Sonoco Products Company - Q3 2023

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to the Q3 2023 Sonoco 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 this session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Lisa Weeks, Vice President of Investor Relations. Please go ahead.

Lisa Weeks (VP of Investor Relations)

Thank you, operator, and thanks to everyone for joining us today for Sonoco's third quarter 2023 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer, and Rodger 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 sonoco.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 two 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 GAAP measures, is available under the Investor Relations section of our website. For today's call, we will have prepared remarks regarding our results for the quarter and outlook for the fourth quarter, 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.

Howard Coker (President and CEO)

Okay, well, thank you, Lisa. Good morning, everyone, and thank you for joining our third quarter 2023 earnings call. Let me again begin with highlights of the quarter. For Sonoco, we executed well, even with the ongoing market uncertainty. Sales came in at $1.71 billion, adjusted EBITDA was $280 million, and adjusted earnings per share was $1.46. Sales were flat sequentially and generally in line with expectations. In the industrial sector, demand remains muted and volumes low. In consumer, volumes were sequentially higher in most businesses, while minimal aerosol can volumes continued to underperform, driven by lower end market demand and ongoing customer destocking. Our profit results were better than expected from strong productivity and effective cost management by our teams.

Our productivity results were benefiting from the capital investments we're making across our plant network, including automation, process improvements, and energy cost reductions. We expanded adjusted EBITDA margins to over 16% and delivered strong cash flow during the quarter. We achieved these results even while we continued to invest in long-term, value-adding projects and R&D initiatives throughout the portfolio. Overall, I'm pleased with how these results reflect our continued ability to execute simplification, transformation, and operational excellence initiatives to build a more resilient company with strong performance through the cycles. We were also pleased to close the RTS Packaging and Chattanooga paper mill acquisition in September.

These acquisitions is well aligned with Sonoco's long-term strategy to focus on our core integrated businesses and expand our sustainable consumer packaging portfolio, serving food, beverage, and beauty markets. The integration process is well underway, and we are delighted to welcome our new colleagues to Sonoco. With that, I will turn it over to Rob for more details on the quarter. Rob?

Rob Dillard (CFO)

Thanks, Howard. I'll begin on slide six with a review of key financial results for the third quarter. Please note that all results are on an adjusted basis, and all growth metrics are on a year-over-year basis, unless otherwise stated. The GAAP to non-GAAP EPS reconciliation is in the appendix of this presentation and in the press release. As Howard said, third quarter financial results reflect Sonoco's continued ability to deliver strong results in a low-volume environment. We generated sequential growth in sales and adjusted EBITDA and improved the adjusted EBITDA margin to 16.4%. Furthermore, we exceeded our expectations and achieved adjusted EPS of $1.46. This strong profitability was broad-based, as impactful cost controls and improved productivity drove near record profitability in both flexibles and rigid paper containers in the consumer segment, and strong profitability in the industrial segment.

In the third quarter, consolidated sales decreased to $1.7 billion. Sales decreased due to low volumes and index-based price decreases in both consumer and industrial. Adjusted operating profit decreased to $213 million, and adjusted EBITDA decreased to $280 million. We maintained an above 16% adjusted EBITDA margin due to improved productivity and long-term cost controls associated with our ongoing business transformation program. Adjusted EPS of $1.46 was driven by strong operating performance as well as favorable tax and FX. Adjusted EPS increased sequentially from the second quarter due to modest volume improvement, positive productivity, and positive non-operating factors, despite negative price costs. The sales bridge on slide seven explains the year-over-year change in sales in the quarter. Volume mix was -$145 million, or -7.7%.

This volume decrease was anticipated and was the product of weakening consumer demand due to the impact of inflationary pricing and destocking at retail, and continued low industrial demand. We continue to take steps to improve demand visibility, and we are managing the business to mitigate the impact of low volumes. Price was -$58 million. Our pricing performance was driven by index-based price decreases, primarily in resin and metals-based businesses. FX and other had a positive impact of $23 million, with FX contributing $17 million. The adjusted operating profit bridge explains the year-over-year change in adjusted operating profit in the quarter. Volume mix was -$31 million, as low volumes impacted profitability. Price cost was -$10 million, as index-based prices declined more than overall inputs declined on a year-over-year basis.

We continue to experience inflation in fixed costs and variable inputs like labor, while market-oriented inputs that drive index-based pricing, such as metal and most resins, declined on a year-over-year basis. Productivity was $30 million due to restructuring activities targeting fixed costs and favorable manufacturing and purchasing performance. Slide eight has an overview of our segment performance for the quarter. Consumer sales decreased to $938 million. Consumer volumes decreased 8.1% due to inflationary pricing and continued destocking at retail. Customers of our consumer packaging remain cautious. We believe that our solutions are winning share. Rigid paper container sales were flat as continued global growth, especially in Europe and Latin America, was offset by weakness in North America. Flexible sales decreased high single digits as low volume with legacy customers offset share gains with new customers.

Metal packaging sales decreased due to tinplate-based pricing decreases and lower volume in both food and aerosol. Demand from our core customers has stabilized. Indications are that destocking with these customers has moderated. Consumer operating profit decreased to $112 million, as strong productivity was offset by lower volume mix and negative price cost. Consumer operating profit margin increased to 11.9%. Flexibles and rigid paper containers both had near record operating profit due to strong productivity. Turning to industrial. Industrial sales decreased to $580 million. Industrial volumes decreased 7.5% due to lower demand in all key markets and geographies. We believe these declines are not share related, as indications are that we continue to gain share based on quality and service. Operating profit decreased to $75 million due to lower volumes and negative price cost.

We generated positive productivity due to our focus on improving paper mill utilization and reducing fixed cost and SG&A. Recent capital investments, such as Project Horizon, have enabled us to focus on the right markets with the right assets. We are operating with agility and continue to evaluate system improvements to maximize profitability. Operating profit margin remained at a historically strong 12.9%, a meaningful improvement from previous economic lows. All other sales decreased to $192 million due to low volumes. Operating profit increased 66% to $26 million due to strong price cost and productivity. Moving to slide nine. Our capital allocation framework aligns with our business strategy to drive value creation through earnings growth and higher margins. Our priority is to dynamically allocate capital to long-term strategies to improve growth and profitability in our core businesses.

We remain focused on increasing the dividend, which at present is $0.51 per share on a quarterly basis or an approximate 4% annualized yield based on our current share price. After capital investments in the dividend, we prioritize investments in accretive and strategic M&A, balanced against our priority of maintaining strong liquidity and access to capital. In the third quarter, we increased the size of our revolving credit facility and refinanced our term loans to extend maturities and reduce the average interest rates, while also funding the RTS acquisition. We began the fourth quarter with record liquidity and the ability to continue to pay down debt with cash from operations. In the third quarter, we generated operating cash flow of $268 million and invested $93 million in capital expenditures. On slide 10, we have our guidance update.

We are increasing our full year 2023 EPS guidance to $5.25-$5.40, raising the lower end of the range to reflect our year-to-date performance, but maintaining the top end of the range to reflect the current market instability, especially considering recent weak demand trends in December. We're also increasing our full year 2023 Adjusted EBITDA guidance to $1.05 billion-$1.08 billion. To reflect these changes and to reflect our expectation of maintaining higher receivables and lower payables than anticipated, we are revising our full year 2023 operating cash flow guidance to $850 million-$900 million. We are managing capital expenditures appropriately and expect to invest between $300 million and $325 million in 2023. Now, Rodger will discuss the fourth quarter outlook.

Rodger Fuller (COO)

Thanks, Rob. If you please turn to slide 11 for our view on the segment performance drivers for the fourth quarter of 2023. First, in the consumer segment for the fourth quarter, we expect stable volume performance versus last year and down slightly sequentially to the third quarter due to seasonality, primarily in our flexible and rigid plastics businesses. In our global rigid paper containers business, softness in some legacy products is being offset with new products using our proprietary sustainable paper solutions. We're excited to continue the global expansion of our rigid paper containers as we utilize the new capacity added in our existing operations in Brazil, Malaysia, and Poland. These operations are utilizing our state-of-the-art equipment and automation technologies, with plans for more investments in 2024 in emerging markets for paper cans.

In our flexible packaging business, we expect seasonally lower volumes after the third quarter holiday pack, but we should see continued solid productivity in flexibles as a result of recent investments in new technology. In metal cans, we expect seasonally lower food can volumes after the peak pack season in the third quarter, and metal aerosol volumes are expected to remain soft in the fourth quarter. We expect positive productivity in metal cans to continue in the fourth quarter due to capital investments. Turning to the industrial segment, as we expected for the second half of 2023, global demand for our paper and converted products remains soft. In the fourth quarter, global industrial volumes will be slightly lower versus last year. We have seen some slight demand improvement in our North American paper and converted products business, with Europe and Asia remaining quite weak.

Also, in the fourth quarter, price cost benefits will be lower in industrial due to index-based pricing and cost inputs. With the lower volumes in industrial, productivity improvements remain challenging, but we will continue to aggressively manage variable expenses as a countermeasure to minimize the impacts from volume deleveraging. Finally, in all other businesses, we expect slightly lower volumes from seasonality. In conclusion, for the fourth quarter, the team's focus on cost control, footprint optimization, and all forms of productivity will be critical till we see a sustained improvement in customer demand. With that, back to you, Howard.

Howard Coker (President and CEO)

All right, thanks, Rodger. In closing, I just want to state that despite all the external demand uncertainty this year, our team is performing extremely well, and we have continued to solidify the foundation of Sonoco and make progress on our strategic initiatives. Speaking further on behalf of Sonoco's management team, I would like to recognize the dedication and hard work demonstrated through the quarter and year at this point and thank all of you for the work you've done. While transformation is well underway, there's still more to be done, and I know our teams are up to the challenge. Just to further touch on these strategic initiatives, which I've been covering through the year, I'll remind you that we're only midway through reshaping our portfolio, and we look forward to completing our non-core divestitures when we can maximize value in the marketplace.

On the operating model side, Sonoco is becoming a more focused, agile, and operationally efficient company. The continued optimization of our mix and factory footprint, combined with driving productivity and value-added capital projects, will sustain and drive margin expansion in the future. Our balance sheet remains strong, and we continue to generate cash and allocate capital in a disciplined and efficient management. Lastly, our commitment to ESG and sustainability initiatives are unwavering and remain wholly aligned to the core values of the company. There are a lot of great things going on in Sonoco, and the team and I generally look forward to providing more in-depth updates on our progress during our planned Sonoco Investor Day, which is scheduled for February 22nd of next year, at 75 Rockefeller Plaza in New York City.

We will be sharing key updates on our segments, our markets, and our fantastic technology innovations, and we look forward to seeing you there. At this time, operator, we would be happy to answer any questions that folks may have.

Operator (participant)

Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will be coming from George Staphos of Bank of America. Your line is open.

George Staphos (Managing Director)

Hi, everyone. Good morning. Thanks for the details. Thanks for taking my question. I guess the first question I had, Howard and team, you know, third quarter, you performed better than your guidance. Congratulations on that. It sounded like a lot of that was productivity. So I guess my question would be: What was—if that's the correct premise, what was the driver of the outperformance? And as we overlay that into the fourth quarter, might we not see that continue, and yet we're looking at a steeper drop in fourth quarter earnings year-on-year?

And the related question to that would be: Is that largely because of price cost becoming a bit more negative, for the reason that you mentioned? And if you had color on that, that'd be great. I had one follow-on after that.

Howard Coker (President and CEO)

Sure, George. Yeah, the third quarter, you know, volumes were about where we expected them to be, a little bit softer. But you're right, productivity actually covered that. So, that's the real driver, as well as how we managed, you know, general cost containment, et cetera. As we look into the fourth quarter, you know, we're seeing seasonal type declines ahead of us. I expect that productivity still should be pretty solid. But there's the real question mark is all around, you know, what the volumes are gonna be. And, you know, as we head into that December time frame, that's the real watch out for us. Do we see people taking extended downtimes around the holidays, et cetera?

So being cautious in that regard, but that's the main drivers of what we're looking at for the remainder of the year. Do you guys have any other?

Rob Dillard (CFO)

Yeah, George, that's a good question. I think that, you know, Howard hit it, hit it right. If you think about next quarter, what we're thinking is volume will be a little bit weaker, just generally because of the seasonality, and we always have been cautious about projecting December in the last couple of years. But the productivity performance has been really strong, and it is due to, you know, some of the strategic investments we've been making. So we're hitting really on all three cylinders of, you know, our procurement, manufacturing, and, and really getting after fixed cost.

And that's what, you know, all the activity the team's been doing. So if you think about year-over-year in the fourth quarter, we're expecting to have pretty similar year-over-year performance and productivity of, you know, between $0.20 and $0.25 of improvement. And so we feel really good about how all that's starting to flow through the P&L.

George Staphos (Managing Director)

Thanks for that, Rob. I guess one related question and then a quick one on metal. So you mentioned that legacy flexible was weak, meaning your legacy customers in flexible were weak. You picked up some new business that helped offset. Rigid paper was down in North America. You know, it's sort of the same novel we've been all reading in terms of all the companies, but what are your customers in those key consumer markets saying about whether we're done with destocking, whether the consumer demand is looking you know sequentially better as we get into 2024? And then last question, metal, where is that performing versus your deal model at this juncture, given all the volume degradation we've seen? Thank you. Good luck in the quarter.

Howard Coker (President and CEO)

Yeah, what our customers are saying right now, George, and what we're seeing is, and you can see it as well, that we're starting to see more promotional activity on the shelves, more discounting. You know, part of what we've been dealing with, and I think, the sector in general is, you know, the price inflation through the course of the year and trying to maintain that. And so we're starting to see breaks in that. Don't expect that, that's gonna be a material impact, in the first quarter. We're still early kind of, you know, looking at, you know, what is next year gonna look like.

But certainly, we're having conversations with customers, and you're seeing them on the shelf as it relates to exchanging price for volume at our customer level. As it relates to the deal model on metal, we're right where we said we or thought we would be, particularly if you look at the ebbs and flows of year one and as we approach the end of year two. We had a just phenomenal year last year, and it's really relative to the well-publicized inventory variances that we had year-over-year, positive versus negative. You take them and you average them out, and we're right on top of exactly where we thought we would be. So we feel very good about that.

But even more importantly, you know, as we continue, the integration has gone fantastically. The synergies that we identified are there and being obtained. And frankly, really pleased with the incremental synergies that we had didn't anticipate that we have ahead of us. And, you know, I've said this before, the market reaction has been very, very positive, and, frankly, this is a marathon, not a sprint, but really pleased on how it's been integrated, really pleased with the overall financial performance, and looking forward to continuing with the synergies and other opportunities that we see over the coming period.

George Staphos (Managing Director)

Thank you very much. Good luck in the quarter.

Howard Coker (President and CEO)

Thanks.

Operator (participant)

One moment for our next question. Our next question will be coming from Anthony Pettinari of Citi. Your line is open, Anthony.

Anthony Pettinari (Research Analyst)

Good morning. Just following up on George's question. You know, in consumer, you obviously sell into a lot of different end markets and customers. I'm just wondering, are there specific markets where destocking maybe is a bit closer to an end or others where maybe you're seeing, you know, new rounds of destocking or pullback that's surprising you? And I'm sorry if I missed this, but is it possible to quantify what you're expecting for Q4 in consumer on a year-over-year basis?

Rodger Fuller (COO)

Hi, Anthony, it's Rodger. Yeah, consumer fourth quarter, we're looking at flat on a year-over-year basis, with some improvement in the metal can side of the business, both metal and paper, and some continued volume struggles in flexibles, but flat year over year. And you really have to look at it, you know, almost SKU by SKU. But in the flexibles area, confection and snacks have been very weak. I wouldn't call that destocking. I think that's more of a price on the shelf issue.

And then, you know, if you think about where the inventory and the destocking is really more on our metal side of our business, where you have longer shelf life on products. And as Howard said, we're seeing that, you know, start to ease and come to an end, but ease up. So again, in the fourth quarter, we see slightly better metal volumes than fourth quarter of last year.

Anthony Pettinari (Research Analyst)

Okay, that's very helpful. And then in industrial, you talked about maybe some improvement in the U.S. I don't know if that's just purely a function of easier comps or there's maybe some organic growth there, and I just wonder if you can comment on that. And then in Asia and Europe, you know, understanding you don't have great visibility, and there's a lot of macro uncertainty, do you have any sense whether those markets are getting worse or sort of stable or getting better? Or any, you know, other comments that you can give there.

Rodger Fuller (COO)

Yeah. Hey, Rodger, again. Yeah, North America, you know, I said slight improvements, and I think that's what we've seen. We've certainly seen the... We feel like the bottom in North America from a, from a volume standpoint and, and industrials. You know, if you look at our URB system, you know, we operated about 85% capacity in the third quarter, which was, you know, 5% better than the marketplace. So we felt, we felt good about that. That's coming from our integrated system, as well as some really good, strong, long-term customer relationships. So, you know, North America, a little sign of, of improvement. You know, I wouldn't call it a trend yet, but we'll see how it goes in the fourth quarter and move into the, the first quarter. Europe and Asia remain weak.

They're not getting worse, which is nice, but they remain weak. The URB systems ran in that 75%-80% capacity area. We expect the same for the fourth quarter. And if you look at year-over-year industrial volumes for the fourth quarter, we're calling it down about 1.5%-2%, and that's versus down 7.5% in the third quarter, year-over-year. So incrementally, we're seeing a little improvement, plus, of course, the comps are getting easier as we move quarter to quarter, and that will continue into the first half of next year.

Howard Coker (President and CEO)

Yeah, and Anthony, I'd just add to that, as we talk about the volume side, we feel like we've been in manufacturing depression or recessions really since December or so of last year. Our volumes, as you have seen through the course of that period of time on industrial, have been challenged, to say the least. But I can't tell you how impressed I have been with the team performance. We talk about productivity, we talk about the investments that we've made. You know, I guess you guys are probably glad we're not talking about Project Horizon every moment that you see us or hear from us.

But, you know, that's just a poster child of, you know, not being in the corrugated medium market outright now, vertically integrated, and how does that flatten out and improve, well, frankly, improve, particularly in times like this, our overall industrial margin profile. So, you know, we're seeing some degradation, very high levels last year from a price cost perspective, even with difficult volumes. You know, you've seen [tandem] and chip has dropped by $20 a ton, you know, but we are extremely confident that we're gonna maintain, you know, those double-digit type margins, even in difficult times. And what excites me about where we stand today is there will be a recovery. We're not losing share, the market's not shifting in any way, and there will be recovery.

And when that happens, the leveraging effect we are not enjoying right now in our productivity will come into play. And you know, looking forward to getting out of this situation that we're in, hopefully, that will be you know. And for us, it's hard for anybody to have a crystal ball. But you know, maybe mid-next year, we start seeing some type of improvements on the industrial side, and with that will come added leverage as it relates to the investments and the productivity that we have.

Anthony Pettinari (Research Analyst)

Okay. That, that's very helpful. I'll turn it over.

Operator (participant)

One moment for our next question. Our next question will be coming from Mark Weintraub of Seaport Research Partners. Your line is open, Mark.

Mark Weintraub (Senior Analyst and Head of Business Development)

Thank you. First question was the RTS transaction getting completed. Obviously, the world's changed a little bit, OCC higher, URB a bit lower. Can you update us kind of on what type of accretion or EBITDA contribution in the current environment is reasonable to be anticipating?

Rob Dillard (CFO)

Yeah, Mark, that's a good question. Really no change. I mean, we've been really pleased with how those assets have come over to our portfolio. You know, as when we talked about it last year, we said it was $50 million of EBITDA with about $16 million of targeted synergies, but 10 of those were kind of day one. What we're seeing is that those synergies are coming through day one. So the business is performing well. I would say there, the TSA load is probably a little bit more than you probably were anticipating. We think that this is, you know, that it's, you know, give or take $0.05, plus or minus a couple cents per quarter next year. And so we feel really good about how that's coming through and how the business is operating.

As Howard said, I think that it's additive to the system in this low volume environment because the mill is relatively covered, but it gives us more tons to spread across the system, so we feel really good about that.

Mark Weintraub (Senior Analyst and Head of Business Development)

Okay, great. And that includes Chattanooga when you're talking in this conversation?

Rob Dillard (CFO)

Yeah, that's a good question. I was talking about both. I mean, we think about it all as one kind of integrated transaction.

Mark Weintraub (Senior Analyst and Head of Business Development)

Got it. Makes sense. And then second, maybe what are some of the other actions that you're taking that can move the dial that are outside of business getting better, that are gonna be flowing through next year, that you'd wanna highlight as we think about bridging out 2024 versus 2023?

Howard Coker (President and CEO)

Mark, yeah, you know, we continue on our journey as it relates to, you know, as you know, three years ago, 3.5 years ago, we really started kicking up our capital related to, to growth and productivity. And with through COVID, you know, a normal capital cycle can run 1.5-2 years. COVID has extended that. So we're the expectation is we're gonna see, incremental improvement, from those investments going into next year. And, you know, we've talked a lot about, you know, the restructuring, how we manage our businesses from the center, and, you know, what is the portfolio gonna look like, going forward? So we've been busy over the last, 18 months or so.

The term around here is clearing the underbrush, but doing small divestitures, closing facilities that are dilutive to the overall company and non-strategic. That's gonna continue. When we're together in February, we plan to try to. We will present to you guys. You know, it's not mission accomplished. It's where we stand at this point in time. I think you'll be pretty impressed with some of the restructuring activities that we'll announce at that point in time, and how we're gonna be managing the company going forward. From a modeling perspective, sorry, I can't help you with how that all equates economically quarter by quarter or through the year. Hopefully, more information will be coming as we get together in February.

Mark Weintraub (Senior Analyst and Head of Business Development)

Okay. Fair, fair enough. And, and just lastly, recognizing, it's, it's a dynamic environment, but, given where tin plate is, et cetera, did you have a perspective on whether there's likely to be additional, inventory impacts, that flow through, you know, metal benefits or, negative impacts, next year, or any help there? I mean, it would seem like that could be another negative, but-

Howard Coker (President and CEO)

Yeah, well, it's early and, you know, everybody's aware of what's going on from a supply side perspective there, tariffs, acquisition, discussions, et cetera. A lot of noise, which is causing delays in terms of our negotiations. So it's really not there yet to talk about what we think from a direct inflationary impact. What I would say is from a inflation or deflation impact, what I would say is that our customer profile from an inventory perspective is much more favorable. Major customers are saying, in one case, those with a customer a couple of weeks ago, who was, you know, half their inventory, and to our detriment in the first half of the year, as they've brought it down, and they're coming in, you know...

So we're seeing that across the board, that the inventories are starting to normalize. So whatever happens on steel pricing, up or down, the relative impact should be less favorable or negative as inventories at our customer locations have decreased.

Mark Weintraub (Senior Analyst and Head of Business Development)

Understood. That's helpful. Thank you.

Operator (participant)

One moment for our next question. Just as a brief reminder, if you would like to ask a question, please press star one one from your telephone. Our next question will come from Gabe Hajde of Wells Fargo Securities. Your line is open.

Speaker 8

Hi, this is Alex, not Gabe. Thanks for taking my question. I appreciate all the comments you guys made on the Q4. But maybe just if I were to kind of think about 2024, can you kind of comment on how you're thinking about the working capital and your inventory?

Rob Dillard (CFO)

Hey, Alex, for Q4?

Speaker 8

For Q4 and 2024, if you can comment on the next year's inventory?

Rob Dillard (CFO)

Yeah. So for Q4, you know, how we're thinking about it and what we've thought is, and I think Howard kind of hit the point on metal, is that we have taken out and made a real concerted effort to take inventory out of the business. And so at this point, you know, the inventory is a little over $250 million less than what it was. We expect that'll be stable through the end of the year. A big part of that reduction was in metal. For the other working capital categories, you see from last year, Q3 to Q4, we released $100 million of AR.

That's something that, while we don't expect it to be that magnitude every year, that's just part of the normal cycle for us, and so we expect to release another $100 million of AR in Q4, which will put us at about taking out about $148 million of working capital, give or take. For next year, you know, it's really early days. We are really managing inventory, you know, really aggressively and have been, and we're managing AR and AP really aggressively as well. We feel like we're at the right level of days at this point, and don't feel like we need to be too aggressive in pulling inventories down any further in the businesses, especially as, you know, some businesses are expecting growth next year.

So I think the days, you know, the metrics for working capital will stay constant next year, and that would be the guidance we would give on working capital in 2024.

Speaker 8

Okay, thank you. And can you just remind me again, or remind us again, what portion of COGS is labor?

Howard Coker (President and CEO)

What portion of the COGS? Can you repeat that again, Gabe? You're breaking up just a little bit.

Speaker 8

Yeah. Sorry, can you just remind us again what, what portion of COGS is labor? And, I, I guess, how should we kinda think about the mid-single-digit labor inflation next year? Do you have anything in your, in your contracts to kind of pass this through to, to, on your-- to your customers through price increases?

Howard Coker (President and CEO)

We do have the opportunity to pass on labor, but, you know, we're having to carry it until the timing of price adjustment come into place, typically quarterly. But certainly labor inflation is continuing to roll over, you know, through this year and then early next year. So, it'll be a timing issue with the customers.

Speaker 8

Okay. And, sorry, lastly, just what portion of COGS is labor?

Howard Coker (President and CEO)

Yeah. It varies by business. You know, I mean, I'd say that in, in some businesses it's, you know, in the 10%-20% range. Most of the COGS is really materials. And, you know, there's a component of that that's certainly fixed, but it's definitely, you know, less than 25% in, in every business. And, and, you know, some businesses, it's really in the, in the single digits.

Speaker 8

Okay. Thank you. I'll turn it over. Thank you.

Operator (participant)

Okay. And I would now like to turn the conference back to Lisa Weeks for closing remarks.

Lisa Weeks (VP of Investor Relations)

Thank you for joining us today. If you have any follow-ups, we'll be around after the call to answer your questions, or please feel free to contact me to schedule a follow-up. We look forward to seeing you on the road at our planned conferences and events in the coming weeks, and we will look forward to reporting our fourth quarter and full year results on February 15th, 2024. One week later, we will be having our Investor and Analyst Day on February 22nd, 2024, in New York, as Howard referenced. This will be an in-person event, and a webcast will also be available. Registration details for the in-person event, as well as the webcast, will be available on our website soon. With that, we'll close the call and hope you all have a great day.

Operator (participant)

This concludes today's call. Thank you for participating. You may now disconnect.