Pactiv Evergreen Inc. (PTVE) Q3 2021 Earnings Call Transcript

Pactiv Evergreen Inc. (PTVE 0.98%)
Q3 2021 Earnings Call
Nov 04, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Pactiv Evergreen third quarter 2021 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dhaval Patel, senior vice president of IR and strategy.

Please go ahead.

Dhaval Patel -- Senior Vice President of Investor Relations and Strategy

Thank you, operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our third quarter 2021 earnings call. With me on the call today, we have Michael King, chief executive officer; and Michael Ragen, chief financial officer. Before we begin, please visit the Events section of the company's Investor Relations website at www.pactivevergreen.com and access the company's supplemental earnings presentation.

Management's remarks today should be heard in tandem with reviewing this presentation. Before we begin for our formal remarks, I would like to remind everyone that our discussions today may include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

We refer you -- all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Lastly, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. And reconciliation to comparable GAAP measures are available in our earnings release and the appendix of today's presentation.

With that, let me turn the call over to Michael King. Mike?

Michael King -- Chief Executive Officer

Thank you, Dhaval. Good morning, everyone, and welcome. Yesterday after market closed, Pactiv Evergreen released its third quarter 2021 results that were broadly in line with the update we provided you on September 8. Our quarterly results demonstrated the resiliency of our product and our portfolio.

Demand recovery remained on track and total volume improvement was 3% in the quarter. Price mix was up 14% in the quarter. In addition to ongoing contractual pass-through of cost increases, we took additional pricing actions across both our contracted and street customers. These pricing actions were necessary because of continued inflationary pressures across not just materials, but also conversion costs and higher rates of transportation.

In addition to pricing actions, we are addressing the labor challenges by continuing to focus on recruiting efforts, and along with retention bonuses and wage increases to address the shortage. We are making continued progress and expect a more normal labor market by late next year. We are also mitigating logistic cost pressures through a more focused approach on optimizing inventories and maximizing lane and truck usage. While EBITDA and EBITDA margins remain muted in Q3, we believe they are on track for recovery over the coming quarters.

Please now turn to Slide 4. During this presentation, we will discuss key business takeaways and 3Q 2021 highlights, provide a business update, go through our third quarter financial performance and discuss our near-term outlook. We will conclude with questions and answers. Please now turn to Slide 6.

Net sales in the quarter were up about 17% due to continued volume recovery and strong price mix. Customer and consumer demand remained strong across our end markets with total volume up 3%, as we have discussed before. EBITDA margins remain pressured because of the continuation of higher raw material, labor, and supply chain costs. In the face of this inflationary pressure, we remain focused on managing the variables that are in our control.

Throughout our manufacturing and supply chains, we remain aggressively focused on productivity and efficiency. In addition to the ongoing contractual pass-through of increased cost, we took additional pricing actions in our portfolio. The combination of these factors contribute to price mix being up 14% across the system for the quarter. We may continue to see significant inflationary pressure in the near term.

If we do, as others expect, we will have to pass through these cost increases through additional pricing as we remain committed to maintaining margins and profitability. While we have made some early strides, there is still some work here to be done. Fortunately, I have the team in place to help position the company to manage any challenges while we focus on growth in the future. Byron Racki has been with us for over two months as the president of the beverage merchandising business and already helping drive a culture of change in urgency.

I'm also happy to tell you that the closure of the coated Groundwood business is ahead of schedule, and the majority of the work was completed by October 31st. Byron remains focused on improving the pricing and profitability of the business unit while also continuing to lead the business review of beverage merchandising. Doug Owenby, our new COO, has been with us for a little over six weeks. He's hit the ground running and is focused on improving productivity and reliability, driving new and better standards across the operations.

We will also be focusing on employment retention and automation opportunities. In addition, we announced a number of actions to better position the company for future growth. On September 8, we announced our plans to acquire Fabri-Kal, and the acquisition was completed on October 1st. I'm excited to have Fabri-Kal join the team, and welcome them to the Pactive Evergreen family.

A month into the acquisition, I would like to share that we have internally already laid out our integration strategy. We have begun to execute on that plan and remain on track to deliver synergies. Now that we have closed on the transaction and further analyzed the business, we are even more confident and excited about the combined company's breadth of sustainable product offerings, market reach, and the synergies potential. We will provide more information on such transaction in the coming quarters.

In Q3, we also announced the pending sale of beverage merchandising's Middle East business in order to remain focused on growth in our core business. If I could turn your attention to Slide 7. Let's move to Q3 2021 highlights. Net revenue of $1.394 billion was up 17% from Q3 of 2020 as we saw continued volume recovery from the prior year and strong price mix improvement of up 14%.

Net income from continuing operations was $2 million and earnings per share from continuing now in operations was $0.01. Adjusted EBITDA was $119 million for the quarter as raw materials and logistics inflation, along with labor challenges continue to impact the pace of the EBITDA recovery. Free cash flow, defined as adjusted EBITDA less capex, was $51 million. Finally, we announced and closed our acquisition of Fabri-Kal.

Turning to Slide 8. Turning to our year-to-date highlights, net revenue was up 11% to $3.91 billion due to increased pricing and strong volume recovery. Year-to-date adjusted EBITDA was $326 million, which includes a $50 million one-time impact from winter storm Uri. Please now turn to Page 9.

Two years ago, we created a path for the company that included ambitious and measurable ESG commitments. This plan built on our long history of supplying sustainable products and developing responsible manufacturing processes. So in 2020, we announced the goal of 100% of our products to be made with recyclable and renewable materials by 2030. This year, we are specifically focused on gathering the internal data and organizing our reporting on operational metrics related to greenhouse gas emissions, energy, water, and waste.

Sustainable innovation is a top priority at Pactiv Evergreen to support our customers' goals and our own. Since 2019, the company has introduced over 100 new sustainable products that are specifically designed to also improve customers and our consumers' experience while reducing the post-use impact on the environment. A major part of this effort is a focus on sustainable material research. Additionally, our commitment to integrity translates to continued improved communications around sustainable claims for packaging.

This includes systematic, on product labeling for third-party certified compostable products. We believe it will contribute to reinforce trust in our company and our industry. From a manufacturing perspective, we are looking to reduce water and energy consumption. We recently undertook a water stress analysis for all company locations.

The results indicated that 97% of water usage is in areas with low water stress. We continue to strive to reduce our overall water usage. We also initiated greenhouse gas emissions analysis for our paper mills, our largest source of emissions. To identify improvement opportunities, using these learnings will be incorporated into our goal setting exercise.

Transparency is how we know we are doing what's right. This summer, we published our first public CDP disclosures on climate change and water security, and we are really planning on releasing the SaaS meet and GRI disclosures in the coming months. More details on these and other activities may be found at investors.pactive.com in the ESG section. I will now turn it over to Mike Ragen for a detailed financial review.

Michael Ragen -- Chief Financial Officer

Thanks, Mike. Moving to Slide 11, looking at our third quarter 2021 financial performance, net revenue was $1.394 billion versus $1.195 billion in the same period last year, an increase of 17%. The increase was primarily due to favorable pricing from raw material pass-through and price initiatives, along with higher sales volume. Adjusted EBITDA was $119 million versus $173 million in the same period last year.

The decrease was primarily due to higher raw material and logistics costs and labor challenges constraining production and increasing costs, partially offset by higher sales volume and favorable pricing. Free cash flow, defined as adjusted EBITDA less capex, was unfavorable to the same period last year due to lower adjusted EBITDA. Moving to Slide 12. Looking at our year-to-date 2021 financial performance, net revenue was $3.91 billion versus $3.514 billion in the same period last year, an increase of 11%.

The increase was primarily due to higher sales volume largely due to higher demand as the economy recovers from the COVID-19 pandemic as well as favorable pricing. Adjusted EBITDA was $326 million versus $445 million in the same period last year. The decrease was primarily due to higher manufacturing, the logistics, and material costs, net of price increases, and the impact of winter storm Uri. Free cash flow, defined as adjusted EBITDA less capex, was unfavorable to the same period last year due to lower adjusted EBITDA.

Moving to Slide 13. This slide helps to bridge Q3 year-on-year revenue and EBITDA. Looking at revenue, when comparing to Q3 last year, we saw some volume favorability of $32 million with the key driver of our revenue growth being price increases of $169 million. For adjusted EBITDA while volume was marginally favorable, given labor-related production constraints, pricing was favorable by $176 million, but this was more than offset by $231 million of high costs.

It is important to note that in Q4, we expect that year on year our increase in price will be approximately in $40 million higher than the increase in COGS, reversing the Q3 negative. Moving to Slide 14 and our results by segment for Q3. Our foodservice segment saw net revenues up 26%, driven by higher pricing to recover cost increases and steady volume recovery. Foodservice volumes for the quarter were up 5% on 2020 and down 7% on 2019 volumes.

Demand in foodservice is strong. However, labor constraints are impacting our ability to meet demand. And adjusted EBITDA for our segment was down 21% versus same period last year due to higher manufacturing, logistics, and material costs, partially offset by favorable price and higher sales volume. Our food merchandising segment saw net revenues up 10%, driven by favorable pricing, partially offset by lower volume.

Food merchandising volumes for the quarter were down 6% on 2020 and down 8% of 2019 volumes. As with our foodservice segment, demand is strong. However, labor constraints are impacting our ability to meet demand. Adjusted EBITDA for the segment was down 32% versus same period last year due to higher COGS and lower sales volumes, partially offset by favorable price.

Our beverage merchandising segment saw net revenues up 12%, driven by strong volume recovery. Adjusted EBITDA for the segment was down $8 million versus same period last year. The key drivers being higher COGS, partially offset by higher sales volume and favorable pricing and customer mix, and additional costs related to tropical storm Fred. Moving to Slide 16.

We are maintaining our full-year adjusted EBITDA guidance at $550 million. We are holding this guidance despite the anticipation of the continued inflationary pressures that --and with the expectation that resin prices will remain flat in Q4 into Q3. All of our segments are seeing strong demand with our ability to meet demand being dependent upon increasing labor levels in our manufacturing facilities. Our efforts to increase labor are helping to lift our production output, and we expect to see this improve in Q4 and into 2022.

We expect a strong year-on-year lift in our pricing of around $200 million in Q4. As mentioned previously, we expect year-on-year price increases to exceed COGS increases by approximately $40 million in Q4. Also, the integration of Fabri-Kal is ongoing, and the business review of beverage merchandising remains on track. Thank you for your time.

As an appendix to the presentation, and we have also included Q3 year-to-date highlights by segment. Q3 year-to-date revenue and adjusted EBITDA bridges versus same period last year consolidated statements of income and loss, a reconciliation of net income and loss to adjusted EBITDA and free cash flow, and a summary of progress in our strategic investment program. I'll now pass it back to Mike King for closing comments.

Michael King -- Chief Executive Officer

Thank you, Mike. In closing, while the third quarter was in line with our September update, we continue to believe we are in a transitionary environment, and our results do not reflect our true potential. While we still face a number of challenges in the near term, I am confident our team and employees are up to the task and we'll continue to take actions to improve our performance. We continue to believe that if and when raw material input costs moderate, our contracted pricing actions will catch up and lead the improved margins.

In addition, we have closed the acquisition of Fabri-Kal and began its integration and remain on track on the business review of the beverage merchandising segment. We will provide further updates on these initiatives in the near future. Finally, I would like to thank all the Pactiv Evergreen workforce for their continued hard work to serve our customers and to enhance the value of the company to all of our stakeholders. With that, we will now open it up for your questions.

Operator?

Questions & Answers:

Operator

[Operator instructions] And the first question comes from Ghansham Panjabi with Baird. Please go ahead.

Ghansham Panjabi -- Baird -- Analyst

Thank you. Hey, guys. Good morning. I guess, first off on the 3Q to 4Q sort of EBITDA bridge over $100 million, there's a lot going on with Fabri-Kal, price, costs, volumes, labor shortages, etc.

Can you just help us bridge that differential on a sequential basis for us.

Michael Ragen -- Chief Financial Officer

Yeah. Good morning, Ghansham. This is Mike Ragen. How are you?

Ghansham Panjabi -- Baird -- Analyst

Good. Thank you.

Michael Ragen -- Chief Financial Officer

Good. So if on Slide 13 of the presentation, you would have seen that essentially price is up by -- this is the Q3, price is up $176 million. The COGS were up to 231, so negative of 55 there. The expectation is for Q4 that price will be up some over $230 million while -- this is year on year while COGS will be up around $190 million.

So there's sort of a $90 million to $100 million swing in the price COGS dynamic between the quarters. And then over and above that, Fabri-Kal adds about -- it's around $10 million into the quarter. Volumes, quarter on quarter no major change. We're expecting you know labor challenges to continue but they're improving.

We're getting better. We're getting more people into the plants but it does take a little bit of time to train them up and make them effective.

Ghansham Panjabi -- Baird -- Analyst

Sure. Thank for that. And then in terms of food merchandising, the volume declined -- I know you called out labor challenges there but is there some degree of just mean reversion where mobility is boosting food service but coming at the expense of grocery stores, etc., or is it just purely the constraints that you cited there?

Michael Ragen -- Chief Financial Officer

It's -- so the biggest thing here in food merchandising is, to your point, a little bit of that. And what I'll point to is that egg sales are down versus 2020. They're down 15% to 20%in the quarter. As you know, we're the -- sort of leading packager in egg cartons and so that's a key driver there.

And over and above that, meat trade volumes are down somewhat. Both of those surged in the -- in 2020 because more people were eating at home and so there is a bit of a reversion there. Most of the other areas are pretty much flat year on year.

Ghansham Panjabi -- Baird -- Analyst

Thank you very much.

Michael Ragen -- Chief Financial Officer

No problem.

Operator

The next question comes from Chris Parkinson with Mizuho. Please go ahead.

Chris Parkinson -- Mizuho Securities -- Analyst

Great. Thank you very much. Good morning. You've recently made a few new hires in your team and are still assessing several strategic initiatives or opportunities across both your cost structure as well as the portfolio.

Can you simply give us a quick update. What's been potentially a pleasant surprise thus far, what's kind of the incremental opportunity, and -- or potentially there are other things you believe are going to be more challenging? Just anything you can give us for '22 or '23 would be appreciated. Thank you.

Michael King -- Chief Executive Officer

Thanks, Chris. Yeah. So I am -- as I mentioned in the call here, I am been pleasantly surprised with the add to the team. Specific to Byron Racki, the president of our beverage merch business, I think bringing in an experienced guy that knows the paper making and board-making world has been beneficial.

Certainly no secret that our mills have been challenged. Getting velocity and turning around those mills while we take the time to strategically review our product portfolio, our operations, our footprint, all those things. He's -- brings a lot to the table there and we're already seeing the green shoots from his short tenure. As it relates to operations, getting some velocity, positioning our operations to be world class in terms of digital enablement, automation, things that we see, ongoing headwinds in the markets around labor, our goal there being to insulate ourselves and, frankly, position ourselves to win on the back end of the current supply chain.

Doug Owenby brings a lot to the table there. As we get fitness around what we're considering a new labor force and a very dynamic labor force, we don't expect that to change. Insulating our factories from the variables that come with that and really have an optionality around automation as we're seeing progress in the last kind of two months that as we position the business to win there, Doug brings a lot to the table and yeah, I'm excited about that. We've had a handful of others, really all the other adds on the team and visibly and behind the scenes have all been to give velocity, not just on productivity, but really as you started to see our acquisition activity and strategic looks at product mix and positioning the business, not just for a good next 12 months, but a good next five years and beyond has become a focus.

So getting proactive with all elements of the strategies of the business is really I would tell you generally where I've seen progress in the last six months is whether it be how we procure product, position or supply chain, go after strategic and tactical productivity items, and frankly, just get on our front foot with the realities of what -- Mother Nature and some of the macro/micro economic challenges that face us, those things don't slow down. So having the bandwidth to proactively manage, I can tell you that we're in a better position today than we were six months ago, and that's largely because of the adds and the team I have in place.

Chris Parkinson -- Mizuho Securities -- Analyst

That's helpful color. And just as a quick follow up, can you just give us, let's say, two points on volume trends for each segment as we head into 2022 and then hopefully your improving ability to meet that demand's post '21 supply chain disruptions and labor headwind? Just any color on that would be very helpful. Thank you.

Michael Ragen -- Chief Financial Officer

Mike.

Michael King -- Chief Executive Officer

Yeah, Mike, you want to do that or are you -- I'm happy to either way.

Michael Ragen -- Chief Financial Officer

Yeah, up to you, Mike.

Michael King -- Chief Executive Officer

Yeah, go ahead and I'll fill in OK.

Michael Ragen -- Chief Financial Officer

OK, sure. I think in foodservice, we've continued to see strong volumes around containers and as the economy opens up and people start to get back to work, we're seeing strong demand in cups as well. And that ties closely to the sort of noncommercial sector opening up again, things like schools and universities and ballparks and things like that. So we're seeing strong demand there.

In food merchandising, I mentioned before that protein and egg sales are down a little bit, which is the inverse of the foodservice trends. But with -- overall, we'll expect to see ones normalize but everything else should continue to be strong. And then in beverage merchandising we're seeing school milk come back, which is great to see. That drives both our cotton sales and our external board sales.

And as food service cuts come back, paper cups specifically, we see better board sales as well, not to mention that we're also seeing for [Inaudible] we're seeing some stronger demand there as well. So that would more or less summarize by segment what we're seeing.

Chris Parkinson -- Mizuho Securities -- Analyst

Thank you very much.

Operator

Next question comes from George Staphos with Bank of America. Please go ahead.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks. Hi, guys. Good morning. Thanks for taking my questions.

Hope you're doing well and thanks for the details. I wanted to first hit a little bit on operations. And segue to Fabri-Kal, so Mike and Mike, can you talk a little bit about how you will and how we should try to observe and measure your ability to improve on the labor situation? I think you'd said you hope it normalizes, and you're not alone here so we're not blaming you guys by any stretch, by later in 2022. And I noticed that, Mike, you said -- Mike Ragen that Fabri-Kal will be roughly about $10 million in EBITDA in the quarter.

I seem to remember that the LTM for Fabri-Kal when you announced the deal was somewhere in the mid-50s. So maybe that's just operating friction when you're first bringing in the business but is there any labor issue there that also needs to be normalized for Fabri-Kal looking out to 2022?

Michael King -- Chief Executive Officer

Yeah. So I'll give you color on labor and then I'll let Mike talk to the Fabri-Kal question in terms of earnings. So Fabri-Kal is and no different -- they're faced with the same challenges as I think everybody who's in manufacturing in the country right now, so we didn't get a larger-than-expected surprise on labor. What I can tell you is that the green shoots we're seeing headed into Q4 and the progress we're making, adding humans to both businesses is positive.

We're not seeing a regression in terms of labor. We're seeing it go the other way. I think what you heard me say on the call, and I certainly welcome more clarity as we move into 2022, but you know it doesn't feel like the controllable elements aside, it doesn't feel like things are going to slow down in a meaningful way. And even if they did in terms of unemployment and bringing people back to manufacturing jobs, I think we're all chasing the curve still.

Our modeling and what we see based on the progress here headed in Q4, we do anticipate getting whole in 2022. When that is whether it's Q3 or Q4, that -- there's a lot of things we don't control that will dictate that.

George Staphos -- Bank of America Merrill Lynch -- Analyst

What do you think your labor inflation might look like here on year '22 versus '21, including -- if you normalize for Fabri-Kal, obviously.

Michael King -- Chief Executive Officer

Well there's two, so that's a tough one but I'll take a run at it. We've added a lot of labor inflation in-year, frankly. So we've taken a lot of that pain this year. In a normal year, I think our labor inflation is between 2% and 3%.

And we're going to be order of magnitude twice, maybe three times that if you added two -- the 2021 moves we've made and what we need to do to position ourselves to keep humans in 2022.

Michael Ragen -- Chief Financial Officer

Yeah, George. I'll just weigh in a little bit on that to give you -- and Mike directionally is right. Dependent on where we are in the country depending on which plant 7% to 10% is what we're expecting year-on-year increase in labor.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Makes sense. And that's -- I appreciate that. I just wanted to hit one more question on growth then I'll turn it over. So I wouldn't have expected you to continue at the fantastic growth that you saw -- obviously, comps were easier in 2Q for food service where you're over 30%.

This quarter you're up, I think the volume was 5%. Are there any things in your view that would trouble you about the 5%? Are you happy with that? Are you seeing any signs that the pricing that you need to put into the market, we totally understand, is having any kind of demand destruction in your business or not? Relatedly, Mike and Mike, can you tell us where the cup and led business is versus 2019. You're obviously up a lot versus last year. And if you could give us any kind of view on plastic versus fiber based in food service.

Is there one sector that's growing paper versus plastic more than the other? And if you could quantify that, that would be great. Thanks. I'll turn over and have a great quarter.

Michael King -- Chief Executive Officer

Yeah, thanks, George. So on the pricing or the commercial elements of demand, we can sell every container and cup and item we can make. So the pricing action we've had to take isn't curb demand. We're constraining our demand through our ability to make product at the moment and we're moderating that based on keeping stable inventory.

So truthfully it's -- demand's not the concern. The concern is making sure we're positioned to meet and recover inventories and demand heading into the next Qs. Go ahead.

Michael Ragen -- Chief Financial Officer

George, versus 2019, our cup-led volumes were about 9% down in the quarter. And most of that is driven by fiber cups, and that's a lot to do with the number of people that are going to work and picking up a coffee on the way to work. We'll start to see that sort of pick up a little bit, we think, in the near future but plastic cups are very strong.

George Staphos -- Bank of America Merrill Lynch -- Analyst

All right. Thanks, guys. I'll turn it over.

Operator

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson -- Goldman Sachs -- Analyst

Thank you. Good morning, everyone. So I guess my first question is thinking about this price cost balance in the third quarter and then kind of flip that you're expecting to -- it's a positive in the fourth quarter.  In 3Q, you talked about COGS being $231 million year-on-year headwind. Can you break that down a little bit into whether the pure raw materials, supply chain, logistics, kind of where can help us think about the different buckets of that COGS inflation, how you would think about that tracking in the fourth quarter?

Michael Ragen -- Chief Financial Officer

So pure raw materials are around $180 million of that and then the only remaining piece is -- of $50 million is higher, manufacturing and logistics costs.

Adam Samuelson -- Goldman Sachs -- Analyst

And how would that look in 4Q?

Michael Ragen -- Chief Financial Officer

In 4Q, it's -- hang on a sec. It's mostly materials year on year.

Adam Samuelson -- Goldman Sachs -- Analyst

And why would the supply chain logistics on a year-on-year basis not be a headwind? I'm just making sure I'm clear on that.

Michael Ragen -- Chief Financial Officer

It's because in the last year we had a mill outage in our Canton, North Carolina facility. And so year-on-year, those costs won't repeat.

Adam Samuelson -- Goldman Sachs -- Analyst

OK and then just a clarifying point on guidance, I believe when you had -- when you announced Fabri-Kal in early September and you've taken the full-year guidance to $550 million, at that time the $550 million I didn't believe actually included any contribution from Fabri-Kal because it hasn't closed yet. Now obviously the $550 million does. I just wanted to make sure that's true and if so, just make sure we're clear just -- is it just more raw material pressure and labor constraints that are in the fourth quarter that are offsetting the incremental Fabri-Kal earnings?

Michael Ragen -- Chief Financial Officer

Yeah, it does include Fabri-Kal. As I mentioned before, it's circa $10 million for Fabri-Kal. And so we're maintaining our $550 million number. And we'd like to be better than that but we're just sticking with the $550 million.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. And then if I could just squeeze one more. The -- if you look at the labor constraints and the impact that it's had on on your volumes, any way to quantify or frame what you think that cost on a volume basis in 3Q and how much of that is still costing you in 4Q from a production perspective?

Michael Ragen -- Chief Financial Officer

It's a little bit. How long's a piece of string really. I think we know that the demand is there, we know that our customers want more product, we know that other people out in the market don't -- other customers or potential customers are coming to us asking for product, particularly in food service. And in food service, could we see 10% higher, maybe.

It's -- it would be a guess.

OK. All right. I appreciate the color. I'll pass it along.

Thanks.

Operator

The next question comes from Mark Wilde with Bank of Montreal. Please go ahead.

Mark Wilde -- BMO Capital Markets -- Analyst

Thanks and good morning. Mike and Mike, I wonder -- first of all, can you give us any help in just thinking about sort of the magnitude of the pricing initiatives that have been announced over beverage merchandising and board and paper and how you would see that kind of cadencing in over the next few quarters?

Michael Ragen -- Chief Financial Officer

So what I can tell you is that year on year, we're expecting pricing in the beverage merchandising segment to be around $30 million favorable in Q4. And so we -- what we've been out pushing price whether it's -- we've obviously got a lot of contracts in place around the [Inaudible] that we've been taking out of market price increases and pushing those as hard as we possibly can. So quarter-on-quarter Q4 versus Q3, we're expecting around $60 million of higher pricing in that segment.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And then how should we think about what it is yet to come over the next couple of quarters when we factor in lags? And also I think you guys were out with more price increases just earlier this week.

Michael Ragen -- Chief Financial Officer

Yeah, I think in coming quarters we'll continue to see you know the full effect of the -- of our increases. I think year on year if I was looking forward to 2022, I'd expect price to be up over $100 million in that set.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. All right. Then weren't -- just the kind of broader one for both you and Mike King, and I'm just curious about what you're actually seeing on the ground there in terms of customer pressure to move out of plastics and other substrates. We hear about all of this potential movement yet a couple of weeks ago one of your competitors announced that they had picked up a big piece of QSR business that was moving from paper into plastics.

So just curious kind of across your portfolio how much pressure you're really seeing on plastic packaging.

Michael King -- Chief Executive Officer

I think -- so I'll take this. I think we're seeing a -- I don't want to call it a pause but I do see that we're seeing people or customers more interested in getting containers and packaging today given demand. So some of the pressures on, for example, foam -- gingerly foam containers, things that we're trending out of service and we're seeing that kind of rebound and we've had to bring assets back to life, so to speak, to meet demand or try to meet demand. I don't think we're seeing a big reversion to non-green or non-environmentally friendly substrates but we certainly are seeing people an acceptance of alternatives to get the -- to meet demand.

I think that if you just look at the regulatory environment, there's been no slowdown there. So we've you know we've had things -- we've had to make some moves to different substrates to address that too so to keep it balanced. I'd say it's slowed but I don't think it's gone away and we certainly expect that those pressures continue albeit they're a bit curved at the moment being outpaced by the desire for volume. And as -- if I take the example you gave there, there's still a victory speech on the environmentally front with the move that was made there.

So fiber versus the plastic, it's -- they're both kind of in the same category if you dig into that one. So that one -- those moves are happening and we're benefiting from those moves as well.

Michael Ragen -- Chief Financial Officer

I've just -- Mark, I'll just add one small thing. There is one area that we are seeing a push from retailers and that's really around [Inaudible] moving out of moving out of foam into molded fiber and [Inaudible].

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And the last one I had was on just I understand that you've just gone through a pretty big capital cycle at the Pactiv Evergreen. I'm just curious with these tight labor markets and the real escalation in labor costs, does it suggest that there -- you may need to take yet another step up in terms of capital for plant automation, things like that.

Michael King -- Chief Executive Officer

Yeah that's a really good question and in fact one of the areas where, as I mentioned, we dug on the -- we are taking a bit of a different look there, certainly insulating our factories from the dynamics in the labor force but also just really positioning our factories to be more efficient. We are we are looking harder at automation for sure. So if you look at their capital intensity that we've had, we had a large a large portion of our strategic investment program has been around automation. And you can expect that we do look harder at that moving forward.

Mark Wilde -- BMO Capital Markets -- Analyst

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

Operator

The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question. I guess I just wanted to go through the guidance a little bit. So assuming the midpoint -- assuming $550 milllion for the year, that implies kind of a $224 million number for Q4.

If I take off $10 million from Fabri-Kal, we're still at $214 million, which is up about $100 million from the Q3 number. So how are you thinking about that 100 sequential improvement? Is that kind of food service getting closer to about $100 million itself. I think you did that number in Q2 of 19 excuse me and then maybe a doubling of bev merch to the $30 million or $35 million level. And that again would imply kind of you know closer to $100 million number for food merch, which is a doubling.

So just it seems quite a large magnitude of an increase sequentially. So maybe you can just help us understand that bridge a little bit. Thanks.

Michael Ragen -- Chief Financial Officer

Yeah, sure. Thanks, Arun.  So if you think about each of the segments, I'll give you a steer on that. Foodservice will be over $100 million and add a lot -- and again a lot of that is driven by the higher pricing and net of some COGS increase. Food merchandising, I'm expecting that to be in the set -- like somewhere between $65 million and $75 million.

And then beverage merchandising is a large lift between $50 million and $60 million. And so why the big lift? It's predominantly price increases and price actions, partially offset by higher COGS in that segment. So it's a decent lift in that segment but a lot of those price actions are contractual and we're fully expecting that segment to hit their numbers.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks for that. And as a follow up, maybe we can just kind of extend that into '22. So given that you're going to be exiting the year at, say, a $225 million run rate and then mayb you assume a little bit more synergy capture, maybe some progress on restructuring, and price cost, is $225 million kind of the right quarterly run rate that we should think about from here on and improvements to that and that would kind of imply a kind of a longer term $900 million annualized EBITDA level? Is that kind of what you're headed toward or already there? Or is -- is there something specific that jumps the Q4 number above that level?

Michael Ragen -- Chief Financial Officer

Yeah, there's a bit of a tailwind in Q4. So no, I wouldn't just multiply by four. But getting to a normalized number, you -- we'll see margins starting to get back to normal in Q4 and -- but there is a bit of a margin tailwind in that quarter that won't -- isn't necessarily indicative of ongoing.

Arun Viswanathan -- RBC Capital Markets -- Analyst

And then just lastly, if I could. On bev merch you laid out some of the issues that you were facing there in the past within the mills and noted that maybe progress needed to be made in each of the eight stages in the production process. Could you provide an update on where you stand maybe in that that evolution? Thanks.

Michael King -- Chief Executive Officer

Yeah. So yeah, just -- for those who maybe refresh -- we look at our mills as kind of eight or nine sub-factories. Each one of those sub-factories has had faced need for efficiency and productivity gains and reliability gains. I would tell you that we have made progress in all phases of those sub -factories.

We've also faced some challenges with flooding and lagging effects of a winter storm. So those things have hampered some of those sub-factories but I can tell you from a from a decluttering of our focus exiting the covered ground wood business in Pine Bluff that shutting that complex down has been beneficial. We've been able to displace humans into open positions and fully staff the mill. That's been a big win for us.

And then in Canton, recovering from the floods that we had in Q3 as well as being able to address some of the reliability, the break-fix type items, we've gotten after the spending that's why some of the excitement you'll hear in our voices around Q4 there. We're seeing better days, so we have made progress on all fronts and we have a lot to do still and and we'll keep doing that. But we've made we've made progress despite some of the challenges in each one of those kind of sub-factories.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

The next question comes from Kyle White with Deutsche Bank. Please go ahead.

Kyle White -- Deutsche Bank -- Analyst

Hey, good morning. Thanks for taking the questions. I wanted to follow up on Arun's first question but I ask you in a little bit different way. The fourth quarter outlook implies kind of an increase of $54 million year over year on EBITDA.

Your price cost is expected to be up $40 million. And then you have Fabri-Kal of $10 million coming in. That makes up almost entirely of the increase. I guess why shouldn't we see a stronger fourth quarter than the outlook implies considering expected volume growth? Is it just some conservatism in the guide or is volume contribution expected to be kind of impacted by the supply chain environment?

Michael Ragen -- Chief Financial Officer

Yeah, that's that's correct. The supply chain challenges will mute volume at least that's what we forecast. We're pushing to produce as much as we possibly can but we do expect -- the challenges are there. They're there today.

We're one month into the quarter already and there's still way -- but it is getting better.

Kyle White -- Deutsche Bank -- Analyst

Got it. Thanks. And then on price cost, as you look to 2022, a lot of moving parts considering you should be catching up on resin and you have some paper board price increases rolling through. Are you able to give us a sense as to what you expect price cost to be next year in total either using the kind of current pricing environment or however you want to phrase it?

Michael Ragen -- Chief Financial Officer

Yeah, we are expecting -- I think we talked about this. I think it was when we revised guidance. We were expecting to have a little bit of a tailwind into 2022 because pricing lags probably $50 million to $60 million.

Kyle White -- Deutsche Bank -- Analyst

Perfect. I'll turn it over now. Thanks.

Operator

The next question comes from Andy Scheffer with Onex Credit Partners. Please go ahead.

Andy Scheffer -- Onex Credit -- Analyst

Good morning. Thanks for taking my questions. Can you give us an expectation on capex for the fourth quarter?

Michael Ragen -- Chief Financial Officer

What I can tell you for the full year will be between $275 million and $285 million.

Andy Scheffer -- Onex Credit -- Analyst

OK. And then as it relates to the labor inflation that you were discussing earlier, 7% to 10%. Is that in total and should we think about that as it's a 7% to 10% increase on a, call it, 95% of full staff?

Michael Ragen -- Chief Financial Officer

Yeah. That's the pure inflation. As we add people in, we get additional output. So that gets factored into the COGS, the marginal increase in COGS.

Andy Scheffer -- Onex Credit -- Analyst

And then the [Inaudible] beverage, what will the cash proceeds be for that?

Michael King -- Chief Executive Officer

I'm sorry. What did you say?

Andy Scheffer -- Onex Credit -- Analyst

The joint venture that you're selling, the beverage packaging business in the Middle East. What will the cash proceeds be for that?

Michael Ragen -- Chief Financial Officer

It's $40 million to $50 million.

Andy Scheffer -- Onex Credit -- Analyst

And then can you sort of walk us through the labor issues just in terms of how the journey's been and where you stand now and and describe for us how we get to that normalization in the third and fourth quarter? Just in terms of magnitude of headcount and what you think the drivers are and maybe what's maybe working for you in terms of success and bringing people back.

Michael Ragen -- Chief Financial Officer

Sure. We're short probably 1,500 people in our plants. Our total population of people is around 15,000, so circa 10%. It's -- in terms of what you do to get that back, we have -- what, like I guess SWAT teams that go round to each plant, they deep dive the data.

They go through to work out what the issues are with getting people in that particular area. They come up with detailed solutions, detailed tracking, and then go through an execution phase, onboarding, training, and then embedding people into the plant. Now it's not a one and done thing. It's something that we have to do.

It's an ongoing process because people leave all the time. Someone opens a new Amazon facility down the road or someone else reacts to what we're doing, so it's a bit of a knife fight and it's different in every single area.

Andy Scheffer -- Onex Credit -- Analyst

And then is there. Is there any overriding reason that that's the one thing that you see in the press is it? There's no good explanation as to or maybe it's not maybe it's that there's not a one size fits all but you know what has been driving it and what's caused it to last so long.

Michael Ragen -- Chief Financial Officer

I'd be speculating.

Michael King -- Chief Executive Officer

Yeah, the recipe is different everywhere. I mean that's why what works in one region isn't working in other regions. So there's a host of ways to address it. We know it's bigger than just wages and money, so there's definitely a work-life balance element.

So being flexible with peoples had to be a big part of our recipe for success. Retaining people -- getting people is one thing, retaining them is the other. So don't want to overlook the fact that curbing vacancy is one thing but curbing people walking out after you invest in training. So having retention elements in our approach has been a win for us in all areas but people -- there's a work-life balance element that we can't overlook when it comes to making it a place people want to work.

And manufacturing versus other sectors, I think, are particularly pressured in that regard.

Andy Scheffer -- Onex Credit -- Analyst

OK. And then my last question is you were discussing answering some questions regarding the fourth quarter. And I just want to make sure what I took away was accurate. Volumes will still be up but they will be up less obviously because of labor, raw materials, sourcing, and then whatnot.

And that it's the increased costs, in addition, is offsetting some of that volume increase. It's not that the supply chain and other issues are creating a situation where volumes will not increase. They're just not increasing at the same rate, one. And then there's added cost pressure that's continuing.

Michael King -- Chief Executive Officer

Yeah, that's correct.

Andy Scheffer -- Onex Credit -- Analyst

Thank you.

Operator

[Operator instructions] The next question is a follow up from George Staphos with Bank of America. Please go ahead.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking the follow-ons. I'll try to be quick about it. First of all, we showed good progress on SAP both in the quarter and the year.

As we look out to '22 will you keep updating us on SAP? How are you going to continue to communicate the productivity and the return on the investments that you're making relative to what you've said in the past. That's question number one. My question number two, recognizing that you're catching up now on price cost, which of your resins are still the most problematic in terms of obtaining supply for us so that for your converting operations? And then last question I just want to come back to the growth of plastic versus paper recognizing, as you pointed out, with that QSR example you can have a plastic package that is as as sustainable as a paper based one but what are you seeing in aggregate in your portfolio? Year-on-year growth either in the quarter or year to date, plastic versus paper and if there are any highlights that you would point to. I think prior, you're just talking to the cups piece.

Thanks guys, and good luck in the quarter.

Michael Ragen -- Chief Financial Officer

I think, George, in -- with regard to SIP, you can see that in the update that we have in the sort of revenue generating areas at the top of the table, we've most of the money there. And so we're almost through that automation. We're going to continue to do that. Where we're not doing so much of the spend is in the areas that are a lower payback around cost reduction at the bottom of the table.

In terms of keeping updated I think what we'd like to do is to now incorporate this into our ongoing -- just our ongoing way of life right. We're going to have capex. We're going to be looking at capex from the point of view of what's profit generating and what's maintenance. And then talking about that moving forward and well obviously there's some trailing benefits to come but that's probably the way the best way for us to talk about this because we'll get into mixed and interspersed with new investments next year.

In terms of resin supply, at the moment in terms of supply itself, nothing for us is really overly problematic. We get issues here and there. Price is more our issue right now. Occasionally you get you know something like last week getting benzene to one of the big converters was -- the conversion sites to polystyrene was a problem in this set and the other.

But overall, it's not as big an issue. And then in terms of the paper piece. Year on year obviously we're seeing our patents in beverage merchandising coming back in schools. So that's positive.

In terms -- I talked about the drink containers but also a lot of the -- there's a lot of growth in other containers like food containers in paper as well but no more so than what we're seeing in plastic. And in fact, plastic is -- continues to be more favorable when carrying food or hot food in particular. And then in things like meat trays and egg cartons and things like that, egg cartons we are seeing a trend toward fiber. Meat trays, we're not really seeing much going out of plastics.

And any other sort of containers that are in supermarkets, I think plastics is still leading so we're not seeing trends away from that at the moment.

Operator

This concludes our question-and-answer session. I will now turn the conference back over to Michael King for any closing remarks.

Michael King -- Chief Executive Officer

I'll just close by saying thank you, everyone, for your interest in our company and following us and joining us on the journey here. Look forward to brighter quarters as we close out 2021 and presently 2022. With that, we'll talk to you in another quarter. Thank you.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Dhaval Patel -- Senior Vice President of Investor Relations and Strategy

Michael King -- Chief Executive Officer

Michael Ragen -- Chief Financial Officer

Ghansham Panjabi -- Baird -- Analyst

Chris Parkinson -- Mizuho Securities -- Analyst

Michael Ragen -- Chief Financial Officer

George Staphos -- Bank of America Merrill Lynch -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Kyle White -- Deutsche Bank -- Analyst

Andy Scheffer -- Onex Credit -- Analyst

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