is extremely strong and reflects the cash and debt positioning we did earlier this year in response to the pandemic. Our third quarter 2020 consolidated cash balance of $783 million includes $578 million held in short-term investments that are very liquid and of high credit quality. Moving on to our debt balances, our consolidated debt totaled $2.14 billion at the end of the third quarter, a decrease of $129 million from the second quarter. These changes in our cash and debt balances during the third quarter reflect debt repayments, the canned packaging acquisition, and our very strong third quarter cash flow generation. Moving to slide 10, you find our base earnings per share guidance, which is 70 to 80 cents per share for the fourth quarter and $3.29 to $3.39 per share for the full year. This range continues to reflect the ongoing uncertainties regarding the challenging macroeconomic conditions stemming from the COVID-19 pandemic. You'll also see that we're expecting our full year 2020 operating cash flow to be in a range of $643 to $663 million, and free cash flow to be between $290 and $310 million. Specific to free cash flow, This updated full-year outlook is a solid $40 million improvement over our original guidance provided in February of this year. Turning to slide 11, I'll cover some of the key assumptions and circumstances impacting our fourth quarter base earning guidance. Related to demand, and first related to COVID-19, we expect to have a mixed impact on demand for our products, with the net impact being slightly negative to earnings compared to the fourth quarter of last year. In addition, our outlook assumes a typical seasonal year-end slowdown in some of our businesses, such as protective solutions and display and packaging. Howard will provide more comments about our fourth quarter demand outlook in a few minutes. Also, we'll continue our focus on controllable cost reductions in areas such as travel. and we expect to continue driving strong productivity results, although we don't expect our fourth quarter productivity contribution to be as strong as the third quarter. Moving to our price-cost expectations for the fourth quarter, while we forecast that OCC prices will remain stable in the near term, we do expect our industrial segment to have a negative impact price-cost relationship compared to the fourth quarter of last year. We expect this negative earnings impact to be similar to what we experienced in this year's third quarter. Specific to certain non-operational earnings assumptions, we've assumed a third quarter tax rate of 24.8%, which is 160 basis points higher than our 23.2% tax rate last year. Also, our interest expense will be higher than in the fourth quarter of 2019 due to our increased debt balances that I mentioned a few minutes ago. These two non-operational items combine for an expected three to five cent headwind versus the fourth quarter of last year. And finally, related to our M&A activity, our fourth quarter guidance includes tech, can packaging, and display and packaging Europe. So while we expect the D&P Europe divestiture to close during the fourth quarter, we don't know the exact timing, so we've kept the results in our guidance. This business is expected to contribute about a penny of EPS per month during the fourth quarter. On slide 12, you see the key assumptions underlying our full-year cash flow outlook, and I'll highlight a few of these. We do continue to take advantage of government assistance programs around the world, with most of the impact being here in the U.S. For full year 2020, we expect these programs to provide us with approximately $35 million of positive cash flow, and around $25 million has already been recognized through the third quarter. I will note that most of this cash flow impact will reverse in the next couple of years. Next, We've adjusted our 2020 CapEx spending outlook to $180 million from the $195 million we mentioned in July. This outlook continues to include $15 to $20 million of capital for Project Horizon, and Howard will discuss this strategic project more in his comments. We also still plan to defer our voluntary U.S. pension contribution, estimated at approximately $150 million, and related to the termination process into 2021, but we do have a related $37 million cash tax benefit this year. And finally, as you see on slide 13, our current liquidity position is very strong. It was approximately $1.3 billion at the end of the third quarter. This was composed of the $783 million of cash and short-term investments that I just mentioned a few minutes ago, as well as our $500 million revolver availability. Due to our excellent cash generation and stability of the financial markets, we are using $300 million of our excess cash balances to proactively repay certain bank term loans today as we continue our focus on maintaining an investment-grade balance sheet. So this concludes my review of our third quarter financial results and our outlook for the fourth quarter. So I'll turn it over to Howard.

Thanks, Julie, and good morning, everyone. Let me start by saying really how proud we all are of the way our associates continue to respond to the critical needs of our customers during these unprecedented times. During the third quarter, our diverse mix of consumer and industrial-related businesses reflected the improved global macroeconomic conditions coming off of the pandemic-induced recession in the second quarter. as we were able to exceed the high end of our bottom line expectations. Our consumer packaging segment produced solid year-over-year improvements as the at-home food demand stabilized from the preceding quarter's pantry stocking, while our paper and industrial and converted product segment experienced improvements sequentially from the prior quarter's lows, reflecting a partial recovery of our global industrial served markets. In addition, Our protective solution segment achieved record quarterly results as customer demand rebounded. And our display and packaging segment achieved one of its best quarters in more than a decade, really driven by cost reduction activities. Julie gave you the details for the quarter, so I won't repeat those achievements, but I do want to spend the bulk of my comments highlighting actions we're taking to further improve our businesses. When I first spoke with you in February, I told you we'd be initiating an increased sense of urgency to tackle some of the lingering issues that have been impacting our results. Our first area of focus was addressing our corrugated medium machine in Hartsfield. As you're aware, Sunoco is a small independent producer of medium, and it made no sense long-term for us to remain in this market. As a result, our team engineered what you're familiar with, Project Horizon, to convert the medium machine into a 180,000 ton per year uncoated recycled paperboard machine. When completed in early 2022, this machine will be one of the largest and most cost-effective URB machines in the world. While we are well into design and engineering of this important project, Our team has determined we can drive additional cost savings by modernizing and optimizing our raw material and finished goods handling for the entire Hartsville mill complex. As a result, we plan to spend an additional $30 million over the next two years to construct new paper oil finishing and packaging capabilities, construct a new 160,000 square foot finished goods warehouse to eliminate offsite storage and transportation, and provide for 150,000 square foot storage area to accommodate 100% of our OCC furnished for the entire mill complex. When completed in 2022, these projects are expected to drive an incremental $5 million in savings. So, combined with the original $83 million cost for Project Horizon, we now expect to invest a total of $113 million over the next two years to drive a combined $29 million in annual savings, and of course with returns well above the cost of capital. You've probably heard me say that I'm a strong believer in looking in the mirror rather than looking out the window. What I mean by this is we believe we can achieve greater success by investing in ourselves. We believe that investing in this extended project horizon can create significant long-term value. Next on our list has been to address issues we have faced in our perimeter of the store operations on the West Coast. Based on the experience we have gained over the last few years and the need to adjust to changing market conditions, we have made the decision to consolidate three of our thermoforming converting operations into a single focus plant serving the fresh berry and whole fruit markets across the West Coast and into Mexico. Logistically, we'll be relocating equipment from our facilities in Mexico and Washington State, primarily into our larger Southern California operation. As Julie mentioned, total estimated restructuring costs will be approximately $18 million, and as you've heard, we have recognized most of that in the third quarter. Once completed, our expectation run rate savings will be approximately $10 to $12 million. We will continue to serve our West Coast and Mexico-based customers, as well as expand our capabilities to support the growing fresh egg market by redeploying resources both in California and into our operations in Florida. For some time, we have discussed the need to optimize our portfolio, and we took action a few weeks ago to progress our increased focus on our core consumer and industrial-related businesses by signing an agreement to divest our European contract packaging business for $120 million in cash. Sunoco built this business from scratch over the past 20 years to serve global CPGs with custom packaging and supply chain management services throughout Europe and into the Middle East, Africa, and Asia. This business has grown to nearly $300 million in sales with 2,600 employees, But the nature of the business produced margins that are lower than most of our consumer and industrial converting operations. In fact, if you remove the business from our financial results, our overall EBITDA margin improves by approximately 40 basis points. I want to thank our dedicated management team and employees and our contract packaging operation in Poland for their contributions to Sunoco and wish them all the best with their new owners. We expect the transaction to close during this quarter, and we expect to use the proceeds to reduce debt while providing additional capital to invest in our core businesses. Also during the third quarter, we completed the acquisition of CAN Packaging, a technology-driven designer and manufacturer of sustainable paper packaging and related manufacturing equipment located in France. This acquisition provides us a new option to our paperboard CAN portfolio including patented technology to produce high-performance paper packaging that can be made round, square, rectangular, oval, oblong, or even triangular. Adding canned packaging innovation, intellectual property, and proprietary manufacturing capabilities will allow Sunoco to leverage our strong material science and engineering capabilities to develop paper packaging solutions designed to meet the needs of demanding products and supply chains across a variety of markets. We also see using CAN Packaging's unique low-cost machine technology to expand our consumer products offering into other growth markets. Now looking ahead for the fourth quarter, we assume that global macroeconomic conditions will remain relatively stable and that our customers' demand will experience a normal year-end slowdown. On slide 14, of our presentation, we show you how we believe our businesses will respond to current market conditions. So looking ahead, we expect our consumer packaging segment will continue to benefit for consumers' at-home eating patterns. Our industrial-related served markets are expected to experience weak year-over-year demand, but we do expect these markets continue to show gradual, sequential improvements. As Julie mentioned, our paper and industrial converted product segments should continue facing a negative price-cost headwind during the fourth quarter due to higher year-over-year recycled fiber costs and lower market pricing, and we expect OCC prices to remain relatively stable. I'll mention we announced this week a $50 a ton price increase for uncoated recycled paperboard in the U.S. and Canada, effective November 16th. We are experiencing significantly longer backlogs in our mill system, and inventories are lower than normal. In fact, we put off a scheduled outage this month to continue running to meet demand. In addition, we are seeing inflation of input costs driven by much higher freight and paper-making chemical costs. So this price relief is important to keep up with our customers' needs. We were extremely pleased by the strong third quarter turnaround in our protective solutions business, and we believe improved demand should continue into the fourth quarter, especially in our pharmaceutical and appliance-served markets. While we do not yet know the role we may play in the potential cold-chain transportation of future FDA-approved COVID vaccines and therapeutics, our industry-leading thermosafe temperature-assured packaging experts stand ready to assist and a much-anticipated launch of new life-saving medicines. Finally, in our display and packaging segment, we expect to experience continued slow demand for retail promotional display activity, but the related impact of the operating profit should be mitigated by continued cost controls. While we have not fully recovered from the pandemic-induced recession, we continue to see gradual improvements. I'm extremely pleased with how our teams are executing and delivering strong earnings and cash flow during this challenging time. Finally, I'm more confident than ever that Sunoco is poised to emerge as a stronger, more resilient company positioned to general solid returns for our shareholders. Now with that, operator, would you please review the question and answer procedures?

Yes, as a reminder, to ask a question, you'll need to press star 1 on your telephone. To answer our question, press the found key. Please stand by the composite Q&A roster. Our first question comes from George Stappos with Bank of America. You may proceed with your question.

Hi, everyone. Good morning. Thank you for all the details. I guess the first question that I had, you mentioned some of the puts and takes within the consumer segment. in the third quarter. Howard, how did your customers run during the quarter? Were there any supply chain issues looking out the front end that might have helped or maybe impaired your ability to generate volume in the quarter? And what's the outlook on, you know, that flow through to retail at the present time?

George, our customers, frankly, through the quarter ran well. We certainly saw some disruptions in the second quarter, but really no issues there at all that I can think of. Roger, do you have anything to add to that? No. Again, the shock of Q2 has been recovered, and folks seem to be managing through it fairly well. Okay.

Thanks for that, Howard. The next question I had is on PICP and industrial. Obviously, you know, the pandemic had a pretty big negative effect on you this year. Kudos to you and the team on the productivity there and, frankly, across the whole organization. What would you need to see if we had a crystal ball that was perfectly accurate what would we need to see in terms of macro or demand or whatever else you choose to put into this for paper industrial converter products to be up year-on-year in EBIT in 21 versus 20, and for that matter, comparable with 19? What would have to happen? And related point, do you have the price increases that you're out with today any benefit at all. I wouldn't imagine so, but any of that built into your guidance for fourth quarter.

Sure. Thanks, George. I guess, you know, what would need to happen, first of all, frankly, we're seeing it, particularly here in North America as it relates to the paper business. As I noted, we are experiencing backlogs, not only on the URB side of the business, but on the number 10. So it's certainly not a volume question as it relates to the paper side of the business. And I'm going to jump ahead and talk about the price increase. Now, we didn't build anything really into the quarter based on the timing of the yield, but that would be the second component to your first question for the paper side of the business. So we're feeling pretty good as we finish out the year and go into next year. On the tube and core side, you really got to look inside the quarter to see the sequential improvements, certainly quarter over quarter, but we're seeing month over month. So frankly, we will just need to see that continued pace of ramp up. And if it was to continue at the type of rates that we saw from the second half of last quarter onwards, we could be fairly close to the areas that you're talking about within the first quarter of next year, maybe into the second. But there's a lot of caveats obviously built around that side of it. But, Langer, unless you've got it.

No, I think you covered it, Howard. I mean, towards sequentially, we saw improvement in our human core business, the film segment, the tape segment, textile, every month of the quarter, and the same for the paper segment. Every month of the quarter, we saw improved output. We saw higher unpaid orders. And if you look at operating margins for the industrial segment, it improved from July to August and improved from August to September, and we expect that to continue in October.

Last one, I'll turn it over. Thanks. If you think about how COVID and the vaccine might affect the business, I know it's too early to call. I know there'd be a lot of, there'd be very, very wide guardrails around this. But in the scenarios, as you've thought about them, calculated them, painted them, you know, what could a vaccine do for Sunoco on an annualized basis within protective? Thank you, guys.

You know, we've run – first off, you know, we have for some time, basically from the beginning, have been working very closely with our customers to make sure that we have the available capacity, and we're preparing – we are prepared for that. You know, and, of course, have run various scenarios in terms of what it could mean to us, and – You know, I'm not sure at this point in time we know enough to actually throw a number out there because there's such a wide range. It just really depends on is the solution an existing customer that we're predominant or 100% supply? That's a beautiful thing to think about on the higher side, but it could be a solution that is not a customer. But our expectations are based on the high level of global demand that no matter who comes up with the solution, that they'll have to engage across the supply side to ensure that the demand requirements are met.

How much did you increase your capacity, Howard?

Roger, why don't you jump in on that one?

Yeah, George, what I tell you is, you know, obviously we've got great experience already delivering high-volume vaccines. You know, we do over half of the seasonal flu vaccine in the U.S. every year. You know, this year we're seeing a spike of about 30%. So we're going through that season now. We're about halfway through that season at the end of the third quarter. We'll finish it up in the next, let's call it 30 to 45 days. The nice part about the COVID vaccines coming in is seasonally, they'll be starting to really drive through our system, we think, in mid first quarter, all through the second quarter. So seasonally, the vaccines, the seasonal vaccines, that's the flu season for the seasonal vaccines. So we've got existing capacity ready for these six customers. And we're meeting with many of them today talking about where can we go ahead and upfront add capacity. So it's hard to give you the exact number except to say we're working closely with all of them and trying to be as prepared as possible for the necessary capacity once they're ready to roll out the vaccine. Thank you very much, guys.

Thank you. Our next question comes from Mark Wild with Bank of Montreal. He may proceed with your question. Great. Thanks, Howard. Good morning, Mark.

Howard, I wanted just to start off, if we could talk about the decision to just hold the dividend flat. I think probably the whole time you've been working at Sonico, the dividend's gone up every year. So if you could just provide us with a little color on kind of how you and the board thought about that decision.

Well, I guess maybe the easiest way to say it, just a bit of extra precaution as we go into the fourth quarter. And if you're talking about the year-over-year, we did – what we're not doing now, we are planning to take a hard look at it in February. And if we take action in February, we maintain that annual year-over-year increase. So we just felt like at this time, let's operate with an abundance of caution and revisit this in our February board meeting.

Okay. And then secondly, I wondered – Without getting too kind of granular on the call, just the potential for any kind of further portfolio moves in the wake of the European display sale?

Yeah, and thank you for pointing out non-granular. We're certainly looking at continuing to challenge our portfolio. We see opportunities, and that works in progress.

Okay. All right, and the last one I want to ask is just, you know, if you've given any thought to kind of improving the effectiveness of the company in terms of M&A capital, you know, it just, it seems like over the last 30 years, you've spent a lot of money on various forms of consumer packaging. But, you know, if we step back and look at the company today, the biggest piece of consumer packaging is probably still the, you know, legacy composite can business where you've not only, you know, grown the core, but you've added things, you know, like the field you just did in France or the, you did over in Europe about four or five years ago.

Yeah, we're absolutely. I think I've mentioned to most of you certainly individually, maybe even a previous call, that we've been going through our strategic planning process, and part of that is talking about just what you were suggesting, going back in time, looking what has been successful for the company, maybe some things that are not so successful. What I'd start with is say that one walk away is outside of the cleaning up of some businesses that you noted earlier. We feel like we've got a fairly solid foundation. We don't need to add any more capabilities, if you will, from an acquisitive perspective. And the real takeaway from the early view of our strategic plan reviews, I spoke to during my comments, and that's looking in the mirror before you look out the window. And one of the things we're seeing is that we've got, as our business units come to us and say, feed me more capital, I've got more returns to deliver our owners, our shareholders, and we can actually generate even organic growth in businesses otherwise maybe previously we thought not. So So that's where I get into that conversation about investing in yourself. We recognize that's where the highest level of return is. It correlates to our team coming to us from the paper division saying, give us $30 million more and we can improve the flow of this complex and generate a really nice return. So sorry if I'm being long-winded. It's to say acquisitions are going to be important to us. but they're going to be relative to the markets and the products that we produce today. But you're going to hear from us over time that we're going to spend a lot more activity and dollars around improving the foundation of this business.

Okay, very good. Thank you. I'll turn it over.

Thank you. Our next question comes from Gabe Huxley with Wells Fargo. You may proceed with your question.

Good morning. Thanks for taking the question. Just two quick ones as it relates to Project Horizon. I just want to confirm, Howard, that you're not, in fact, adding any additional capacity or freeing anything up. This is more about, I guess, improving efficiencies. And then you and the industry have done a pretty good job or some heavy lifting in terms of keeping supply demand and balance. And more recently, we heard of someone adding a little bit of capacity on the URB side. I'm just curious if you're still kind of looking across your platform to further optimize or if a lot of that work has already been done.

Thanks, Gabe. Yeah, the second phase of Project Horizon, they're basically two different projects. We've got a 100-year-old mill complex, and I'm not going to try to explain to you the inefficiencies that we have in terms of how we're handling raw materials and finished goods. But it's all about what you said. It's a step-up change in terms of efficiencies, not just related to the number 10 machine, but to all of the complex. Yeah, aware that new capacity is coming in the market. Look, you know, we are going to continue to challenge – you know, our output and our footprint on the URB side. But it's more related to what we've done over the last, I call it, four-plus years, where we have, many of you will remember, our NAOS project, where we increased capacity in our best machines and took out capacity while keeping the market relatively stable. Of course, the same conversation around Project Horizon. New capacity coming into the market, look, that's the whole point. We're positioning ourselves as low-cost producer. We're going to be the strongest player in this market, and if others want to come into the market, so be it, but we're very confident that we're going to be able to be highly, highly competitive going forward. And yes, we are going to continue to challenge how do we become that much more efficient in everything we do.

Thank you for that. And Julie, maybe on the The recent divestiture announcement, I appreciate that there's some timing associated with it, but assuming you kind of redirect the capital, I think you said, to kind of pay down debt, can you give us a directional ballpark? I think you said a penny per month, but just what the net impact might look like for next year on a bottom-line basis or something?

Yeah, sure, Gabe. Yeah, the – The full-year kind of estimated EPS impact of B&P Europe is around 15 cents. So that's what we would expect, kind of full-year 20 to full-year 21, roughly.

Okay. Thank you. Thank you. Our next question comes from Steve Scherfover with DA Davidson. You may proceed with your questions.

Thanks. A couple of mine have already been answered. But there's a new company that's making a bit of a splash in biodegradable plastic packaging. And I'm just wondering how hotly you're pursuing biodegradable plastics for some of your perimeter of the store applications.

Well, not necessarily. There's so much news about so many emerging technologies here. I'm not completely aware of the company you're referencing, but from our perspective, our real focus from the source is PET. It's the RPET content going into the package, and where we're spending a lot of our time and effort is ensuring that, first and foremost, that folks understand that a berry tray is as recyclable as a water bottle. In fact, its components have been built off of recycled water bottles. And so we're spending more time in terms of educating and participating with industry to ensure that folks recognize that. And I'll add, you know, now that you bring the topic up, I'm really pleased. We have announced really last week that we now have, for the first time ever, a staff vice president, head of global sustainability reporting in to me to really help – organize all our efforts around all our formats within our company. And just to put a plug in, her name's Elizabeth Rue and been with this company for 15 years and a superstar. And I'm really looking forward to her contributions and further position on ourselves as a sustainable company.

Well, not to be argumentative, but I think the knock on plastic is that We know it's recyclable, and we know that the overwhelming majority isn't being recycled, and that's why people are excited about the biodegradable element. So that's something to pursue.

Yeah, fair enough. But that's what the industry is working on right now is to get that message out and make sure that the collection programs are in place to increase – the amount of material that is coming back into the system versus into the landfill. But don't disagree. If there's a holy grail in terms of a fully biodegradable, that's something to be looked at.

Okay, and one quick clarification from Julie, please. So if the European packaging or contract packaging is a penny per month, then how is the impact – In 2021, $0.15, I thought it would be less than $0.12, assuming you pay down some debt.

Yeah, well, and, you know, I was really focused more on the kind of operating profit after-tax impact of that business. There's some seasonality, I think, as you know, in the displays business, and so the fourth quarter is generally, you know, slightly lower than other particular quarters during the year for that business.

Okay, thanks, Beth.

Thank you. Our next question comes from Salvatore Tiano with Seaport Global. He may proceed with your questions.

Yes, hi. Thanks for taking my questions. So first a little bit on your capital structure and capital allocation. Obviously, you raised some debt, as many others did in Q2, due to COVID uncertainty, but you seem to be paying this quite slowly, even though on a net debt basis, I see quarter to quarter you keep on delivering. So, what is the rationale for maintaining most of this debt, even after the $300 million you just mentioned, on your balance sheet at this point? Do you see, for example, any near-term M&A opportunities that could present themselves, and you should be ready to act fast?

Thanks, Alex, Julie. Yeah, I mean, I guess, you know, we did repay in the second quarter – I'm sorry, early in the third quarter of July $150 million term loan. And I mentioned in my comments we're actually repaying another $300 million of bank term loans today, just drawing down excess cash. And I wouldn't be surprised, you know, depending on – based on what I know today, if we're not – if we haven't repaid all of our short-term prepayable debt by the end of this year. So, you know, we are, you know, we wanted to see how the third quarter, you know, came through. We're extremely pleased with the results of the business and especially the cash flow generation, which, again, is driving this $300 million today. And, again, I expect more debt repayment in the fourth quarter. You know, at that point, I mean, again, we've repaid our short-term debt and, You know, we've mentioned for next year we do have spend for Project Horizon. We have our pension termination-related contribution. And so, you know, in addition to potential acquisitions, we do have some, you know, kind of call it invest-in-ourselves higher spend next year that we're also planning for. So all of that comes into play when we look at our cash and debts.

Okay, perfect. Thank you very much. My second question is a little bit on the $50 price increase. If you can remind us of how you came out also with a tube and core price increase, and if you can remind us within your 1 million ton North America system, how many tons of open market URB sales and converted tube and core sales have been affected by what you announced and what other pricing mechanisms you have in place?

Yes, Alex, Roger. In round numbers in both our paper and our Achievement Core business, about 50% or so of our price change mechanisms move off the RISC TAM Vending Chip Index. Probably about 25% or so move off OCC and another 25% are open market. So as you look at price increases for both paper and Achievement Core, what you need to think about is what can we do in the open market? So that's about 25% of the volume. And then when does RISD move the TAM Vending Chip Index, which is totally up to that organization as we go forward. So that's why we built in a minor amount of price impact into the fourth quarter. But more of the impact will come starting in the first quarter of next year.

Okay. Thank you. Our next question comes from Adam Josephson with T-Bank. You may proceed with your question.

Thanks. Good morning, everyone.

Good morning.

Howard, it seems like the confection market is in need of some help, so I hope you and everyone else there is planning to do your part this Halloween season.

I'm hoping, yeah, thanks for getting that out, get that message out.

One more on the portfolio, Howard. So I know you're selling the European display business, but just more broadly, tell me if you disagree, but I think Sunoco's view is somewhat of a hybrid in that you have many defensive characteristics, the balance sheet, the dividend, the consumer business, but you have some cyclical aspects as well, notably the the paper in industrial business. So you don't sit in a neat bucket either, you know, buy Sunoco in an Armageddon scenario or buy Sunoco in some reflationary, you know, economic recovery scenario. And I'm just wondering if how, if at all, you think that affects the multiple at which you trade versus your competitors, if you think there are misperceptions in terms of where you fit in a portfolio, et cetera, and just if you're satisfied with the stock's performance given what your earnings performance has been in recent quarters and years for that matter.

Yeah, thanks, Adam. Of course, no, I'm not satisfied with our stock performance. And, you know, to your point, First off, when we talk about cleaning up the portfolio, there's some outliers that I think most of you have even recognized that we're working on. But if you talk on the broad perspective, it has been a longstanding strategy of the company that we participate on the consumer side of the market and on the industrial side of the market. And what that has done, and you can go back in time period after period in terms of situations, just like what we went through and are going through right now, where you see a good balance in terms of strength on the consumer side that is able to overcome weaknesses. So, in effect, it's kind of built into our entire thesis is that we're a company you can invest in, and we can pretty much guarantee you consistency throughout the good times and the bad times We've got a balance sheet that reflects that. And as Mark pointed out, a record in paying dividends. We feel like these are all things that are extremely important to the owners of the company, our investors. And so we're absolutely going to continue maintaining that balance. But I do want to point out again that on the industrial side of the business, if you go back to the last recession, Our EBIT margins were vastly different than they are today. And if you think about the amount of self-help that we've put in terms of improving our operations, we feel like we've created a new floor as we're walking around this 7% type range and that we should get that business back in normal times to that double-digit, low double-digit type space. The strategy is the strategy, and we're going to clean it up, but we're going to continue to invest so that we can improve the returns on these foundational businesses.

I appreciate that, Howard. And, Roger Fuller, just one for you, back to the paper backlog in North America, et cetera. So I think what you said was that there was gradual improvement, demand improvement throughout the quarter, but you found yourself in a position in which you have very low inventories, such that I believe you said you're actually having to postpone maintenance outage. So I guess I don't quite understand if it was gradual improvement why you would have found yourselves short of inventory. And so can you just talk about, again, the pace at which demand got better? Was there a sharp recovery, say, in September, or was it really, in fact, gradual? What you think is driving this improvement? And particularly just given the resurgence of COVID cases throughout the country, are you at all surprised by that? the demand recovery you're seeing. Thank you.

Yeah, Adam, thanks. Yeah, I don't know if I'd say gradual. Certainly it was gradual in the Cuban Core side of our business, and again, I think the Cuban Core volumes for the fourth quarter will look a lot like the third quarter. What we've seen is pretty fast improvement, substantial improvement in unmade orders starting really in the first of July, and it expanded each month throughout the quarter. You know, RISD reported the unmade orders for September. They were the highest since January. October, you're going to see a higher number, I'm sure, which will be the highest since sometime last year. We're turning away orders. A lot of it is you're seeing the pickup in economic activities, so our specialty category for four aligners, external tubing core, volume is very strong. So were we surprised? A little surprised about how fast it came on, but... I think the fact is it looks like it's going to stick, and it seems to expand every day and every week. So that's kind of where we are today. So, yes, the pickup, as quick as it happens, surprises us, but as far as we're concerned, it looks like it will last through the cycle again. Thanks, Roger.

Sure. Thank you. Our next question comes from Don Chantanjavi with Bayer. You may proceed with your question.

Hey, guys. Thanks for fitting me in. I guess just as a follow-up to Adam's question on paper and industrial, so your volumes were down 10% in 2Q, just kind of rounding a little bit, and 8% in 3Q. How should we expect that progression, you know, over the next, I don't know, three quarters? And the reason I ask is because, you know, obviously 2Q was impacted by the shutdown, et cetera. And a lot of other companies that have industrial exposure have, you know, commented on a more significant recovery sequentially than what you showed.

Yeah, again, sequentially, I mean, if you even look outside of our industrial businesses, I mean, think about our auto consumer businesses, you know, and the sharp turnaround there. So in some of what you may classify as other markets outside of industrial, we're seeing that. But, yeah, we're seeing sequentially for paper companies, You know, we're only giving guidance so far for the fourth quarter, so we're seeing that strength really pick up. Cuban core, again, I think you'll see flat in the fourth quarter. So at this point, I think as far as we can see, those paper volumes remain extremely strong. You guys?

Yeah, I mean, I can get pretty direct and just say as we modeled out Q4 is – Gone from what you noted, the 10, 8% last. I'll just tell you, we're modeling about a 5% for Q4. So that's inclusive of exactly what Roger talked about with improvement in paper and tube and core as well.

Okay, terrific. And then on consumer, can you just remind us how big industrial plastics is as a percentage of that segment? How much was it down in 3Q? And then the same for flexibles as well. How much was flexibles down in the quarter? I'm sorry if I missed that, if you already said it.

Yeah, this is Julie. The industrial business is, wow.

It's $130 million in annual sales. For the quarter, it impacted us on a volume basis around $7 million. So, again, it was a fairly substantial impact to the plastic space. And as Julie mentioned, you know, if you look at our overall consumer volumes, they actually added about a full percent in terms of our volumes. So, again, that kind of shows the impact of that one particular component. Again, kind of offset really strong performance in some of our pure consumer-related plastic businesses. Maybe switching to flexible, we were a little bit lower, you know, for the year. And again, as Roger mentioned, that was principally driven by confectionery being down, what it was. The other businesses did fairly well. But again, when you're having people not buying those sweets that they normally like to get when they're in and out of convenience stores or traveling, as well as the slower build that we see for Halloween this year, that's had that negative impact.

Okay, and then just one final one, maybe for Julie, is can you quantify the temporary savings that you experienced in 3Q that may not repeat going forward? What was the dollar amount of that?

You know, our travel, just as an example, was down about $6 million year over year. You know, I think what's interesting is, you know, there are costs that are down specific to the pandemic, and – You know, group medical is another kind of million or $2. So, you know, then you've got, you know, the reality that, you know, unfortunately incentives are down as well. And so there are various, you know, costs that are lower. So I'd call it in the, you know, kind of maybe $10 million or so.

And again, there's also some offsets, Gonsham, as we talked about. There are increased costs because we're having to make sure that our employees are in a safe environment, and so we're having to increase additional costs as well, which we don't remove from our discussion.

Okay, that's a good point. Thanks so much.

Thank you. Our next question comes from Josh Spector with UBS. He may proceed with your question.

Yeah, hey, everyone. Thanks for squeezing me in here. Maybe a build from that prior question is just, If you look at the productivity that you guys have done year to date and your comments about your expectations around fourth quarter, you're probably looking at maybe $100 million, $110 million or so in productivity this year, significantly above what you guys have done in the prior years. I guess if you were to bridge into next year and assume a modest volume recovery, how much productivity should we expect into next year or how much give back from this year would you expect?

Yeah, it's pretty hard to say. I'm going to hand it over to Julie on the specific, but I appreciate you bringing that up. Productivity has been really critical to our performance this year, and it's across the board, and I just have to give recognition to the fact of how much energy we've put in over the last three, four, five years that relates procurement organization to our SPS operational and direct investments. You know, it's amazing, really, as we watch these volumes start to slide back in, that we're starting to see where we really are able to do a lot more with less. But, Julie, as it relates to next year.

Yeah, sure. You know, I'm just looking at 2019, we delivered close to $50 million of productivity. And you're right, this year, you know, I think we'll easily be above $100 million. So... I think for next year, in between those two, when you look across supply chain, fixed costs, efficiencies in the factories, again, we've been really doing a lot of restructuring, as you've probably noticed this year, taking out unnecessary costs that we'll be able to leverage more as those businesses' volumes increase. So I think it's reasonable to assume next year lands basically between 2019 and 2020.

Okay, so you would expect incrementally productivity to be additive to growth next year, and there's not really a headwind we should consider for some of the temporary items. Is that fair?

Yeah, absolutely, absolutely. I mean, when you look back at our history, I mean, we generate productivity every year across the different kind of levers that we focus on. And so, absolutely, we would expect continued contributions from productivity next year.

Okay, thanks. Yeah, that's clear. And one other one around the canned packaging acquisition, I thought it was interesting. You talked about that expanding into maybe other higher growth markets outside of consumer markets. I was just curious, what markets would that acquisition allow you to target, and why is it now that you can target those markets with that acquisition versus what you had prior to?

Yeah, let me, this is Howard, clarify a definition of markets and my comments were really around geographic. One of the things that this brings with us is unique machine building capabilities that are small footprint, low cost, relatively lower volume. It's a different model than Sunoco has traditionally had. it's now affording us the opportunity to expand. We're already in Brazil, but to go into Brazil, go into China, deeper Southeast Asia, and bring a lower cost but differentiated product to those types of markets. And we're seeing a lot of pent-up demand for just that. So when I said markets, it really meant geographies.

Okay, thank you.

Thank you. Our next question comes from Brian McGuire with Goldman Sachs. He may proceed with your question.

Yeah, thanks. I know we're going late, so I'll try and keep it quick. Just wondered on general inflation, what trend you're seeing. I think there's been some concern around freight moving higher. And then, you know, with regards to resin, any impact in 3Q from resin lag and any expectations for what we might see in 4Q there?

Yeah, Brian, for Roger, I think as we look at Q4 on resin, we're expecting about a 3% or so increase. As you know, just a reminder, we move typically quarterly, so a small headwind in the third quarter, and we'll see how that plays out next year. There are projections for up to 5% to 7% next year, but we'll have to see. The bigger area we're watching is freight. We're seeing our freight cost increase month over month. not so much fourth quarter, but as we look at next year as we renegotiate contracts, that's an area we've really got a strong eye on and an area that we're seeing across the board, and I'm sure other companies are seeing that rate increase coming for 2021.

Okay, and just last real quick, I think you mentioned the number 10 machine, the backlogs have improved a lot. I'm guessing you've probably swung everything back over to – in corrugated medium from recycled pulp, and we can just kind of confirm that given how tight that market is. And just any thoughts on maybe adjusting the timing of the conversion of that machine to kind of take advantage of the more improved economics and outlook for corrugated in the near term?

Brian, yes, Roger. Just a very small amount of pulp on that machine for the fourth quarter. Some commitments we've made. Otherwise, we would have stripped it out. We stripped all the pulp out of our URB system. And really, no changes to timing on Project Horizon. That timing is determined by equipment costs, contractor costs. So we really can't pull that up. But at this point, very little pulp sales at all coming out in the fourth quarter.

Yeah, and horizon or the number 10 conversion, I guess the first phase is putting in the new pulping process, which we expect to have that in and feeding the whole network. And as a reminder, that is modern day, can handle mix extremely well. That's going to go in probably late next summer. And then we're going to plan today is to take the machine down itself in December, have it up and running early January of 2022, and you'll see a ramp-up period during the first quarter of 2022. Okay.

Thanks. Very clear. All right. Appreciate it. Take care.

Bye-bye. Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from George Stappos with Bank of America. You may proceed with your question.

Hi, guys. Thanks for taking the time real quickly to conclude for me. You know, we talked about portfolio. We talked about productivity. You talked, Howard, about looking in the mirror as opposed to looking out the window. When we look out to 21 and then, you know, choose whatever year, 22, 23, do you have a return on capital goal, an increase in return on capital, 200 basis points, 300 basis points, whatever that might be? You know, the context in the past you said the margin target is not a strategy. What about trying to grow return on capital given, you know, the history of the company where returns have been generally trending lower the last 10 years? Thanks, guys. Good luck in the quarter.

Thanks, George. I'd say, you know, do we have a specific goal set at this point in time? No. You know, we're evaluating each opportunity, each project on its own merits. So to be perfectly fair, we're building the process right now and, you know, We'll let you know, you guys know exactly what we'll be looking at on an annualized basis as we start racking and stacking all of the opportunities we've got in front of us. But we certainly expect to be flat to accretive.

Okay, that's helpful. Thank you, Howard.

Thank you. Our next question comes from Salvatore Tiano with Seaport Global. He may proceed with your question.

Yeah, sorry. Thank you very much for taking my follow-up. Quickly, we've been seeing by some of the producers of foodcamps, both in Europe but also in the US, they've been commenting that their customers are commissioning higher plantings because they're trying to have more foodcamps in their portfolio. Could this approach essentially cannibalize some of your fruit and vegetable sales next summer?

Yeah, it's really hard to say at this point in time. You know, I wouldn't expect that, frankly, if you, you know, the categories that we're participating in, particularly canned strawberries, I don't know if that's going to really be a big, big winner in the market as opposed to fresh. And that's where, that's the categories that we're in. We're talking about salads, berries. I can certainly see if you're talking about canned corns and other products, that statement would hold true, but I really don't think it's going to play any bearing on the side of the market that we participate in.

Yeah, certainly. I mean shifting from strawberries or whatever other plantings that will benefit you to other fruits and vegetables being planted that traditionally would go to food camps. That was, I guess, the concern.

Yeah, sorry. We don't anticipate any issues there.

Okay.

Thank you very much.

Thanks.

Thank you. Our next question comes from Adam Josephson with KeyBank. You may proceed with your question.

Thanks, everyone, for taking my follow-up. For Howard or Roger, just on OCC, I don't think anyone's asked about it. I think you said that you don't expect prices to go anywhere anytime soon, just appreciating they're already below average. What do you think happens now, now that China's ban is about to go into effect? How do you expect China to supply itself with fiber? What does that mean for their imports of container board either from the U.S. or Europe or elsewhere? And how do you expect that situation to play out over the next several months and years for that matter? And what impact, if any, do you think it could have for you guys?

You know, Adam, as we talked about in the short term, you know, yes, China is out of the market. They're not going to have the permits next year. you know, all the puts and takes. That's why we feel like OCC is going to stay relatively flat, you know, for the foreseeable future. As it relates to how it plays out in the long term, you certainly are aware and have seen all the investments that the Chinese companies have made, not only here in North America, but globally. And so I think what we're going to start seeing more and more of is – diversions of AOCC, European OCC into pulping type operations to keep these mills filled. And we'll have to play that out in terms of how that tightens the market up and the cost implications of that. The other side of it is, as has been noted several times during the call, that we and others have participated in producing pulp when it made sense to keep our mills running. It's going to be interesting to see. I don't have the answer. As we become and the market becomes tighter, you know, what is the price implications as China continues to work of that pull, as China continues to work out their long-term supply plans? So I really don't have a straight answer for you. Frankly, never had when it relates to OCC. And I think I won a $5 bet with you if you would ask about OCC. So thanks for having me. Thanks for bringing that in.

Thanks a lot. Thanks a lot, Howard. Best of luck in the quarter.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Roger Schrum for any further remarks.

Well, again, thank you all for staying with us, and we appreciate your questions. We certainly also like your interest in the company. So, as always, if you have any further questions, please don't hesitate to give us a call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.