Pactiv Evergreen - Q3 2022
November 8, 2022
Transcript
Speaker 0
Good morning, and welcome to the Pactiv Evergreen Third Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Dhaval Patel.
Please go ahead.
Speaker 1
Thank you, operator, and good morning, everyone. Thank you for your interest in Factiva Evergreen, and welcome to our Q3 With me on the call today, we have Michael King, President and CEO and John Bausch, CFO. Please visit the Events section of the company's Investor Relations website at www.pactiveevergreen.com and access the company's supplemental earnings presentation. Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I would like to remind everyone that our discussions today will include Forward looking statements, including statements regarding our guidance for 2022.
These forward looking statements are not guarantees of future performance And actual results could differ materially from those contemplated by our forward looking statements. Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our most recent Annual Report on Form 10 ks and quarterly on Form 10Q as well as our upcoming quarterly report on Form 10Q for a more detailed discussion of those risks. The forward looking statements we make on this call are information available to us as of today's date, and we disclaim any obligation to update any forward looking statements except as required by law.
Lastly, during today's call, we will discuss certain GAAP and non GAAP financial measures, which we believe Prepared in accordance with GAAP and a reconciliation to the most directly comparable GAAP measures is available in our earnings release and in the appendix to today's presentation. Unless otherwise stated, all figures discussed during today's call are for continuing operations only. With that, me turn the call over to Active Evergreen's President and CEO, Michael King. Mike?
Speaker 2
Thank you, Donald. Good morning, everyone, and
Speaker 3
welcome. Yesterday, after the market close, Factiv Evergreen released solid Q3 2022 results and as a result is raising its 2020 full year guidance to $760,000,000 to $780,000,000 Coming out the company's best quarter in its history as a public company, in Q2, are continuing to show positive momentum and stability on several fronts, including delevering the balance sheet and continuing to Enjoy improvements in our operational performance. The company reported revenues of $1,600,000,000 a 2% decline versus the prior quarter And up 15% versus the prior year quarter. Adjusted EBITDA was $187,000,000 for the quarter, A $62,000,000 decline from 2Q 2022 levels and a $68,000,000 increase from the prior year quarter. Our volume declines are due to a combination of shifting consumer trends, the impact of inflation on consumables our continued focus on value over volume as we have improved our ability to service our customers.
During the quarter, we completed a number of actions that We closed the sale of our Evergreen Asia business and received gross proceeds of $336,000,000 We also completed another pension lift out to transfer $656,000,000 of gross plan liabilities. This marked our 3rd successful lift out and we will continue to explore additional opportunities to reduce the liabilities. We are now at a net leverage ratio of 4.5 times versus closing 2021 at approximately 7.6 times. We remain committed to lowering our leverage and reiterate our goal of sub four times net debt to EBITDA. Since last year, we have discussed the challenges Of the tight labor markets and the overall lack of availability of labor impacting the industry.
This has impacted our business and the ability to service our customers. We have also provided steady progress on our actions to improve the labor situation. Today, we are at target staffing levels in almost every area of the business. Our operations, as indicated by our results, are now stable. We are in a proactive state managing our labor needs in unison with our customer demand.
In addition, operationally, the company has seen improvements in our overall equipment effectiveness and production throughput. There has been continued improvement in reliability and production in our paper mills as well as our converting operations. Finally, We have restored our inventories to target levels and improved our overall service and delivery with our customers to pre-twenty 19 levels. Our customers understand the value we provide and appreciate the strides we have made to support our mutual businesses together. By securing labor and improving our production output, we've been able to partner with our customers to get the needed support through pricing to enable us favorably navigate the ongoing inflationary environment to a mutual benefit.
As you'll hear during this call, we are excited about our progress And the business momentum under a strong management team despite the ongoing macroeconomic environment. I am pleased to share we have shifted rapidly from a reactive I will now turn it over to John to give you a more detailed overview of our results before my discussion on outlook and closing remarks. John?
Speaker 2
Thanks, Mike. I'll begin by reinforcing Mike's comments regarding the strength of the quarter and provide a few highlights starting on Slide 7. This year, we've seen inflationary impacts affect many aspects of the business, most notably in wages, input materials and logistics. Our hourly wages are beginning to moderate, and we're not seeing the steep increases from earlier in the year. However, employee retention remains problematic We're still seeing elevated turnover with new employees at lower skill level positions.
Resin prices for polypropylene are coming down. While we've seen some increases in other polymers, The resin costs are mostly passed through to our customers, albeit with a lag. Other input material costs such as energy, chemicals and wood Generally, we continue to rise throughout the year, which has impacted our margins, particularly in the Beverage Merchandising segment. We're starting to see transportation cost Softening following the run up from earlier in the year. The inflationary impacts we're seeing are felt across the industry, and we're generally seeking to recover the increases with our customers.
You'll note we're seeing some declines in volumes and as Mike mentioned, pursuing a strategy of value over volume to preserve margins and returns. Our outside spending to replenish our inventory from last year's depleted levels has wound down with a $35,000,000 inventory build this quarter. This is down from $154,000,000 last quarter. We are now at target inventory levels and expect smaller quarterly movements going forward. Our cash position benefited from the sale proceeds Mike mentioned, but was impacted by working capital outflows a decline in accounts payable of $66,000,000 largely driven by the pay down of invoices from our recent inventory build, expect a portion of this to reverse next quarter.
Despite these outflows, the company generated $20,000,000 of free cash flow In the quarter, it has generated $72,000,000 of free cash flow year to date, while also spending approximately $300,000,000 to build inventory. With LIBOR rising from 0.1% at the beginning of the year to its current rate of 3.86%, Interest expense has become a headwind to our cash outlays. While the future path of interest rates remains uncertain in either direction, we'll look to mitigate some of that volatility. Presently, every 100 basis point change in LIBOR has a $22,000,000 annualized impact to interest expense. As a reminder, the Fabrikal acquisition closed on October 1, 2021, impacting prior year comparisons.
I'd highlight that during the quarter, ERP Systems and have largely completed the integration of the 2 companies. Our synergy targets are well ahead of schedule with annualized synergies this quarter close to 50,000,000 For future comparison purposes, the Asia business sold contributed $23,000,000 of adjusted EBITDA on a trailing 12 month basis During the quarter, the company committed to divest the remaining closures businesses in Hungary, Spain, Egypt and Bahrain And has moved these assets to held for sale. The sales proceeds and any future financial impacts are not expected to be material. A final note before walking through the financials. The planned mill outage we referenced on our last quarterly call, originally scheduled for Q4, Was pulled forward and successfully completed in Q3, further accentuating the operational success this quarter.
Now I'll turn to Slide 9 and review our financial performance in the quarter versus the prior quarter. Net revenue was $1,609,000,000 Down 2% versus the prior quarter as price mix was up 2% due to material cost pass throughs and other pricing actions, while volumes are down 3% Due to the market softening and the inflationary pressures and seasonal trends in foodservice and food merchandising, adjusted EBITDA was $187,000,000 Down $62,000,000 versus the prior quarter due to higher material costs net of pass throughs, lower sales volumes and higher manufacturing costs. Our free cash flow for the quarter improved to $20,000,000 versus negative free cash flow of $18,000,000 last quarter, primarily due to the completion of our strategic inventory build. Moving to Slide 10, we provide a more detailed bridge of our results from the prior quarter. The $31,000,000 sequential decline in revenue $35,000,000 higher price mix.
The $62,000,000 of adjusted EBITDA decline from 2Q to 3Q was primarily due to $72,000,000 from higher material and manufacturing costs and a $23,000,000 impact from lower volumes, which partially offset a $34,000,000 increase from price mix. Continuing on Slide 11 and our results by segment For Q3 versus the prior quarter, our Foodservice segment saw net revenues down 4% Due to lower sales volume due to the market softening and inflationary pressures as well as seasonal trends, adjusted EBITDA for the segment was down $2,000,000 or 32 percent due primarily to higher material and manufacturing costs and lower sales volume. Our Food Merchandising segment saw net revenues up 2%, driven by 6% favorable price mix, primarily due to higher material cost pass through to And pricing actions partially offset by 4% lower sales volume primarily due to the market softening and inflationary pressures and seasonal trends. Adjusted EBITDA for the segment was down 10% due primarily to lower sales volume and higher manufacturing costs, partially offset by favorable pricing net of material cost Our Beverage Merchandising segment saw flattened net revenues with price mix up 1 And volumes of 5%, primarily due to higher liquid packaging board volumes from sales to the former Asia operations, Which replaced a 6% decline due to lower beverage carton sales arising from the disposition of the business.
Adjusted EBITDA for the segment was down 10% to $26,000,000 due largely to higher material costs, net of material costs pass through, partially offset by lower manufacturing costs. Next, I'll review our financial performance in the quarter versus the prior year period starting on Slide 12. Net revenue was up 15% compared to prior year as price mix was up 17% due to material cost pass through and pricing actions While volumes were down 8%. Volumes were impacted by a tough comparison to strong sales volume last year As businesses and restaurants reopen post COVID-nineteen lockdowns in foodservice as well as the market softening amid inflationary pressures In food merchandising and the exit of the coated groundwood business in beverage merchandising, adjusted EBITDA improved by $68,000,000 to $187,000,000 due primarily to favorable pricing, net of material costs passed through and the benefit of the Fabrikal acquisition, offsetting higher manufacturing and employee related costs as well as lower volumes. Our free cash flow for the quarter improved $20,000,000 due to stronger cash earnings combined with lower CapEx, which is partially offset by net working capital outflows.
Moving to Slide 13. We provide a more detailed bridge of our results from Q3 2021 to Q3 2022. The year over year revenue improvement was driven primarily by $242,000,000 from price mix and net benefit of $88,000,000 $109,000,000 due to lower volume. The $68,000,000 of year over year adjusted EBITDA improvement was due to a $236,000,000 benefit And $23,000,000 due to Fabrikal acquisition ended the divestiture of our Asia business, partially offset by a negative impact of $126,000,000 Material costs and $42,000,000 due to higher SG and A and other costs, driven primarily by employee related costs and $23,000,000 from lower volumes. Continuing on Slide 14 and our results by segment for Q3 versus the prior year.
Our Foodservice segment saw Net revenues up 27%, driven by higher pricing to recover material and other cost increases as well as the impact the acquisition of Fabrikal, which more than offset the impact of volume declining by 8% due to the dynamics around businesses reopening that we previously noted. Adjusted EBITDA for the segment was up $49,000,000 or 77% versus the same period last year, primarily due to favorable pricing, Net of material costs passed through and the impact from the acquisition of Fabrikale partially offset by higher manufacturing costs, lower sales volume and higher employee related costs. Our Food and Merchandising segment saw net revenues up 16%, driven by favorable pricing, Primarily due to pricing actions and higher material costs passed through to customers, partially offset by lower sales volume, primarily due to the market softening and inflationary pressures. Adjusted EBITDA for the segment was up 43% versus the same period last year due primarily to favorable pricing, net of material costs pass through, partially offset by higher manufacturing and employee related costs and lower sales volume. Our Beverage Merchandising segment saw net revenues up 5%, Driven by 16% favorable pricing, primarily due to pricing actions and higher material costs passed through to customers, partially Adjusted EBITDA for the segment was $26,000,000 versus $16,000,000 in 2021, a 63% increase.
The key drivers were higher pricing, net of material costs passed through and the prior year cost of $7,000,000 from Tropical Storm Fred, partially offset by higher manufacturing costs, Which included $8,000,000 related to a scheduled coal mill outage during the quarter, which we originally expected to be a 4th quarter event. Next on Slide 15, I'll highlight our significant deleveraging over the course of the past year Due to a focus on adjusted EBITDA improvement and net debt reduction, we ended Q3 with $559,000,000 in cash and $4,200,000,000 in Our cash position benefited in the quarter from the proceeds of the sale of the Asia business. Our net debt at the end of the 3rd quarter was around $3,700,000,000 We ended Q3 with a net debt to LTM adjusted EBITDA ratio of 4.5 times, Declining for the 3rd consecutive quarter. Additionally, we continue to evaluate our alternatives to reduce our debt levels. I'll now pass it back to Mike for further comments.
Speaker 4
Thank you, John. If I could
Speaker 3
turn your attention to Slide 17 as we move on to our ESG updates. I want to take a minute to talk about our social responsibility key initiative, which covers much of our work under the environment, social and governance umbrella. As we continue building a values driven business, we are reminded that aligning purpose and performance creates value for companies, their employees and their communities. What better way to illustrate our purpose of packaging a better future than to give a big tip of the hat hundreds of employees who participated in our 1st PACT of Evergreen month of action. Across North America, our teams organized over 170 events and food drives for nonprofits and food banks in their communities.
In Kalamazoo, for example, Our employees gathered well over £5,000 of donations to help relieve food and security. And near our headquarters in Lake Forest, over 20 teams participated in Packing events with the Northern Illinois Food Bank. We're still tailing the donations, but I couldn't be prouder of our people Coming together ahead of the holidays to package a better future for many of our neighboring communities and families. In the last quarter, we also committed to set near and long We plan to establish these targets in line with science based target initiatives. And by doing so, we are doing our part in addressing the global challenge that is climate change.
As it relates to our products, we continue to innovate to meet our customers' needs. We've been working to develop an effective replacement for PPAS, a chemical used in some of our molded fiber products that provides oil and grease repellency. We expect the new line of BPI certified compostable PPAs free molded fiber containers and tableware to be released later this year. In time for our customers to comply with the growing number of state regulations banning PFAS and food packaging. As of today, less than 1% of our SKU offerings contain PFAS chemicals with an ultimate goal to eliminate PFAS from our offerings altogether.
Finally, we're pleased with the steps we're taking to build a more ethical, resilient, sustainable and profitable company. This quarter, we've started to look beyond our own operations and expand an audit program for our strategic suppliers in collaboration With Sabex, one of the world's leading ethical trade membership organizations, these audits should help to give confidence With our customers and inform a sustainable procurement strategy for the future. To learn more, we invite shareholders to view our latest disclosures, And the ESG section. Now please turn to Slide 18. As we have stated, we are updating our full year guidance range to 760 To $780,000,000 from the previously communicated range of $750,000,000 to $770,000,000 This modest increase reflects our confidence And stabilized operations across the organization, along with a cautious view of the current macroeconomic environment.
There is currently less Visibility into end market demand due to varying factors, including inflationary pressures, along with actions by the Fed to reduce inflation and the impact these actions will have on the broader economy. We plan to stay vigilant and continue to focus on executing our strategy and servicing our customers while generating attractive returns for our stakeholders. In closing, I would like to thank all of the Packet Evergreen workforce For their continued commitment and hard work, I would also like to thank our valued customers and vendor partners for their continued commitments to our mutual success. With that, let us open it up for questions. Operator?
Speaker 0
Thank you very much. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our rosters. Thank you. The first question comes from Ghansham Panjabi from Baird.
Please go ahead.
Speaker 5
Hi, thanks. This is actually Tom Dignan sitting on for Ghansham. If so, could you provide more detail on segment volumes in terms of what categories Outperformed and underperformed? And then any color on early 4Q trends would also be helpful.
Speaker 4
Sure. So I'll just comment that by each one of our businesses. The first thing I would say from a volume trend perspective, There's no real systemic decline, but there's really just some things that need to be understood in terms of just Kind of three points. In our foodservice business, we talk about volume for value and as We've improved service levels, really looking at where we're best to serve customers that Are supporting us through price and helping us through the inflationary timeframe that we're in. We've been able don't enjoy as you've seen the margins that support and we've exited low margin Business throughout not just this Q, but prior Qs.
So that overarch is not just our foodservice business, but all three of our segments. And then Q2 versus Q3 from a comparable, I would say the thing to note there is that there is a bit of seasonality in all three of our businesses. And that's really the large difference with the summer builds. And then from a year over year, obviously, Q3 was the start of a large reopening in the U. S.
And so difficult comps year over year for us in terms of just Inventory replenishments and the reopening that started largely in Q3 last year. Food merch is very stable. I will tell you that as I noted in Q2, our beverage merchant business is still Largely oversold on all products. Hopefully that helps.
Speaker 5
Yes, that's helpful. And then just for my next one, how should we think about the different cash flow variances for 2023 just in terms of CapEx, cash interest and working capital?
Speaker 2
Yes, good morning. For 2023, we're not guiding to anything from a cash flow basis For next year, so stay tuned for our next call. We'll give you some more guidance into next year.
Speaker 5
Sounds good. Thanks. I'll turn it over.
Speaker 0
Thank you. The next question comes from Arun Viswanathan from RBC Capital Markets, please go ahead.
Speaker 6
Great. Thanks for taking my question. Yes, congrats on all the progress. It's a nice quarter there. So maybe you could just help us understand, Do you expect kind of elasticity impacts across most of your businesses?
It seems like you're holding it pretty well from a resiliency standpoint. We had heard about some weakness in foodservice. And then along those lines, is your portfolio well positioned in case there is little bit of a trade down with the consumer. Thanks.
Speaker 4
Yes. So Yes, I just want to be careful that for us as I stated in the last question, we do view our foodservice underlying demand as stable. And so while there is some softness out there in other channels, I would say our business largely is stable Outside of decisions we've made. And I would say that, yes, we are positioned very well for what we're calling the trade down, where People are dining out and enjoying the takeout experience. Certainly as people's wallets get tighter, there is a trade down and we are Well positioned to enjoy that with our position in the chains and QSRs.
Speaker 6
Okay, thanks. And then if I could just ask one more on the restructuring actions that you've taken. Could you just provide an update, I guess, on Some of those are going, maybe if you've had any new learnings within beverage packaging. I know that you consummated the sale of the asset there, but Any other further actions that you'd expect along those lines? Thanks.
Speaker 4
Yes. So we've taken a number of actions Dating Bennett to the closure of the Kota Groundwood, we've had the divestitures as you've noted. We continue to look for opportunities certainly, Nothing to share in terms of further decisions in that regard. I would tell you that the challenge is 2 pronged obviously is the controllable internal work that we need to do and have continue To improve our operations and our mill performance, but also commercially where as we get fitness in terms of customer contracts
Speaker 7
and pricing,
Speaker 4
We've seen that improvement come along as well. So we've seen great progress in the throughput and the operating efficiencies We certainly have invested there, no secret and both in talent and in CapEx, As well as really put a focus on what's core and you're seeing us Really look at tightening that business up and staying and trying to tighten our focus to our core assets. I'd say that's our strategy, Overarching strategy and that hasn't changed. In terms of further divestitures or anything around the strategic review, Again, as I've stated before, it's an iterative process. As decisions are made and we do decide to move forward on things, We will be open about those.
We just have nothing further to share at this time on that.
Speaker 6
Thanks.
Speaker 0
Thank you. The next question comes from Kieran De Bruin from Mizuho. Please go
Speaker 1
ahead. Hi, good morning. Just I was wondering if
Speaker 8
you could talk in terms of pricing initiatives and What you're seeing in terms of the input costs and on the raw material front, how some of those raw materials have maybe changed 3Q versus 2Q? And And what your kind of pricing pipeline looks like through the rest of next year and your ability to maintain some of that price if we do get into a softer kind of volume environment with your customers? Thank you. Yes. Just to Thank you.
Speaker 4
Yes, just to level set. So we twofold, obviously we have Our contractual pass throughs, which we continue to recover 100%. And as far as our ability to continue to State Elastic in terms of inflationary recovery, we've made great strides in all three of our businesses to Continue to stay whole in that regard. As it relates to our input costs, Q3, I think we continue to see Largely in our food businesses, particularly the resin stabilizing to falling off in some regards in terms of cost. And then I think we continue to expect the same throughout the end of the year.
As it relates to beverage merchandising, a bit different. We continue to see a delta between our costs continue to go up in that business in terms of our input costs. So it's a little bit different than what you'd see in our food businesses. So all the fiber energy and input costs that do impact natural gas that impact Business continue to go up and are headed in a different direction. And so we still have a delta on that recovery, Albeit indexed and fully recoverable.
Speaker 8
Great. And then just a quick follow-up on the Current debt profile, I mean, you've done a really great job of getting that down to 4.5 times. I mean, it seems to be trending towards that kind of For below level within next year potentially. So how do we think about your capital deployment priorities post kind of hitting that lower, I guess, below 4 times target on a go forward basis? Thank you.
Speaker 7
So
Speaker 4
I'd say our deployment targets are largely not different than today. I would say that our focus continues to be on returning EBITDA returning projects. And so the geography of our capital is largely around Areas of automation, for instance, certainly looking at growth capital where we're able To take profitable volume and partner with our current customer portfolio, new customers, as well as really look at Similar to what we've done recently with FabryCal, if the right opportunity presented itself, We certainly want to be at the ready and have a continue to have an ear to the wall on what other assets might become available for us to grow inorganically as well. That is all. And John, I'm sitting here looking at John who's certainly I'd be remiss if I didn't say that's all The umbrella overall that would be we do wish to continue to delever.
So in terms of usage that's our priority just to get to that below 4 times.
Speaker 2
And I'll just expand a bit on the deleveraging front. There's 2 components of the leverage. This point is obvious, but growing EBITDA is one way to achieve that. So as we look at those capital Projects that Mike just mentioned, we are looking to grow that EBITDA, increase our margins and our returns in Process, so that's one aspect of the equation, but the other is just the absolute debt levels. We do have some cash on the balance sheet that Certainly in excess of what it takes to run the operations.
And so we're looking at alternatives that we can use some of the excess cash to continue bring the absolute debt levels down as well.
Speaker 8
Thank you very much.
Speaker 0
Thank you. The next question comes from Adam Samuelsons with Goldman Sachs. Please go ahead.
Speaker 9
Yes. Thank you. Good morning, everyone.
Speaker 6
Good morning. Good morning.
Speaker 9
So I guess the first question is just thinking about the updated guidance, which for the 4th quarter implies Sequential decline of $25,000,000 to $45,000,000 or so of EBITDA. And I just was hoping to get some clarity on kind of The key moving pieces within that relative to the Q3 performance, I presume there's some seasonality, I don't know, it's been hard to Parse that from your historical results in the last couple of years, given all the other external factors going on. But help us think about kind of expectations on volume, Price cost, other discrete factors that would be driving that kind of sequential decline in the 4th quarter?
Speaker 4
Yes. I'll give the yes. So if you go back to kind of Q3, Q4 of 2021, Certainly coming out of the pandemic and you talked about external factors, certainly that masks any seasonality that our business would normally have. So typically our Q4 is our softest quarter of any calendar year. And In the recent Qs, we've seen some choppiness in what normal looks like Really driven by the consumer and that grand reopening that happened last year with a lot of the mandates coming off and mobility increasing Drove a spike in two things, a spike in our customers pull through because they were trying to right size inventories And also a spike in certainly usage and so the consumer was very active.
And that's largely The reason for the Q over Q change. This year, I would say the guidance increase is largely Not volume driven, but it's really more around our move to put the we pulled an outage ahead In our beverage business, and so having reliance on our improvements in the operations, we certainly wanted to make sure We shifted that. It's a modest increase. And we're also cautiously optimistic about volumes in Q4 as well. So while we'll see Some normal seasonality, we still have as I've mentioned previously stable segment volumes, stable demand in every one of our segments.
Speaker 9
Okay. And then just as a follow-up, given the actions you take This year on kind of getting your own inventory back in a better position and what I think you framed is value over volume. Can you just quantify kind of the level or the amount of foregone sales This year from those actions as we think about kind of lapping that internal rebuilds in 'twenty three?
Speaker 2
Yes, Adam. I don't know if we really cut the business that way in terms Foregone sales. The broader piece that I would tell you is that it is a strategic decision as we're looking at Targeting as Mike said, targeting the right customers, those that will help us with the Managing through the inflationary environment we're in and really doing that value over volume selection. But in terms of Those customers that or the piece that is falling away, it is a lower margin business and so It's not overly impactful from an EBITDA standpoint as it is just a volume perspective would just be my broader answer to that.
Speaker 0
Thank you. The next question comes from Mark Wilde with Bank of Montreal. Please go ahead.
Speaker 10
Thanks. Good morning, Michael. Good morning, John.
Speaker 6
Good morning. Good morning.
Speaker 10
John, just curious for my first question. As you think about that increased guidance for the full year, is there anything in there incremental that came from just Your view of potential cost benefits here in the Q4, particularly with resin coming down?
Speaker 2
No. From a year standpoint, not particularly from that beat. I think the beat, As we've talked on, it's probably more of an operational basis that we've been able to continue to improve on that front. A lot of the resin pricing declines is something that we'll see probably more pickup into going into next year than seeing it in Q4.
Speaker 10
Okay. And then I'm just curious over in beverage merchandising, we've just had a dizzying number Price increases announced on kind of bleached paperboard and paper. And so I'm a little surprised that you're not seeing kind of Better margins in that business with all those increases. And I'm just curious, how much of a lag is there in terms of Raising price on kind of both internal and open market sales in that business. And is that a factor in kind of margins still being down here in the mid single digits?
Speaker 4
Yes. We haven't disclosed the lag effect in that business, but We are not on the right side of price cost just because we haven't caught up in terms of that recovery, I can say that. And just As I've said in other calls and just for transparency, we certainly do have more work to do on the commercial front With contracts falling off and some of the legacy commercial deals that were done in that business that will allow us To get back to what you've identified is a margin gap.
Speaker 10
Yes, okay. All right. And then finally, Michael, just any color on this Closures business, I have to say, I was a little surprised I didn't realize the offshore extent of that closures business.
Speaker 4
Yeah, I mean not knowing what color you're looking for, but I can just tell you that non core business for us Certainly a legacy set of orphan facilities that Really, we are managing very insignificant in terms of our earnings and Really it was about getting it in the right hands and not really about us continuing to be distracted with it.
Speaker 10
Okay, all right. That's helpful. Thanks very much.
Speaker 0
Thank you. The next question comes from Kyle White from Deutsche Bank. Please go ahead.
Speaker 7
Hey, good morning. Thanks for taking the question. A question for you, John. Now that you have almost half a year under your belt here, where do you see the most opportunity Great value for the company. Where do you see the most room for improvement and what might be your focus going forward?
Speaker 2
Sure. Good morning, Kyle. I think that's a great question. There's a couple of different aspects. 1, and I'll build on a comment Mike made earlier around capital deployment, really having a really focused approach to capital deployment, Returns based methodology to really prioritize those projects and focus on things that are Going to continue to grow the business, but at a better return and a better margin.
I think that's one area. In terms of just operational improvements, In terms of the core businesses, continue to evaluate those, but there are areas where we can certainly run the business more efficiently And continue to build margins and frankly, just streamline some of our operations. So operational Kind of enhancements, I would say, in that area. And then I think lastly, just around and some of the things we were talking about in terms of deleveraging the business, I think working on ways to reduce our cost of capital, which is a bit challenging with some of the Macro headwinds in the market in terms of rising interest rates, but trying to reduce that cost of capital, reduce the volatility in the business. And I think nothing to announce right now, but there are some things that we're looking at in terms of ways that we can reduce that variability in the business.
And I think I've talked about it with you and others. As I've entered the company, this business does have a very Recession resilience, reliable cash flow stream, but the volatility in the cash flow from quarter to quarter Doesn't necessarily represent the underlying stability and strength in the business. And so very much focused on continuing to drive ways that can reduce that volatility in the cash flows from
Speaker 10
a quarter to quarter basis
Speaker 2
to help reduce the volatility and then lower our cost of capital.
Speaker 7
Got it. That sounds good. And then just a point of clarity on the maintenance. Just trying to understand, was the cold mill outage originally planned for the Q4? And then was that total impact $8,000,000 related to this or is there more that drags into the 4th quarter?
Speaker 4
I think you've got it right.
Speaker 2
It was completed in Q3.
Speaker 4
Yes, it was scheduled for October and we did it in August.
Speaker 7
Perfect. Thank you. I'll turn it over.
Speaker 0
Thank you. The next question comes from Anthony Pettrini with Citi. Please go ahead.
Speaker 11
Hi, this is actually Brian Bergmeier sitting in for Anthony. On the last call, I think you mentioned $200,000,000 free cash flow guide for 20 22. I'm just wondering if that's still a good number to use. I'm just thinking about your inventory levels into year end, which seem normalized now. And I'm not sure if Pactiv will see a cash benefit from lower resin prices?
Speaker 2
Yes. Good morning, Brian. Let me just I'll clarify something from the last call. So I don't believe we guided to $200,000,000 of free cash flow for the year. We did make some comments And provided just a general area of mid-100s as probably an area where we would see free cash flow.
As we stand today, Again, reiterate a couple of components. 1, we did spend $300,000,000 on building inventory, but and we're $72,000,000 Free cash flow positive year to date, so 3 quarters in. As we stand today, we are Still targeting being north of $100,000,000 in free cash flow. Not sure if our guide is to the mid $100,000,000 but we're somewhere north of 100. I think the real piece there that's probably a delta quarter over quarter is just the working capital components and seeing how that ends up the year.
Given the build in inventory that we saw last quarter, you might have seen this quarter, and I mentioned this in the prepared remarks, There is a bit of a payables piece that is a bit of a catch up that hit us this quarter. So I am looking for that to unwind this quarter to more normalized non inventory working capital levels. And so That piece is where we should see some more free cash flow generation in the back in this last quarter.
Speaker 11
Got it. Thanks for the color there. Yes, I've made a mistake on the $200,000,000 So thanks for clearing that up. And then just for a follow-up, Foodservice volumes are down like mid single digits year to date. And I'm just wondering if it's possible to parse out Maybe how much of that is just from Packdive's internal inventory decisions versus how much of that is due to Decline seen at your customers' demand levels?
Speaker 4
Yes, we've not disclosed that. I would say generally the volumes at our customer levels are pretty stable. So you could say the lion's share of those declines are really self inflicted or choices we've made Generally.
Speaker 11
Got it. Thanks. That's it for me. I'll turn it over.
Speaker 0
As there are no further questions, this This concludes our question and answer session. I would like to turn the conference back to Mr. Michael King for any closing comments.
Speaker 4
Yes. Thank you, Stephen. So I'd just like to personally thank everyone for joining today's call. We certainly are excited about the progress we've made thus far And recognize that we still have much to do on several fronts. We certainly recognize that there's Significant amount of value that we continue to unlock and can unlock and that is creating the kind of momentum in the culture in this business and We're winning today versus where we were just a short 12 months ago.
This management team is very committed to our strategies. Our strategies are paying off. And as I've noted on today's call, it's great to be in a proactive state versus just a short 12 to 18 months ago. With that, again, we thank you for your support. We thank you for following and being a part of the journey.
And as always, thank you for supporting PACTIVE Evergreen. That will conclude today's call.
Speaker 0
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.