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spk00: Good day and thank you for standing by. Welcome to the third quarter 2022 Sunoco Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Weeks, Vice President, Investor Relations. Please go ahead.
spk01: Thank you, Operator, and thanks to everyone for joining us today for Sunoco's third quarter 2022 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer, and Roger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the third quarter, and we prepared a presentation that we will reference during this call. The press release and presentation are available online under the Investor Relations section of our website at www.sinoco.com. As a reminder, during today's call, we will discuss 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. Please take a moment to review the forward-looking statements on page 2 of the presentation. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial conditions and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as Reconciliations to Gap Measures is available under the Investor Relations section of our website. For today's call, Howard will begin by covering a brief summary of third quarter performance. Rob will then review our detailed financial results for the third quarter. And along with Roger Fuller, we'll discuss our guidance updates for the fourth quarter in full year 2022. Howard will then provide a progress report on our strategic priorities, followed by a Q&A session. If you will turn to slide four in our presentation, I will now turn the call over to our CEO, Howard Coker.
spk06: Thank you, Lisa, and good morning, and thanks to all of you for joining our third quarter call. As you read in our press release, we reported strong year-over-year performance where revenue grew 34% to $1.9 billion, and we expanded base EBITDA margins 200 basis points to 15%. Our base earnings per share of $1.60 was a 60% increase over the third quarter of last year. These results, which were above the high end of our guidance range, were enabled by stable consumer packaging demand, mainly from staple food items, strategic pricing and our commercial excellence initiatives, and overall improving supply chain conditions. As a result of our strong results year to date, we have increased our full year 2022 guidance. This performance is another positive proof point for our continued successful execution of our strategic priorities in what remains a dynamic environment. Our teams have remained diligent in support of our customers while we continue the journey to build a better Sunoco. I want to express a warm thanks to all of our team members for their incredible hard work during this period. With that, I'm going to turn it over to Rob, and I'm going to take you through our financials for the quarter.
spk10: Thanks, Howard. I'll begin on slide six with a review of key financials for the third quarter. Please note that all results discussed will be adjusted to base, and all growth metrics will be on a year-over-year basis, unless otherwise stated. The gap to non-gap EPS reconciliation can be found in the appendix of this presentation as well as in the press release. The third quarter financial results again represented Sunoco's ability to deliver strong results from our core market positions. Sales increased 34% to $1.9 billion in the third quarter. This sales growth was driven primarily by the Sunoco metal packaging acquisitions and an 18% increase in prices as strategic pricing efforts continue to both offset inflation and reflect the value we provide our customers. We've been steadfast in providing excellent service and availability to our customers, and we believe we are being rewarded for this in the marketplace. We grew volumes 1.6% in consumer, largely as a result of this commitment. Furthermore, our strong revenue growth is translating into operating leverage. Base operating profit increased 67% to $225 million, and base operating profit margin increased 240 basis points to 11.9%. Turning to slide seven, base EBITDA increased 55% to $284 million, and base EBITDA margin increased 200 basis points to 15%. This focus on margin improvement is strategic and is backed by ongoing portfolio management actions, footprint optimization activities, value-enhancing capital investments, and strategic self-help programs. Finally, base earnings per share increased 60% to $1.60. This increase in earnings is attributable to strong operating performance, offset by 5 cents of negative FF and 9 cents of negative tax rate. The sales bridge on slide 8 provides the primary drivers for revenue growth in the quarter. Volume mix was negative 52 million, or 3.7%. Our consumer segment continues to see growth in core RPC and flexible businesses. However, industrial volumes were down 9.5%, with the greatest impact in Europe and Asia, while notably the U.S. was also negative due to the number 10 paper machine downtime and continued weakness in the white goods market. Price was 250 million positive, up 18% in the third quarter. Consumer prices increases were led by strong performance in our core RPC and flexible businesses. Industrial price increases were led by strong performance in the U.S. and in Europe. Acquisitions increased sales 334 million as metal packaging completed their peak food can season with food volumes up sequentially, offset by mid-single-digit year-over-year decline in aerosols. Aerosol volumes were impacted by inventory destocking as volumes normalized to pre-COVID levels. While acquisitions have been an important part of our historical revenue growth, excluding acquisitions, organic sales growth was still 10% in the quarter. Foreign exchange and other was negative $57 million in the third quarter. As a reminder, 75% of our sales are generated in the U.S. Page 9 has our base operating profit bridge. This displays the operating leverage of our core businesses in the current market environment. Overall, volume next was negative $14 million, again with strength in RPC and flexibles, also by lower volumes in industrials. Industrials was impacted by the shutdown of the number 10 paper machine as we completed the grade conversion from corrugated medium to high-value URB. We estimate this volume impact to operating profit was between $7 and $8 million. Price cost was a positive $90 million benefit to base operating profits. Our core franchises continue to achieve strong strategic pricing performance, and price cost improves sequentially from the $79 million we achieved in the second quarter. The consumer business overall had strong price cost performance, generating over $20 million of favorability. The industrial business had strong price cost performance as well. as we continue to benefit from strategic pricing while OCC costs continue to decline. OCC averaged $123 per ton in the quarter, and OCC prices are currently $45 per ton based on the Southeast RISD index. Year-to-date, we have achieved $254 million of price costs. As a reminder, we experienced approximately 40 to 45 cents per share of metal price overlap in the first half of this year, most of which is accounted for in acquisitions. under the metal packaging business and not accounted for in price cost. Acquisitions and divestitures generated $32 million in the quarter as metal packaging continues to perform as expected. Margins in the business were lower than previous quarters due to normal seasonality associated with heavier mixed or seasonal food cans and lower volumes in aerosols. Other impacts on the quarter were negative $18 million due to higher depreciation, non-recurring COVID benefits, and FX headwinds. which impacted operating profits $6 million in the quarter. By 10 has our segment performance for the quarter. Consumer sales grew 72% to $1 billion, and operating profit grew 93% to $128 million. Operating profit margin increased 130 basis points to 12.4%. The primary drivers of this performance were metal packaging and strategic pricing, while productivity and volumes were also positive. Industrial sales grew 4% to $661 million, and operating profit grew 48% to $82 million. Operating profit margin increased 365 basis points to 12.4%. The primary driver of this performance was strong price-cost performance with prices up and OCC declining, offset by lower volume nets, especially in international markets, and lower productivity due to planned downtime of the number 10 paper machines. All other sales increased 10% to $198 million, and operating profit increased 19% to $15 million. This growth was driven by strong strategic pricing performance while volume was essentially flat. Turning to slide 11, our capital allocation framework is aligned to our business strategy to drive value creation for our shareholders. Our priority is to allocate capital to high return investments in core businesses to drive growth and improve efficiencies. From a free cash flow perspective, we remain committed to increasing the dividend, which is at present 49 cents per share on a quarterly basis, or a greater than 3% average yield over the last 12 months. Year-to-date, we've paid $193 million in dividends. After capital investments in the dividend, we prioritize investments in accretive M&A transactions aligned with our long-term strategy. We'll manage capital to optimize our balance sheet and to retain our investment-grade credit ratings. During the quarter, operating cash flow was $138 million and capital investments were $87 million. On slide 12, we have our updated guidance. For fourth quarter, our EPS guidance is $1.20 to $1.30. We're increasing our full-year EPS guidance to $6.40 to $6.50, a 20-cent increase from previous guidance. We're increasing our full-year expected base EBITDA guidance to $1.14 billion to $1.16 billion. This record performance is based on our continued strong strategic price performance and a stable market environment in our defensive consumer markets. We're reducing our operating cash flow and free cash flow guidance by $100 million due to increased working capital demands. Current elevated working capital is associated with inflation and disrupted supply chains, both from our suppliers and our customers. As supply chains normalize, we anticipate inventories to normalize and benefit cash flows. While this is occurring now, we expect higher free cash flows in 2023. For your reference, we've included additional modeling information in the appendix of this presentation. Now, Roger will discuss our outlook on a segment basis.
spk05: Okay. Thanks, Rob. So, please turn to slide 13 for our view on segment performance, which supports our fourth quarter guidance. Across consumer, volume trends are seasonally lower in the fourth quarter. In our legacy packaging businesses, we have lower planned shipments from pre-holiday stocking of some packaged foods and lower seasonality of fresh fruits and vegetables in our plastic clamshell business. But we see another overall solid volume quarter for both global rigid paper containers and flexibles given the seasonality. In the metal packaging space, we're seeing solid volume in food cans sequentially to Q3, offset by aerosol cans, which continue to trend lower than the COVID highs. We continue to invest heavily across the consumer business for innovation and around new sustainability programs to support global growth in snack packaging and in overall efficiency projects aligned to our operational excellence programs. Finally, in consumer, we believe we'll continue to benefit from previous strategic pricing initiatives as well as relative stability in our raw material costs. In industrial converting, we don't expect volume recovery in Europe and Asia in Q4, and we are seeing slowing industrial demand in North America, as many of our customer bases are reducing inventories prior to calendar year-end. The global tube and core market is experiencing slowing demand in paper mill cores supplying the container board market and housing-related markets like textiles and foreign products. On the paper side of business, with our number 10 machine now operational in North America, We've begun production qualification ramp-ups for new paper grades and are balancing supply with demand to maintain reasonable backlog levels. In Asia, Europe, and Latin America, weaker economic conditions continue to drive lower demand. The lower demand for URB globally is allowing us to complete some overdue maintenance in the fourth quarter, which will allow our paper machines to return to more normal run sizes and reduce changeovers, which should positively impact productivity as we move into 2023. Similar to consumer products, we'll continue to execute our capital investment plan in industrial. Sustainability will continue to drive the need for additional paper production capacity, and we'll continue to invest capital for machine upgrades on our desk paper assets. On the pricing side, our commercial excellence programs continue to generate beneficial strategic pricing. With the steady TAN Bending Chip Index, to which the majority of our pricing is set, with lower overall OCC pricing, and the management of our ongoing energy challenges, we expect favorable price-cost benefits to continue in the fourth quarter. Finally, in all other businesses, we have stable demand across most of our products, including transit packaging for pharmaceuticals and seasonally improved demand for vaccine shipments. Similar to consumer and industrial segments, European markets remain soft. We're continuing to drive value from strategic pricing activities, manage non-material inflation, and expect to benefit from declining resin prices in the fourth quarter. So with that update and look at the fourth quarter, I'll turn it over to Howard. Okay.
spk06: Thanks, Roger. If you'll turn to slide 15, I'm pleased to announce that in the third quarter, we did release our updated corporate responsibility report, which demonstrates Sunoco's commitment to environmental, social, and governance principles. I'm very, very proud of the progress we've made. Okay, we just lost power at our location. If you guys can bear with us for one minute, if you're still on, we'll try to get that rectified. Okay, we have had to shift from lamps to, you did pay the bill, Rob, didn't you? To the flashlights. So let me see if we can pick up close to where I left off and and we'll keep going as we try to figure out what's going on here. As I was saying, sustainability is a key driver for innovation and our new product design activities, as Roger had mentioned, and we continue to grow with both existing and new customers where our solutions provide differentiation and enable our customers to win in their markets. While there is much more work to be done, you can see from our numerous partnerships and memberships that the decisions we make are motivated our mission, which is to create sustainable packaging solutions that help build our customers' brands, enhance the quality of their products, and improve the quality of life for people around the world. That is why I'm pleased to announce progress on one of the most significant investments in Sunoco's history. On page 16, slide 16, we have an update on Project Horizon. In mid-2020, we announced our efforts to modernize the Hartsfield Paper Millage operations with plans for one of the largest and lowest cost URV manufacturing centers in the world. This project fully aligns with our sustainability mission to transition Sunoco globally into production from only 100% recycled fiber by reducing electrical consumption, greenhouse gas emissions, and total water use. In the third quarter, we successfully completed the number 10 conversion from medium to URB and now have the capability to make a number of high-end paper braids. As planned, we have taken down the number one and number nine machines in Hartzell and expect to wrap up number 10 through this quarter and into next year, where at volume, our cost savings opportunity should be somewhere in the neighborhood of $30 million. Additionally, as indicated on slide 17, I'm very pleased to announce our intent to acquire Skarn paper in Denmark. The rationale for this deal is straightforward for Sunoco. We need more lightweight production capacity in Europe to support our customers' transition to sustainable paper packaging. We see a long runway of opportunities for our rigid paper containers in Europe, and Skarn is a key part of ensuring continuity of supply. SCAR manufactures only from 100% recycled paper and has robust sustainability programs in place for renewable energy powered by a biomass boiler system, similar to the one we have here in the Hartsville complex. In 2022, the company is expected to achieve $50 million in sales And this transaction is expected to be accretive to both earnings per share and cash flow. And we expect the transaction to close this quarter. Now, if you'll turn to slide 18, I want to remind you that we continue to execute a playbook to fundamentally change the company. We're simplifying our portfolio into fewer, larger businesses where we have a right to win. If you look back over the last several years, we have purposely realigned our portfolio to more stable consumer defensible markets, which now represent over 50% of our annual sales. In parallel, we continue to refine our global footprint to maximize efficiency while we support our customers' changing needs. We also remain focused on aligning our organizational structure and talent to support these larger scale businesses with a simpler infrastructure as part of our structural transformation initiatives. Core to these changes is our commitment to build a diverse and inclusive workforce at all levels of the organization, which is vital to the heart of the Sunoco culture. As Project Horizon and the SCRM paper acquisition demonstrate, we have invested and will continue to invest for the long-term growth of our core businesses. These investments, along with our commitment to self-help actions, will sustain and expand margins well into the future. Central to all our activities is our commitment to execute on sustainability initiatives. We have a number of innovative projects with our customers and suppliers where we're intentionally aligning our long-term development roadmaps for improved recyclability and the commitment of a circular economy. We see how some of the best technical experts in the business focused on these initiatives day in and day out. So in closing, all these activities are focused on creating a better portfolio, a more resilient foundation, and ultimately a more agile company. I'm confident in our long-term strategy and the foundation that we are building. As we look ahead, we will remain focused on consistent execution as we continue to invest in the future of Sunoco. So let me say thank you for your support and we'll open up for any questions that you may have.
spk00: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Anthony Pettinari with Citi. Your line is now open.
spk12: Good morning. Hi. On the updated free cash flow guidance and inventory headwinds that you called out, can you talk about maybe expectations or visibility into maybe recovering some of that $100 million in 2023? And I guess relatedly, directionally, how much price-cost benefit do you expect that you could carry over into next year, just given kind of current run rates for inflation? and the pricing that you have in place now? I guess I'm thinking specifically on URB, but maybe just for the broader company.
spk06: Bob, you want to grab that?
spk10: Yeah, for networking capital, I'd say there's two parts to that. I mean, what we anticipated was really the impact on 2020 is really just timing. You know, we had anticipated supply chains would cure somewhat in the third quarter and that we would be able to take out you know, some working capital, which is the delta really between the year and what we had initially expected. We do see that coming out now, and we anticipate that that will come out through the balance of this year, though I think that that $100 million just rolls into next year, where we think next year working capital should be, you know, around a $100 million benefit versus, you know, this year being a negative. 200 to 250 million dollar detriment to cash flow next year. So we're really, you know, bullish on how next year is going to shape up from a working capital perspective as supply chains normalize and we're able to really get back to normal and how we operate the business and how we're buying, how we're utilizing our procurement assets. On price cost, I would say we're more thinking about the headwinds of the metal price overlap from last year and the benefit that we got in the first half of the year. We're thinking a lot about industrial price costs right now. Obviously, that's a real tailwind, but I think that we're very cautious to think a lot about industrial volumes in the fourth quarter and then the first half of next year and really kind of tempering our price-cost expectations to do that.
spk12: Okay, that's very helpful. And then just in the consumer business, can you talk about how demand trended over the three months of the quarter and then into October? Did you see any kind of meaningful change or step down there? And then just on customer inventory levels, you referenced that. quickly but is inventory stocking kind of a significant headwind in the consumer business or is it something that you anticipate as being a headwind in 4Q?
spk06: Yeah Anthony, I would say we saw pretty normal seasonal build during the quarter and you know we're towards the end of October and again seeing a very robust activity on the consumer side and I think Roger talked to that in terms of the volumes. feel very, very good about the trends we're seeing in consumer. On the inventory side, that really was more driven off of what we're hearing from our industrial customers saying they're needing to draw down just as we and many, many folks across the board are are talking to in terms of their working capital. And Roger, I don't know if you've got any more to add to that.
spk05: No, that's right, Anthony. Globally, especially textiles and some of our any kind of housing-related activity, we're seeing a real pullback. Just about all textile companies announced incremental downtime over the holidays. So what we're doing is we're getting out in front of that. So we're getting out in front of that by taking the maintenance downtime that we need in the fourth quarter. And for now, what our customers are telling us is it's inventory reduction. It's not necessarily consumer spending. We'll have to see how that plays out in the first quarter of next year.
spk13: Okay. That's very helpful. I'll turn it over.
spk00: Our next question comes from the line of George Staffos with Bank of America. Your line is now open.
spk07: Hi, everyone. Good morning. Thanks for the details. I wanted to hit on a couple of strategic points, one on value-based pricing, the other on self-help and productivity. Howard, can you talk a bit about qualitatively or in terms of talking on initiatives where you stand on value-based pricing? I'm not looking for a dollar amount of benefit next year, although I'd take that if you wanted to give it, but more in terms of the types of activities the type of analysis that you're doing. By 23, are you largely done? Are you largely done now? That's the flavor I'm looking for. In terms of self-help, I seem to recall self-help is going to be a larger driver of 23. Is there a way you could give us a bit of an update there and what the dollar amount in this case could actually benefit 23 and add a couple of follow-ons?
spk06: George, let me handle the self-help side. I'm going to pass on to Roger. I have difficulty understanding the first part of the question. Sorry, we've got technical issues here in Hartsville. But on the self-help side, not to put out a specific number, but to kind of walk through some of what I talk about in my narrative and have been discussing all year is really how we're looking at the structure of the company, focusing on the four core businesses. And to be clear, the parenting strategy that we're undertaking right now is that we have the all-other category and then the four foundationals, which we're calling our canned businesses, our industrial and our flexible businesses. Those will be supported from center as opposed to the all-other. And with that is going to drive productivity and opportunities. And we're finishing that work up yet. And as we get into our budget season, which is just happening right now, we'll have better clarity on exactly what type of economic implications that's going to have. The other self-help has to do with the investments that we've been making. Number 10 has been the poster child. It is the largest single, but as you can follow over the last several years, we have increased our capital outlay from an organic perspective materially. And so there's just a number of projects that actually would surpass in totality the size of number 10 that are going across those core businesses that we see or that should be and will generate really, really nice productivity. And that started about two years ago or so, so it takes about that period of time. So we should see that. That's a big expectation for next year. You can see our productivity numbers. We're going to see those not only return to the normal level as supply chain disruptions lessen, but also as these capital initiatives start coming into place. And I guess finally I'd say on a capital perspective, that's both top and bottom line. So not able to give you a number to ink right now. But that will be coming as we get ready to give you guys our guidance and outlook for next year.
spk07: But, Howard, it would be fair to say that we're looking at more to come as opposed to more already having been digested. Would that be fair?
spk06: Yeah. In fact, very little has been seen thus far. So we're viewing that as a tailwind going in the coming period.
spk07: Thank you. And on pricing? Hey, how are you, Roger?
spk05: Yeah, no problem. Yeah, I mean, as you know, we kicked off our commercial excellence initiative four-ish years ago, and what we're seeing is continued really nice improvements from that. The focus on preparing our teams for large contract negotiations, really digging into all price change mechanisms, which certainly have helped us through the last couple of years of spiking inflation. Turning our attention now to share gain opportunities in some of our businesses. And as Rob said earlier, with the tremendous performance of our team through the supply chain challenges the last two years, we're seeing numerous opportunities there. So strategic pricing will continue regardless of inflation and or deflation. And, you know, there's been a pretty consistent contributor over the last three years, and we expect that to continue. as we move into 2023.
spk06: Yeah, Roger, let me just add to that just to reinforce that, you know, certainly we've got cost movements up and down, you know, all the time, but what we're seeing through these initiatives is recognition, and COVID really helped with this with supply chain interruptions and our ability to keep our customers running, is that, you know, We are being recognized for our value through the margins. We always talk, and we do it as well, price, cost, price, cost. But we deserve a certain level of margin. Our customers are recognizing that. And it's really about cost pass-through or recovery. But our intentions are that the margins should be reflective of the value generation that we are providing the market. And that's what Roger's talking about and our focus in that area. Okay.
spk07: Howard, if I could get a quick one in number three, and I'll turn it over. In the past quarters this year, you've talked about even with the very tough comparisons, you know, because of metal and other factors, you still expected to grow earnings in 23. Since we last spoke, you know, industrial has gotten tougher in terms of the outlook. FX has probably gotten tougher in terms of the outlook. Would you still expect to be growing earnings next year, or is that too tough to call at this juncture? And thanks, I'll turn it over.
spk06: Yes, again, I'd say it's too close to call. We do have that headwind. So I think if you look at next year, it's certainly first quarter, maybe even second quarter is going to be very tough comps because of that. But as we pull our budgets together, we'll look at how that materializes through the course of the year. What I'd say from a cash perspective and an EBITDA perspective, we are very bullish as we release the working capital from this year that I would say this. I'd be rather disappointed that we weren't able to generate the type of EBITDA levels that we have this year.
spk13: Thanks very much.
spk00: Our next question comes from the line of Adam Josephson with KeyBank Capital Markets. Your line is now open.
spk09: Good morning, everyone. Thanks. Howard, I may want to start paying closer attention to your accounts payable in the future, given this issue you're dealing with this morning. On to a more serious question. Rob, in terms of your price-cost guidance for the year, I think in the last quarter you mentioned You expected a $250 to $300 million benefit year to date. You mentioned it's $254 million. Have you changed your expectation along those lines this year? And then relatedly, your Sunoco Metal Pack expectation for the year, I think last quarter was trending toward the $200 million range. Can you give us any update there?
spk06: Yeah, we're seeing continued positive direction in terms of price costs as we go through the year. And on the metal fact side, I think you're right in that ballpark of the expectation for this year.
spk09: Perfect.
spk10: Thanks, Harry. Adam, the way you should think about it is Q2 was $79, Q3 was $90 in terms of positive price cost benefits. You know, the phasing of that as consumers been relatively consistent and the industrials picked up as we've gotten, you know, the benefit of some strategic pricing, you know, offsetting declining OCC input prices. So that trend will, we expect to continue through the fourth quarter, though there is, you know, some volume uncertainty in the fourth quarter, as we said.
spk09: I appreciate it. And how much of that, Rob, did you say you expected to, in effect, reverse in the first half of next year, specifically in metal pack?
spk10: Well, I mean, what we've disclosed is that there was 40 to 45 cents of what we're calling metal price overlap and top EPS basis in the first quarter of last year. We do expect that to not recur next year, which should overall be a relatively meaningful headwind in the first half.
spk09: Yeah, perfect. In terms of the progression of volume trends, can you just help us with, compared to the volume mixed down 4%, how volume was by month and then into October, if you have such data?
spk05: Yeah, I'll take a shot at that, but I think the trends are pretty similar as we went through the quarter into October. I mean, if you break down the 1.6 growth in overall consumer, global paper cans was up 5%, pretty consistent through the quarter. And as we've already said, it seems to be holding up, will hold up in the fourth quarter based on our guidance. Flexibles up 4%, still pretty consistent across the quarter. We look at similar for the fourth quarter. From a consumer standpoint, volumes seem to be holding up fine and with no real slowing as the quarter went along, if that's what you're asking. In industrial, we have seen some accelerated slowing. We talked about, you know, Rob talked about the 9.5% down for industrial. Remember now, number 10 is in this number, but if you strip that out, just like used tubing core globally, as an example, is down 6.5%. with highs in the mid-20s in Asia and down to negative 2.2% in U.S. and Canada. So that gives you a feel. But we have seen slowing that we've already talked about with our customers taking inventory out of the system by the end of the year in both our paper and our Cuban core market. So we have seen some accelerated slowing that is built into our guidance for the fourth quarter.
spk09: I appreciate that. And, Howard, just one last one on the long-term EBITDA guidance you gave right around a year ago. I think if I take Metal Pack out of that, you'd be basically, well, that was pre-Ball Metal Pack, but effectively you're at that 2026 guidance already, aided by the price-cost benefits you've had this year. At what point would you think it necessary to update that 2026 guidance? Do you think that still applies? Any thoughts there I would appreciate.
spk06: Yeah, we're in process right now, Adam, of really re-looking all of our longer-term objectives. And obviously we are at our five-year, we reached our five-year target in one year via acquisition. We're continuing, per George's question, that walk of $180 million of self-help over the five-year period. We have not backed off on that at all. You should hear from us early next year into the first, early second quarter as we walk you guys through our next five-year horizon and objectives. Adam, I wanted to go back to your comments and question to both me and Rob as it related to the metal business. A couple of things to note. One is we had 11 months this year, so we do have a month extra going into next year. And we, you know, aerosols is an important part of that business, and we're actually forecasting, at this point in time, growth in aerosol next year. The previous buyers that owned that business, with the inflation coming into play last January, or this past January, there was a big pre-buy program, so we were very, very weak in aerosols in the first quarter, coupled with the optics we have on share expansion going into next year. So there's some positive things to help offset what the headwind that we are waking up with from a price-cost perspective, but we'll just see how that all unfolds as we finish up our plans for next year.
spk13: Thanks so much, Howard.
spk00: Our next question comes from the line of Mark Wild with BMO Capital Markets. Your line is now open.
spk02: Thank you. Good morning, Howard. Good morning, Rob and Roger.
spk10: Good morning.
spk02: Rob, I wondered to just start out, can you give us some sense for kind of benefit from just lower OCC and lower resin as we think about the third quarter and then what you're expecting in the fourth quarter? It sounds like OCC in the fourth quarter might be down, you know, 70 or 80 bucks a ton.
spk10: Yeah, I mean, it's down more than that, actually. I mean, OCC, we averaged kind of 123. We started the third quarter in the 150 range. And, you know, we're probably below that, you know, receipt quote right now, you know, with some softness, you know, to go in the fourth quarter. So OCC has had, you know, a historical decline in the last, you know, four months. And, you know, there's relatively little inventory in our system in terms of OCC. And so that's really kind of flowing through on a real-time basis. That has been a positive for price cost, you know, two-thirds of our price cost benefits. and the third quarter was from the industrial business. We anticipate that trend to increase as we're steadfast in kind of providing value to our customers and ensuring that our prices reflect that. So we think fourth quarter should have some benefit there. So we do, as I said, we're very mindful of the downtime we're expecting to take, which will be more than the third quarter. in the fourth quarter as a result of just market weaknesses as we bring the number 10 machine up.
spk02: Okay. Second question, I'm just curious, you know, Rob, either from your side side or maybe Howard from your side. We've got a new CFO, Rob. You've got a little different background than past CFOs that I've dealt with have had. You've also got hired a new head of M&A. And I'm just curious about just broadly how you think this is going to change the capital allocation process at Sonico, particularly around acquisitions.
spk10: I mean, no change. We've always been really mindful of what the opportunities are out there. I think we've been really intentional, as Howard said, about really formulating a really forward-looking strategy and focusing on the core and what we really do well and how we can drive value prospectively. So I think now, more than ever, we've really got the key list of things that we do really well that really add value in other businesses where we're actually the better owner of those assets. And I think that we're showing that in the metal packaging acquisition, how we've really kind of brought new energy to that business and to that industry. That's really the gist of the strategy from an M&A perspective. We're thinking a lot about what are the, you know, one, you know, five to 10% off current market that are really kind of additive. And we do view that canned business as just the canned business, that they were completely adjacent and are additive to each other. We're constantly looking for other opportunities to add to the strategy. We're being really thoughtful about what we can do prospectively, and we've got the capabilities internally to really execute M&A at a really high level.
spk06: Yeah, Mark, let me add too, and this does relate to acquisition, you know, the type of growth opportunities that we're seeing right now, particularly on our paper can business, tied to sustainability, The canned packaging, again, it was hardly a notable. It was a 40 million euro acquisition made on the eve of COVID. We're now able, as things have opened up, to take that technology and start leveraging it. And we're seeing really, really tremendous opportunities from an organic perspective. And frankly, we're spending a lot of time now looking at our investment capital in terms of really we have to be cautious about how we deploy it. We have got so many global pent-up opportunities from an organic base. So that's the kind of thing we're looking at. I know that SCARN, and again, $50 million in sales, URB complex, so what? Well, we're not in the lightweight business in Europe. It's 100% consumer-facing. We actually represent 15% of their volume in our own can business. So it gives us, as I said in my commentary, security of supply, but gives us a forward look in the other markets on the consumer side in Europe that before we just weren't able to participate in, at least from a board perspective.
spk02: Okay. All right. Last real quick one for me. Just as you talk about fewer and bigger businesses, Can you help us with what that might mean for some of the joint ventures that you have going forward?
spk06: You know, don't spend a whole lot of time contemplating those. We're in several. Some, the partner is managing it, and we're certainly on the board and a part of the business. Others are more like a 50-50, but... We don't really have that many and that many that are that material. So we don't spend a whole lot of time there.
spk02: Okay. All right. Sounds good. Good luck in the fourth quarter and into next year.
spk06: Thanks.
spk00: Our next question comes from the line of Mark Weintraub with Seaport Research Partners. Your line is now open.
spk11: Thank you. On the $180 million of self-help, which you're targeting over the next several years, and I realize this is a difficult question to parse, but how much would you say is going to be delivering on the cost type side of things versus how much might be more volume driven? And of that, what might be sort of more market dependent on having a good backdrop versus For instance, it sounds like with the number 10, maybe you're increasing addressable market a little bit as well with the new products that you have. Any color you could provide on those would be great.
spk06: Yeah, I'm going to let Roger handle that, but I don't want to leave that without noting that commentary about capital investments, growth opportunities, new products – you know, the wall and plastics and our opportunity with a 90 to 95% paper solution, all that is totally disconnected from this conversation around 180. And it's really a walk of several key areas that we're focused on. So Roger.
spk05: Yeah, I mean, if you remember, I think we were pretty specific about how we divided it into the categories. So let's say a quarter or so is commercial excellence, which we've already touched on. and really ramping up the look of commercial excellence beyond specific major customer negotiations and getting into the other areas like deeply into price change mechanisms, deeply into share gain, deeply into driving volume growth into some of these adjacent markets that we're talking about, so therefore opening up the opportunity for growth. Productivity is really a lot of this around the capital projects and capital planning that Howard's already talked about. In addition, the growth focus, like the sustainability project he talked about, tremendous amount of energy-saving type projects, productivity-generating improvements. Those are ongoing, and you'll see, Rod talked about the capital spending for this year. That accelerates as we get into next year, focused on the integrated businesses. And from the cost side, we talked about some structural transformation work we're working on now as we set up these fewer, bigger businesses. We've taken the opportunity to consolidate some businesses into larger businesses within the integrated business, which leads to strictly cost out. Now, of course, there's offset through labor inflation that we've seen this year, but that's strictly cost out. And then supply management, supply chain, I think is the biggest opportunity we see over the coming years as we really get into this integrated supply chain on our four integrated businesses and drive continued productivity on how we manage those businesses, how we manage data, giving our plants the best data on a daily basis to make the best decisions to drive productivity and serve our customers. And that's more longer term and somewhat dependent on market forces and volume going forward. So I think it's a pretty even split between cost and driving value through the businesses through the markets and the opportunities in the markets.
spk11: Okay. And so, so for the second part, which would be more volume driven, uh, it comes, but it may come more when, when the market is in a place to support it. Is that kind of a fair way to think about it?
spk05: Yeah, I think, I think so. I think, you know, if you think about, if you look at our productivity this year, you know, we're not, we're not the only one in this boat with having a tough productivity, uh, results this year. Some of it's, frankly, just the better operating of our equipment as we're able to schedule out. Think about our global paper footprint. This year, we've had tremendous volume demands, which led to many changeovers in exactly how you do not want to run major paper complexes. So managing that going forward based on volume demands will be very helpful.
spk11: Great. And then as a second question, and again, it's a tough one, but since Everybody's, I think, wondering about it. I'll ask and see what you feel comfortable sharing. The URB markets kind of historically have been sometimes volatile pricing. Things are good. Prices go up. Things are not so good. Prices go down. You've been working a lot on your commercial excellence. We're in this environment, though, where you've got waste paper going lower. Demand is weaker. As we're trying to figure out what's likely to happen in this market, is there anything that you would share about as we do our prognostications and analysis.
spk05: Yeah, I think Howard touched on it earlier. Our focus is on margin and generating the value and getting the value that we're adding through our integrated products, including our URB, which we sell on the outside, and our integrated products like paper cans and tubes and cores. So that's our focus. We talked about what we're doing in the fourth quarter, adding more maintenance to offset some of the reduced demands. Look at the third quarter, excellent example of how we handled reduced volume. We had number 10 down for a good part of the quarter. We had soft volume in Asia and Europe. Look at our operating margin in the industrial segment for the third quarter. So we've managed that through strategic pricing, We managed that through changing most of our contracts to TAM bending chip index in the U.S. So for me, it's about maintaining that margin going forward if OCC stays down versus continuing to drive positive price costs off of higher prices. So I think the team's managed it extremely well. We're investing in our best paper assets. And Howard talked about, you know, and this was announced when we announced Project Horizon. We took number one and number nine machines down at Hartsville. which were older, higher cost, less efficient machines. So we're sticking with that strategy that we started four or five years ago. And so far, I look at the third quarter as paying off.
spk11: Great. Thanks.
spk13: Appreciate the color.
spk00: Our next question comes from the line of Gabe Hescht with Wells Fargo. Your line is now open.
spk04: Good morning, Howard, Rob, Roger. I wanted to dig in on, I guess it's your Q4 guidance slide 13. And you made a mention about lower food shipments. I guess I'm trying to understand what exactly that is. Maybe it's timing related in terms of when you ship some product. But then on the composite can side, I think you are investing in some new capacity there, and we're expecting kind of positive volumes. elasticity has seemed to be, you know, I don't want to say non-existent, but consumers pretty resilient in terms of CPGs taking hefty price increases. Any feedback from your customers in terms of expectations kind of going forward as it relates to composite cans and snacking as such?
spk06: Go ahead. I was going to just touch on the last part of that. You know, as I said earlier, We've got a tremendous funnel. You noted, yes, we're bringing new capacity on our paper can business here in the US and Brazil. We've got a new plant going into place that's just starting up now in Southeast Asia. We've got investments going in multiple locations in Europe. Around our foundational products, the more exciting can packaging type products that are 90% to 95% paper. And in Europe, where the funnel there is just phenomenal in terms of how many machines that we're going to have to build over the next period of time to service not only Europe, but other parts of the world. So it is an impressive looking runway to the point I mean, we just looked at a capital review just for North America over a couple of years period that we're going to be spending somewhere around $40 million in that business from a recapitalization standpoint, productivity standpoint, and growth standpoint. And that's just in one area of the world. So on that side of the business, just could not be more pleased with the amount of opportunity that we have.
spk05: Yeah, and a comment on slide 13 is really about sequentially fourth quarter versus the third quarter. I mean, seasonally, if you think about confection, you know, the holiday has been pre-packed, Halloween's been pre-packed, Christmas has been pre-packed, and then the fresh fruit and vegetable business and plastic clamshell business seasonally varies well in the fourth quarter. As I said, given the seasonality, and Howard just mentioned, our paper can business, our flexible business should be solid, so The question is, are we seeing any reduced demands? Our customers are not telling us that yet at this point. So we expect, again, pretty solid demand and consumer outside of those very specific seasonally lower markets.
spk06: Yeah, the only thing I can point to is there's been some chalkiness in Europe, and that's not demand. It has to do with energy. And, you know, in the food industry, energy is a major component. And we saw customers in September, October that were pushing out orders, waiting to see whether their particular market or country was going to put caps in, and they didn't want to put inventory on the floor, realizing that there was a fairly large reduction in the cost of energy just around the corner.
spk04: Okay. No, that's super helpful. And then I guess on the metal packaging side, It seems like we're navigating a couple of different unique or discrete items. We had some pre-buy at the end of 2021 that impacted 2022. Sounds like you're making some organic investment for volumes, maybe picked up a customer there. So I guess maybe going into 2023, all is equal. What I'm hearing is you'd expect aerosol to be up despite what might be a weak kind of economic backdrop for aerosol cans?
spk06: Yes, that is what we're seeing. I've talked through that. From a year-over-year perspective, the first half of this year was not good from a volume perspective just due to the amount of pre-buy activity the previous owner wanted to put in place coming into the inflation. And yes, there's been value recognition. I would simply say that. We have extremely good assets. It's a well-capitalized business, and we continue to put capital in it as well. So from an aerosol, which is the more sensitive side of the business as it relates to a slowdown, we see the opposite of what you normally would expect. Okay. Okay.
spk04: And one last one, if I may. I guess getting into both of Mark's questions on the industrial side of the house. As we think about, again, it sounds like price cost is expected to be positive here in the fourth quarter. There are a lot of different influences that impact OCC prices, but at least to the extent that OCC on a year-over-year basis is lower and we don't see any change in greasy indices, Is there a reason why price costs would not be positive in the industrial business in the first half of 23?
spk06: Well, you know, at this point in time, we've got a lot of inflation. We spend a lot of time talking about OCC, but, you know, all the chemicals, starch, diesel, labor, there is just a lot of inflation still out there. OCC obviously is the biggest driver of them all. Yeah, look, if the index didn't move, I really don't know how to answer that. I'd say yes, probably we would be on a more positive side, but we don't see any indications right now why the indexes would move.
spk04: Great. Thank you and good luck.
spk00: Our next question comes from the line of Gansham Punjabi with Baird. Your line is now open.
spk08: Hi, good morning, everyone, and thanks for taking my question. This is actually Matt Krieger sitting in for Gansham. I wanted to take a step back and think about, you know, the potential EPS variances for next year. So you used the midpoint of your guidance for 2022 as a starting point. Can you talk about what the major EPS variances could look like heading into 2023? I'm just thinking about factors such as, you know, impact from higher interest rates, FX headwinds, you know, rollover acquisition contributions, synergy capture, productivity that you hinted at, you know, the metal impact from year over year, just other big picture factors would be helpful.
spk10: Yeah, I can tell you we're going through budgeting and planning, as we have been for a while. I would say that this environment is really unique in that we're on the precipice of potentially having a recession. And we're very mindful of that and the impact that has on demand. We're controlling the controllables. So as Roger said, we've got a really robust pipeline of productivity activities. and we're anticipating SG&A to be lower as a result of our structural activities. You know, we also do have kind of some known knowns, which is that the metal pricing overlap will not anniversary, and the depreciation will be higher, and that the growth of those two is in excess of $100 million negative. So we do feel like As Howard said, there's consumer volume opportunity, and we're continuing to watch industrial demand and the availability of industrial price calls.
spk08: Got it. That's helpful. And then just following up and maybe digging in on some of that consumer strength that you're referencing, Many of the CPG food and beverage customers are clearly employing a value over volume strategy currently to offset inflation in their own portfolios. What are you experiencing from a consumer demand elasticity perspective as it relates to the massive level of pricing being passed through the supply chain? It sounds like you've been very resilient. Do you expect that this could be any sort of natural volume headwind into 2023? Any thoughts there would be really helpful.
spk06: Well, yeah, we're really not seeing it right now. And we do, you know, we participate purposely and just have, you know, across the aisle. So from the store brand to the brand later. So trade downs are not a negative to us at all. I think the other is, if you look particularly on the plastic side of the business, we continue to see good strength in our mill business from the more workers at home, consuming at home. And right now, Roger, unless you have any additional color to add, but we're not feeling it on our end. There may be substitutions, but we benefit from that substitution as well, depending on the substrate.
spk05: Yeah, that's right. Our customers are telling us there are bigger challenges to the supply chain constraints of certain raw materials versus demand. I mean, global stack chips... It's put out there by our largest customer in that market. They're producing and publicizing their volumes. Good growth there. Snacks, cookies, good growth there. So we're not hearing it. We're hearing their biggest challenge is more getting materials to get the product on the shelf versus seeing any significant reduction in demand at this point.
spk06: In fact, curtailing marketing because they don't want to stimulate more demand.
spk08: Got it, got it. That's helpful. That's it for me. Thank you.
spk00: Our next question comes from a line of Kyle White with Deutsche Bank. Your line is now open.
spk03: Hey, good morning. Thanks for squeezing me in here. On the core, the strategy of focusing on the core, if we go back 10 years ago or so, or actually, you know, the 2014 Analyst Day, The company had this similar strategy of focusing on its core business and optimizing the portfolio. I think you had the bull molding divestiture around that time. But other than that, I don't recall too much more happening. And then obviously the strategy focused to be more on growth later on. But I guess what is different this time around versus, you know, 2014 or 10 years ago? Is there more of a focus to actually optimize the portfolio? And then what kind of implications does that have from a capital allocation or capital standpoint going forward?
spk06: The easiest way to answer that is we've got a whole new leadership team with a different vantage point and a lot more work that we've put in on what is truly core. Rob discussed it, but we've spent at least 18 months doing exactly what you're doing, going back 10 and 20 years and saying, what is the journey that we've been on? You know, what have we learned from that? And we woke up and, you know, we finished this analysis and said, I'll tell you what we learned is that the foundational businesses of this company have really driven the success that we've enjoyed for all these many years. And we need, and if you can't just look at 14 years ago, you can look at five years ago or, again, 20 years ago. and say, you know, look, are we on a self-fulfilling prophecy where we're, quote, optimizing industrial businesses for cash as opposed to, you know, acting as who we are, the market leader and global market leader in URB and tubes and cores, and the case in point is Project Horizon. That's not an optimizing activity. that is saying that we're going to invest in these foundational business, I hate to keep saying it that way, and they are going to continue to deliver strong value generations to come. And so it is different. There's been a heck of a lot more thought and processes that's gone into the journey that we're on. And that's how we've landed where we've landed. And, you know, we've got our all other category, and we're managing those businesses as best we can, as best owners. And we're seeing improvements in those businesses. And we'll just see where that takes us going in the long term. But equally important is if you go back, as you know, to 2014, we didn't structurally change how we managed the company. we are actually structuring the parenting of the company in such that the focus is only on the core and these other businesses who are frankly burdened by centralized support in some areas and that their markets that they serve require a totally different approach in that competitive landscape and that customer build. It's a different day and time, and this is not a repeat of anything that we've done, certainly in my tenure.
spk03: Got it. That's helpful. And then I just had a real quick one. On rigid paper containers, you know, that business continues to perform very well on volume growth. Can you just help us understand the divergence there as to why volumes are still very strong while metal food is seeing some declines, you know, both benefit from at-home consumption, or I would think they would be somewhat correlated?
spk06: I don't know if I caught the whole question.
spk10: Metal food is a really mature defensive market that our business is growing along with the industry and the CMI kind of down a little bit this year. We anticipate that to kind of have really soft demand trends over the long run, so around kind of GDP minus. But I think what we've seen and what Howard's been talking about with our rigid paper containers business is, you know, just a real revitalization and a real focus on growth and opportunity there and having great customers as partners and really kind of identifying and going to the opportunities. So we've got a great innovation funnel, as Howard said, with canned packaging and that that's really driving a lot of this opportunity. along with just some really, you know, focused market participation that we've partnered on.
spk06: Yeah, and I'd say on the metal side, you know, the integration has gone extremely well. We have synergies on the come, and those are building. We've been able, we will be announcing in January that we have four dedicated metal plants in Legacy Sunoco that will be falling in and being run by, they should be run, by, which is the metals experts, which will also drive additional synergies. But I guess the most impressive for me is having the opportunity to be out in the market and the type of reception that we've received from the customer base has just been exceptional. So we'll see how it plays out, but extremely encouraged about what the volume profile may look against a a business that, on a macro perspective, is, as Rob said, GDP or slightly less.
spk03: Got it. Thank you. Good luck in the quarter.
spk13: Thanks.
spk00: Our next question comes from the line of George Staffos with Bank of America. Your line is now open.
spk07: Hey, guys. Thanks. Very quickly, I know it's late in the call. Rob, first off, Do you have a view on what FX would be if we mark to market relative to your guidance for 22 in terms of what the headwind could be for 23? Second, there have been a couple of questions around this. Bottom line, do you expect or what do you expect your consumer volumes to look like fourth quarter, year-on-year versus fourth quarter? And then lastly, Skern, is there a way to size what benefit to earnings you'll get from having that business? Thanks, guys. Good luck in the quarter.
spk10: Yeah, we're still evaluating FX. I mean, we don't take a position versus where it currently is. So if you just held it where it currently is, you would anticipate that next year would be a mild headwind. Okay. You know, on SCRN, and then I can pass off on consumer volumes. SCRN, you know, that is a, you know, we are anticipating that to be an accretive acquisition for the size that it was. It was a really you know, a beneficial transaction. It's going to be, you know, high single digit sense accretive on a year, on a full year basis. And we anticipate that to close in the fourth quarter. So we'll get the full benefit in 2023 with some synergies on top of that.
spk05: And, George, I think on the consumer reliance fourth quarter, we said it. We expect some more volumes in rigid paper containers globally and flexibles, and then we're going to see weakness in our resin-based businesses due to the fresh fruit seasonality being down. So we finished at 1.6% up for the segment in the third quarter, so I'd expect it to be down slightly from there.
spk07: Thank you, Roger. Good luck in the quarter, guys.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Lisa Weeks for closing remarks.
spk01: Thank you again for joining our call today, and thank you for your interest in Sunoco. We had published a press release earlier that indicates all of our conference activity in the fourth quarter. We definitely hope to see you there. If you do have any questions, don't hesitate to reach out, and we hope that all of you enjoy the rest of your day. Thank you.
spk00: this concludes today's conference call thank you for participating you may now disconnect
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