Thank you for your patience, and welcome to the Sonoco Earnings Conference Call for the third quarter of 2021. I would now like to turn it over to Roger Schrum, our VP of Investor Relations. Please take it away.

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

Thanks, Roger. I'll begin on Slide 3, where you see that earlier this morning, we reported third quarter earnings per share on a GAAP basis of $1.12 and base earnings of $0.91 per share, which is just above the midpoint of our guidance range of $0.87 to $0.93 per share and $0.05 higher than the base EPS we delivered in the third quarter of last year. At a high level, we experienced strong volume growth in many of our businesses, but our third quarter operational results continue to be impacted by significant cost inflation and supply chain challenges. In terms of the $0.21 difference between base and GAAP EPS, the largest item was the $0.30 per share benefit from the use of additional foreign tax credits on our recently amended 2017 U.S. income tax return. Next, we recognized $0.03 per share in GAAP earnings related to net restructuring and asset impairment expenses. And finally, there was a $0.06 impact from a variety of adjustments, including approximately $11 million in discrete income tax expense items, partially offset by $5 million of after-tax net gains running through operating profit. Now moving to our base income statement on Slide 4 and starting with the top line. You see that sales were $1.415 billion, up $103 million or almost 8% from the prior year period. I'll review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $258 million, a $1 million increase over the prior year's quarter. This resulted in gross profit as a percent of sales of 18.2% compared to 19.6% last year. SG&A Expenses, net of other income, were $135 million, an increase of $9 million year-over-year. This increase was expected and key drivers were higher expenses for normalized management incentives, group medical activity, as well as strategic IT projects. So all of this resulted in third quarter 2021 operating profit of $122 million. And I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $14 million was $5 million below last year due to reduced debt balances and a more favorable mix of fixed and floating rate debt. Income tax expense of $20 million was $7 million or $7 million below last year due to our lower effective tax rate of 18.1% compared to last year's 24.1%. Much of this lower tax rate was anticipated, but we did recognize an increased benefit from project work related to R&D tax credits. Moving down to net income. Our third quarter 2021 base earnings were $91 million, an increase of almost 5% compared to the $87 million that we generated last year. Now looking at the sales bridge on Slide 5, you see that volume was higher by $43 million or almost 4% for the company after removing the Display and Packaging sales divested from 2020. Overall, all segments experienced demand recovery or continued strong pandemic-driven volumes, although there was a diverse mix of volume trends within our various markets. Consumer Packaging volume mix was up $6 million or 1.1% as very strong growth in flexibles was mostly offset by lower demand in both global rigid paper containers and plastic spoons. In our Industrial Paper Packaging segment, volume/mix was up $25 million or just over 5%, with a continued surge in post-COVID economic recovery across most of these operations. Our global tubes, cores, and cones franchise volume rose by approximately 12%, and our global paper business increased by almost 3%. Finally, our All Other group saw volume mix growth of $12 million or almost 8% when excluding the impact of display and packaging from 2020 sales. This was primarily driven by a very strong rebound in industrial plastics at almost 45% and solid demand at ThermoSafe, which grew by 6%. Moving to price, you see that selling prices were higher year-over-year by $161 million as we continue to increase prices to battle inflation globally. This was mostly driven by our Industrial segment as we work to recover escalating OCC, freight, labor, and energy costs. In both our consumer segment and All Other group, we have also been acting on price increases to recover the significant inflation in resins and other operating costs. Moving to acquisitions and divestitures, you see a top line negative impact of $111 million, which is driven by the divestitures of our Display and Packaging Europe and U.S. operations, partially offset by the can packaging acquisition completed in August of last year. And finally, the sales impact from foreign exchange and other was positive by $9 million. The primary driver is approximately $13 million of foreign exchange gain associated with a weaker U.S. dollar year-over-year. Moving to the operating profit bridge on Slide 6 and starting with volume/mix. Our higher sales volume of $43 million, combined with the impact of mix, had a positive impact on operating profit of $13 million. Shifting to price/cost, I will remind you that this category includes the earnings benefit from higher selling prices as well as the impact of total inflation. In the third quarter, we had a $14 million unfavorable price/cost impact with most of this falling in our Consumer Packaging segment. In our Industrial segment, we faced continuing increases in OCC costs during the third quarter. As usual, there is a slide in the appendix that shows recent OCC price trends and you'll see that Southeast OCC official board market pricing was $125 per ton in June and increased to $195 per ton in September, resulting in an average of $175 per ton in the third quarter. This represents a $105 increase relative to the third quarter of last year and a $68 per ton sequential increase just over this year's second quarter. Next, is the impact of total productivity, which includes all results from our productivity actions, including manufacturing, procurement, and fixed cost. You see that our total productivity contributed $15 million year-over-year, with a favorable impact being predominantly driven in our consumer segment. Moving to acquisitions and divestitures, the $10 million decrease in operating profit is the net impact from the divestiture of our Global Display and Packaging businesses and our Can Packaging acquisition. And finally, the operating profit change in FX and other was unfavorable by $12 million with various moving pieces, but mostly within SG&A expenses. Moving to the segment analysis on Slide 7. You see that Consumer Packaging sales were up by 9.7%, driven by higher selling prices, which were mostly implemented to offset cost inflation. Consumer segment operating profits fell by 5.4%, driven by unfavorable price/cost, but with a positive impact from their strong productivity results. Our Consumer segment margin declined to 10.2% versus the third quarter of last year when the margin was 11.8%. Our Industrial segment sales grew by almost 30% due to year-over-year price increases as well as recovering demand from pandemic lows last year. Our Industrial segment's operating profit surged by 30% driven by the global turnaround in demand as well as procurement productivity. Our Industrial segment's margin profile was unchanged compared to last year at 8.4%. All Other sales declined by just over 34% driven by the sale of the Display and Packaging businesses, but this was partially offset by volume/mix growth as well as price increases. Operating profit in All Other decreased by almost 68% due to the Display and Packaging divestiture and price/cost headwinds. Margins declined to 4.5% from the prior year's 9.1%. So for the total company, sales were up almost 8%, and operating profit declined by 6%, resulting in a company-wide operating margin of 8.6%. Moving to cash flow. In the middle of Slide 8, you see that our year-to-date third quarter operating cash flow was $220 million compared with $490 million last year. But back to the top of this slide. I'll note that we had a year-to-date GAAP net loss of $150 million compared to a profit of $219 million in the prior year period. Most of this decrease relates to the $404 million after-tax and noncash settlement charge related to our pension termination process that was substantially completed in the second quarter. This leaves us with several primary drivers to our lower operating cash flow. One is the $133 million pension contribution related to the pension termination process. Next is the $59 million increased use of cash by working capital driven both by inflation and by a greater increase in business activity year-over-year. And finally, we had a $35 million negative impact related to last year's COVID-related FICA deferrals that were partially paid in this year's third quarter. Moving down to our year-to-date CapEx spend. Our net spend was $146 million this year compared to $108 million for the same period last year. This $38 million increase is mostly due to the spending on Project Horizon. This takes us to free cash flow of $74 million compared with $381 million for the same period last year. This $307 million decrease, again, is mostly driven by the pension termination process, increased working capital, and higher CapEx spend. I'll note that we paid cash dividends of $135 million year-to-date this year compared to $129 million for the same period of 2020. On Slide 9, you see that our balance sheet and our liquidity position remain very strong and reflects several strategic actions implemented through the first 9 months of this year. Our third quarter ending 2021 consolidated cash balance was $160 million, a $405 million decrease from year-end 2020. This decrease was driven by significant deployments of cash this year, which have included the accelerated share repurchase of $150 million, almost $500 million of long-term debt repayments, and the already mentioned $133 million of pension contributions. These cash uses were somewhat offset by the Display and Packaging U.S. divestiture gross proceeds of around $80 million, operating cash flow generation, as well as commercial paper borrowings. Our consolidated debt was approximately $1.5 billion at the end of the third quarter, a decrease of $231 million from year-end and reflecting the debt portfolio actions that I just mentioned. So finally, on Slide 10. For your reference, we've included our quarterly earnings history for 2020 and for this year. I'll note that the now divested Display and Packaging businesses contributed $0.29 of EPS in the full year 2020 with $0.21 coming in the first 9 months of last year. This compares with this year when we earned $0.03 of EPS in the first quarter before the divestiture of these U.S. operations. But focusing on this year and our fourth quarter guidance, you see that our range for Q4 base EPS is $0.84 to $0.90 per share. This guidance includes several key assumptions, starting with volumes; we expect that demand will remain solid, but this is more than offset by 6 fewer days than in last year's fourth quarter. For price/cost, our outlook is to have a positive overall result in the fourth quarter as various inflation-driven price increases continue to be implemented. Also, while the Display and Packaging divestiture is an $0.08 headwind, this is more than offset by lower SG&A expenses, lower interest expense, and reduced shares outstanding. I'll add that our expected effective tax rate in this year's fourth quarter is approximately 25%, slightly higher than last year's 23.5%. So based on our year-to-date actual base earnings plus our updated fourth quarter outlook, we are updating our full year guidance to be $3.49 to $3.55 per share. Related to our cash flow guidance on a full year basis, we are not changing our full year free cash flow guidance of $270 million to $300 million, but we are reducing our outlook for operating cash flow by $50 million to be between $520 million and $550 million. This reduction is driven by our updated expectations for slightly higher year-end 2021 net working capital balances due to a combination of inflation as well as increased fourth quarter business activity in addition to our updated forecast for the timing and amounts of certain tax payments. These operating cash flow headwinds are offset by our expectation for lower capital spending, which is now approximately $250 million instead of our original $300 million target. And as a reminder, our cash flow guidance excludes the $133 million of onetime pension contributions that we made in the second quarter. This concludes my review of our third quarter results and our outlook for the fourth quarter and full year 2021. So Howard, I'll turn it over to you.

Okay. Well, thanks, Julie, and good morning, everyone. Let me share thoughts on our third quarter performance. We'd also like to provide you a brief update on some important capital projects and what we see as we finish out the year. First, we were very pleased with the improved top and bottom line results delivered in the quarter as our team navigated through supply chain disruptions, raw material shortages, and frankly, unrelenting inflation to meet the needs of our customers. Sales reached a record level, driven by an almost 4% improvement in volume mix despite the impact of the divestiture of the Display and Packaging business. We experienced solid demand in each of our business segments while facing numerous supply chain challenges. For example, we had a sizable consumer customer who shut down for more than a week due to logistics problems, although the customers were impacted by labor and material shortages. Our team did a remarkable job in keeping our plants running despite similar challenges. Base earnings per diluted share improved 6% and above the midpoint of our guidance. Operating profits in our Consumer Packaging segment declined 5% in the quarter and strong productivity improvements were more than offset by a negative price/cost relationship as we continue to chase inflation of critical raw materials and other inputs. Our Industrial segment experienced a 30% improvement in operating profit due to strong demand and associated leverage through our operations. Finally, we were disappointed in results from our All Other segment, which consists of our industrial plastics, protective healthcare, and retail security packaging units. While the 68% decline in operating profit primarily reflects the divestiture of Display and Packaging, several of the businesses struggled due to price/cost as well as a high degree of COVID-related volume impacts such as chip shortages. A key element of our strategy is investing to drive growth and margin improvement. So let me provide you a brief update on some of our large capital projects, starting with Project Horizon. We've made a tremendous amount of progress over the summer. We've completed much of the work on the new stock prep system, which will allow us to use a larger percentage of lower-cost mixed paper. This should be operational by the end of this year, and we expect the machine to be fully converted around the end of the third quarter. We will experience downtime during the conversion, but expect this will have only a minor impact on profitability in 2022, while providing, of course, significant savings going forward. Also in our industrial businesses, we are completing work on a new 100,000 square-foot plant in Tulsa, Oklahoma, where we will be combining our current tube and core operation with two new fiber Sonopost lines to serve growing appliance and HVAC customers in the Southwest. This fall, we are opening a new Sonopost operation in Poland and are working on growth opportunities in Turkey as well as Mexico. Our fiber protective business is attracting a lot of new orders as the market is looking for a more sustainable and durable protective alternative. In our Can business, we recently approved approximately $15 million in new capital to develop additional capabilities to produce cans with new options, including paper bottoms and paper overcaps. As I mentioned previously, we continue to receive increased interest, particularly in Europe, to convert products into a more sustainable paper can option. These new capital projects will go into our existing facilities in Belgium, Poland, and the U.K. In addition, we're making investments in renewable energy projects to help meet our target of reducing greenhouse gas emissions by 25% by 2030. Here in Hartsville, we plan to spend $2.5 million to convert waste methane generated from our mill effluent system into a fuel-quality biogas, which will be treated, compressed, and injected into the pipeline to be used in industrial applications. We're also investing $1.5 million to install solar panels on an East Coast can plant and expect to add further solar power projects in the near future. Combined, these projects will reduce approximately 5,300 metric tons of carbon dioxide annually while generating returns greater than our cost of capital. Entering the final three months of 2021, we do remain upbeat as demand for our products globally remains strong despite those supply chain challenges we all are facing. That said, inflation continues to be a concern. We expect certain raw materials, energy, freight, packaging, and other pressures will continue well into 2022. We now project inflation, excluding OCC and labor, will rise an additional 1.2% over our previous estimate from last quarter. This means our costs globally this year will have increased by more than $250 million or about 9%. And as a result, we will continue executing price actions, and we will remain focused on controlling costs as we work to steer successfully through the continuously difficult operating environment. As for volume, we expect our Consumer Packaging segment to continue to benefit from elevated at-home eating trends driven by remote working and consumers, particularly younger consumers adopting new cooking habits. In most markets, demand for our global industrial products has recovered to pre-pandemic levels, and several of our businesses in the All Other segment, which have been negatively impacted by supply chain interruptions, are starting to see external conditions improve. And we've taken actions to improve the overall performance of several of these businesses. Finally, we're pleased that our ThermoSafe cold chain packaging business has picked up significant new orders to provide temperature-assured shippers for transporting COVID-19 vaccines. Sonoco is coming out of the pandemic well-positioned. We have a strong balance sheet. We have strong businesses, and we have a solid cash flow. We'll continue investing in the long-term potential of our core consumer and industrial businesses while remaining committed to returning value to our shareholders through dividends and share repurchases, and as always, acquisitions that fit our portfolio and expand our capabilities. Let me close by inviting you to participate in our live virtual investor conference beginning at 8 a.m. Eastern on Friday, December 10. While we will miss meeting with you face-to-face, we will do our best to facilitate an open discussion in this virtual manner. You can expect us to talk in more detail about our value creation strategy, and we'll provide you a first look at our earnings expectations for 2022. Roger will be sending you electronic invitations after this call, so please consider joining us again on December 10. Now with that, operator, would you please review the question-and-answer procedure.

Our first question comes from Adam Josephson of KeyBanc.

Howard, can you help us understand the current price and cost situation? We know you've implemented price increases in your industrial business, especially in URB and tubes and cores. What actions are you taking in the consumer segment and elsewhere? Could you also provide insight into the price and cost pressures you're anticipating this year, particularly the impact on EBIT margins? Additionally, what kind of recovery should we reasonably expect next year based on your pricing initiatives, especially if costs were to remain stable?

Yes, Adam, obviously, it tends to be the top question of the day on the industrial side as it relates to OCC. Certainly, we've spent a lot of time talking about resin just simply stated in terms of actions we're taking. Certainly, we have been pretty public in the open market in terms of our noncontract accounts. But we have pretty solid cadence of recovery across all of our businesses. I will say on the consumer side, particularly on the can business, we've got some pent-up increases that are coming January 1 that had not had the opportunity contractually to pass through, let's just say, the second half of this year. So not to give you specific numbers, we're feeling extremely bullish. I think you all know and see what's happening with the OCC side of things. We've seen moderation, if you will, on the resin side. And of course, we do expect that we're going to be seeing increased inflation going into 2022, particularly as it relates to metals, well-publicized as it relates to energy, freight, labor. But frankly, I'm very comfortable that we're going to be on top, if not ahead of that as we move through next year. So I hope that gives you some clarity overall.

It does. It does. And specifically on resin and OCC, just given how large they are for you. Can you just talk about what you're seeing, the magnitude of declines you're expecting in polyethylene, PET, OCC, et cetera, in Q4 and even beyond for that matter if you're willing to go out that far?

Yes. I'm going to try and Rodger to get into, hopefully, more detail and I'm certainly able to. But you see what's happening in OCC. Our indications are that in our filings are our modeling right now as we look into the fourth quarter is that we're going to fall more into that seasonal type pattern and that we do see some pullback and are reflecting that in our guidance for the fourth quarter. But Rodger can certainly give you even more color.

Yes, on the OCC, Adam, we're thinking mid-180s for the fourth quarter. And then we'll talk more about next year in OCC in our December meeting, but that gives you guidance for the for the fourth quarter. On resin, we are finally seeing some signs that the market is turning to be more balanced. If you look at the basic raw materials like polyethylene and polypropylene, we've seen those top out. Not that they're not announcing price increases, but they're not going through, they're being pushed down. So I think that's a very good sign. We're seeing some material now in the secondary and spot markets. On the other hand, if you look at bombing resins like expanded polystyrene, EPP, polyurethane. We are seeing those continue to escalate in the fourth quarter and into the first quarter next year. And finally, the most impactful to Sonoco is the PET market, which is about half of the basket of resins that we purchase. We're seeing escalation continue in the fourth quarter, with both virgin and recycled grades, and we expect that to continue into early next year as well. So on average, the fourth quarter is slightly up versus Q3 but just being slightly up is so much better than we've seen in the first three quarters of the year from a quarter-to-quarter standpoint. And as Howard said, we have 7 resin-based businesses, with some mix of price change mechanisms before those 7 will turn price cost positive in the fourth quarter. 2 will be closer to flat and 1 will still be negative and catching up more to do with supply and demand versus price cost and price increases in the marketplace. So hopefully, that gives you a little feel for what as Howard said, much more positive going forward on recovery and what we're seeing in the resin market.

And just one last one, perhaps for Julie, on the CapEx guidance. Can you just talk about is that project Horizon related? Is it something else? And should we expect that to just come back next year such that CapEx would be elevated? Or just any details, Julie or anyone else would be helpful.

Yes, Adam, Howard. A significant part of this is Horizon, but you can imagine that with the challenges in supply chain, freight, and personnel availability, we may not be able to accomplish everything we had initially planned for this year regarding capital expenditures. Therefore, we do anticipate an increase in carryover into next year. As Rodger mentioned during our meeting in New York, we will provide more clarity on our expectations for capital spending next year.

Our next question comes from Mark Wilde of Bank of Montreal.

Howard, for my first question, I'm just curious, are you seeing any sign of these supply chain issues starting to ease at all?

Not much, but I would say that we're not experiencing significant issues affecting us or our customers. We’re seeing isolated problems, so I don't consider it a widespread issue for us right now. I mentioned a situation in the third quarter where a customer was unable to obtain packaging materials, which caused a week-long shutdown. The main challenges we face currently relate to chip shortages, which are affecting our automotive sector and protective white goods. We have an example heading into the fourth quarter where we're facing about a $3 million obstacle due to the need to transport essential components from Europe to maintain operations. To answer your question broadly, the issue seems to be more widespread across the economy, but it is not as severe for us as it may appear.

Okay. The other question I have is to clarify what happened in Consumer Packaging during the quarter. I'm curious about the benefits from a more typical Halloween this year. Can you quantify that impact?

Yes, certainly. Our flexibles business was impacted, as we previously mentioned, by the trends of eating at home during the previous year and throughout the peak of the pandemic. We did experience a notable increase, with an improvement in volume of about 13% to 15% in flexibles alone. In our global can business, we saw a slight decline of 1% to 2%, roughly 1.5% down. A closer look reveals that North America was the most affected region, particularly when we lost a major customer for a week, which I mentioned earlier. Regarding supply chain issues, it may not be frequently discussed, but in our can business, we are a significant supplier in the adhesives and sealants sector, accounting for approximately 10% to 15% of our North American volume. In this instance, we faced material shortages for our key customers in that area. However, in Europe, our can business continues to perform well with an increase of about 4%. Asia showed little change. Our largest operations are based in Malaysia, which experienced several shutdowns last quarter and this quarter, resulting in substantial pent-up demand. As we reopen, we anticipate returning to a double-digit growth rate. I hope this provides clarity on the current situation.

I have another question regarding consumer packaging. You mentioned the weakness in fresh food, and I was wondering if you could elaborate on that. How much of this is due to soft markets, and how much might be related to the competitive pressures in rigid plastic areas, such as produce packaging, where you might be facing competition from fiber-based alternatives or from supermarket chains looking to reduce their plastic usage?

Yes. I'll pass it over to Roger for more details. From a macro perspective, we aren't observing any shifts in format. Roger, please explain what actually occurred.

Yes, Mark, there were two main factors driving our performance this quarter. First, the return of the pandemic led to a very strong performance in our egg business, which is now closer to or slightly above 2019 levels. However, the biggest factor impacting that business has been our aggressive restructuring efforts. We have focused on adjusting pricing in the marketplace to achieve a better return. You might have seen that we sold our Wilson, North Carolina plant, which was the last step in restructuring what we refer to as our Perimeter of the Store business. This isn't so much about fiber competition but more about our determination to be more competitive with pricing and to exit business areas that are not beneficial. We have now streamlined operations to include one major plant in Florida and one in California to effectively serve the market. While the restructuring has been completed, you will notice an impact on volume. We saw this in the fourth quarter, and some effects will continue into early next year, as our focus remains on achieving the right pricing in the marketplace.

Our next question comes from George Staphos of Bank of America.

I wanted to dig a little bit more into price cost. Howard and Julie and Roger, can you talk a little bit about within the industrial businesses, what price cost was in the third quarter? I don't think you called it out. Obviously, you had a lot of pressure but perhaps the pricing actions are starting to catch up there. And then within your guidance for the fourth quarter, are you expecting price cost for the industrial businesses to be broadly positive, flat, or negative? And if you could quantify, that would be great.

Yes, price cost was slightly positive in Industrial in the third quarter. This improvement was largely due to effective efforts across the board and particularly from our protective business and our wood and reels business. We anticipate it will be even more positive in the fourth quarter as the price increases enter the marketplace. In the third quarter, it was just over $4 million positive, and we expect the trend to continue positively into the fourth quarter.

Okay. And then I assume you're not seeing any signs of this now because the demand is good, and that would be both for your products and what your customers are saying in terms of consumer behavior going forward. But why are you not worried or are there any words that you would have that at some point, the pricing actions that your customers have had to make in the market and that you've had to take because of all the inflation will, at some point, start to feed back negatively on demand? I mean it's kind of hard to replace a tube and core, I get it, but why are you not worried about that in any of your product lines and for your key customers' product lines as well?

I believe this situation will affect the entire retail chain. The more significant concern is the impact on consumer spending power. It's not about whether some will choose not to pass on inflation; all commodities are rising, and we're already hearing that from the major consumer goods companies. We anticipate being on an even playing field. Therefore, it essentially becomes a macroeconomic issue regarding consumers' ability to afford products. As we approach the fourth quarter, typically a strong time that leads into the holidays, we expect this year to mirror last year's trends. Inventory levels are very low, which we believe will drive demand through the next three months. This trend is likely to extend beyond consumers to industrial sectors as well, continuing into next year. Looking ahead, we are very optimistic about the demand we're observing, the price-cost adjustments we are working on, and as Roger mentioned, we're encouraged about how this quarter will end and prospects for next year. Inventory levels are critically low, and this will support ongoing demand.

Howard, that's a great overview and leads nicely into my final question. As we consider the fourth quarter, you mentioned that the volume is expected to be solid. It's challenging to predict a quarter based on just a few weeks of volume, especially with the six-day negative comparison. However, without considering those six days, what do you believe the underlying volume growth is currently for Industrial and Consumer? Looking ahead to next year, with elements like price cost adjustments, initial productivity gains from Horizon, and improvements in working capital, if we project two years into the future, how would you rank or quantify the key drivers of return on capital for Sonoco? You've experienced a slight decline this year for understandable reasons, but what do you see as the primary drivers moving forward? If you could quantify these factors over the next two years, what would they be considering volume, productivity, and so on?

Yes, sure. George, we're expecting about a 3% improvement across the portfolio in the fourth quarter on a normalized basis, following a very strong fourth quarter last year in terms of volume. That's a macro perspective. Looking ahead two years, while I don't have complete clarity on that timeframe, I can say that every capital investment we've approved, including Project Horizon, is intended to generate value and we anticipate it will significantly exceed our cost of capital. Next year looks promising, especially with the benefits of the capital investments. I appreciate your question, as a dollar spent today can take 18 months to two years to yield results, and we believe those results will be significant as we move into 2023.

Is the productivity offset greater than the price cost? I would like to know if you could rank it.

Yes, I'd say price cost from where we sit and the lens that we're looking through, very bullish for next year. But that lens can get crowded in the hurry depending on again, I keep using the word macro, but what happens in the world today or two quarters from now, I don't know. But from what we have visibility of today, we're very positive about price cost. You'll see that being a major driver to performance certainly through the first half of next year. And you'll start seeing the productivity, the returns from capital starting to show up later in the year and solidly into 2023.

Our next question comes from Ghansham Panjabi of Baird.

I'm sorry to go back to price/cost. But just to clarify, and I'm sorry if I missed this, but the year-to-date price cost has been negative $65 million in 3Q, it looks like you came in at negative $14 million. Did you give us a formal outlook for 4Q? I know you talked about Industrial being positive, but on a consolidated basis, what does that number look like? And based on all your recognized pricing and just assuming all else being equal in the raw material trajectory side, including resin, would you recover the entirety of what you lost in 2021 and '22?

Julie here. Regarding the fourth quarter, we expect a positive shift in our consolidated price/cost perspective. Roger highlighted significant improvements, particularly in the Industrial sector. We anticipate this shift to be in the low to mid-single-digit range, about $10 million. While it's trending positively, it's not a dramatic turnaround; however, we remain optimistic about moving into positive territory compared to our performance this year.

Yes. As we look into 2022, we expect to be in a fairly good position. However, we need to see how things unfold. We began the third quarter with a very strong July, but inflation is a concern that we have to acknowledge. We do not foresee significant inflation occurring, but it's important to recognize that it could happen. What you are observing is that we continue to raise prices, particularly non-material-related prices. For example, we are aware of the situation regarding energy, especially in Europe, and we are taking proactive measures. We have implemented a €100 per ton increase on the paper side of our business. This is happening now and is also a proactive step in anticipation of what we expect in the first quarter. We are very conscious of the situation and are actively making adjustments today to avoid being in a reactive position going into next year.

Okay. That's very clear. Regarding the normalization you're observing on the consumer side, I believe you mentioned that composite cans are showing some weakness and that comparisons are challenging. Is the adjustment in sales also due to inventory changes at the customer level, or is it solely a matter of difficult comparisons?

I'm sorry, Ghansham, you kind of broke up at the end.

Yes. Just in terms of what you're seeing with composite cans volumes, are you seeing inventory adjustment at the customer level?

Inventory levels are currently low, and while there is some ongoing catch-up, we feel confident about our market position. We anticipate continued strong demand carrying into next year, which will help not only replenish retail outlets but also align inventory levels appropriately.

Okay. And then just one final one on the $50 million delta on working capital for this year. Would that be an equal tailwind into 2022 based on what you see at this point?

Ghansham, the $50 million that we've reduced operating cash flow by isn't all working capital, but you could say maybe about half of that is, we're also anticipating some higher tax payments in the fourth quarter than original. And so kind of in the, I guess, working capital year-over-year, you might say $15 million to $25 million higher, driven by the factors I've mentioned. We see it as possible that, that could continue into next year as well. But again, right now, we're kind of starting to fine-tune, sharpen our principal on the outlook for '22. But again, depending on inflation, how that trends next year, and again, we will be expecting higher demand as Howard has been talking about. So while we're really feel very good about our inventory management, all of that inflation and increased activity obviously does put some upward pressure on working capital.

Our next question comes from Kyle White of Deutsche Bank.

I wanted to go to the All Other segment. You mentioned it was a bit below what you're expecting. I know you had experienced resin headwinds. And you mentioned the chip shortage, but this is something that has been occurring throughout the year. I guess, was there any other notable headwinds that impact your results or something that wasn't necessarily expected? Any other details you can provide on that segment for 3Q?

Rodger, you want to?

Yes. I think the most significant was probably in our medical thermoforming business that I think Howard mentioned in his opening comments, that business relies heavily on elective surgeries with packaging for the operating room. We had expected that to recover in the third quarter. And it did slightly, but we're nowhere near back to where we were pre-pandemic levels. So we're starting to see that come back, but that will be a headwind to some degree again in the fourth quarter. And then the other major impact was, if you think about the pandemic and the automakers, about half of our what we call our protective business services the automotive industry, during the pandemic, they shut down for weeks at a time. And so we were able to shut down and take labor out of our plants. This past quarter, they had growing downtime which made it very, very difficult for us to strip out costs and strip out labor. So from a quarter-over-quarter, year-over-year standpoint, that business really suffered around supplying the auto industry. So that was unusual for the quarter. And as I said earlier, with price actions with some self-help actions around taking cost out, we see at least a 150 basis point improvement in operating margins as we go into the fourth quarter and then we'll push it on from there.

And Kyle, let me add as well that talking about the negative impacts to the sector. I don't want to miss the opportunity to talk about the ThermoSafe business and the level of COVID activity. We talked from the very beginning of the vaccine rollout that the vaccines were being bulk shipped into central distribution points. Today, they're starting to be in smaller packs going direct to specific retail and hospital/doctor outlets. And that's our sweet spot. So we've received some significant orders starting this quarter and are very bullish about how that may continue through the course of next year.

Got it. That's helpful. Can I could actually follow up on that on the vaccines. Is it possible to either quantify the benefit you receive in the ThermoSafe business related to COVID vaccines? And do you expect with booster shots next year as well as other regions still in the process of widespread distribution? Do you anticipate next year's results could be even higher or similar comparable to this year? Just any thoughts there?

Kyle, it's Roger. A significant portion of the order that Howard mentioned for the fourth quarter relates to booster shots and vaccinations for children aged 5 to 11. This will begin delivery in November and extend into the first quarter. We previously anticipated that COVID vaccines could generate revenue similar to blue vaccines, around $20 million a year. However, we now believe we can surpass that expectation. We are still working with the major pharmaceutical companies to clarify this. So, we expect a very strong fourth quarter for COVID vaccines, and when we convene in December, we will provide a clearer update on the impact for next year.

Got it. That's helpful. And for my next question, can you just remind us of your thoughts on capital allocation as we sit here today? I know you completed the ASR program last quarter. But how attractive does the M&A pipeline look? And in absent M&A, should investors expect you to kind of repurchase shares in the open market going forward?

Yes, Kyle. We are actively engaged in this area and are carefully evaluating assets that align well with Sonoco. M&A is a crucial aspect of our future capital allocation strategy. We also emphasize the importance of dividends and internal capital deployment. We have conducted a share buyback and will continue to consider that as part of our capital allocation strategy, especially regarding M&A opportunities.

Our next question comes from Salvator Tiano of Seaport Research.

Yes. So firstly, I wanted to come back a little bit on the CapEx change. And I do want to clarify that have there been any outright cancellations or major adjustments to any of your projects? Or is it solely delays that are pushing this $50 million?

There have been no cancellations. The situation relates to fulfilling orders for projects and completing the necessary engineering and work. This ties back to the question about the supply chain. For example, with Project Horizon in the paper industry, many of the essential technologies are sourced from Europe, resulting in delays, but there haven't been any pullbacks due to a lack of customer interest in the projects or related items.

Okay. Following up on CapEx, what inflation are you experiencing in these projects, whether related to labor or raw materials? If you had maintained the €300 million guidance without any timing changes, what do you estimate the costs would have been solely due to inflation now?

Currently, I’m unable to quantify that. We have seen some inflation in Project Horizon, but it remains within scope. It hasn't been significant as we consider upcoming projects that I mentioned earlier. The costs currently accounted for reflect what our vendors are experiencing today. We will have to monitor how this develops over the long term, but for now, we feel quite confident.

Okay. Perfect. I just also want to touch base on energy and what we're seeing in natural gas. If you can just put the final print firstly on natural gas consumption, energy consumption by region, but mainly Europe and North America. And also, what procurement models do you have and what leverage do you have besides in URB discretionary price increases to offset this inflation.

Sure. For natural gas, our primary use is in mill complexes in both the U.S. and Europe. It’s not a significant factor in China, where we’re mostly using coal. In the U.S., we have established protocols for balancing hedge strategies, and as inflation began to rise, we had nearly half of our usage hedged for the upcoming year. Inflation recovery will indeed be part of our discussion today. We recently announced non-OCC related inflation adjustments in the U.S., and in Europe, we have more exposure to these changes, reflective of the entire market. Just a few weeks ago, we implemented a €100 per ton price increase. We will continue to assess whether this will effectively cover costs. The competitive landscape is also shifting, and everyone will need to seek recovery. However, we don’t view this as a significant challenge because, as mentioned, we are well positioned in North America. We are introducing price increases that are fully supported by all industries utilizing natural gas in Europe.

Okay. Perfect. To clarify, in Europe, regarding procurement, you don't have any hedges and will rely on raising prices there.

Yes, we are not hedged in Europe, correct.

Okay. Perfect. My last question is about the volumes in Industrial Paper Packaging, which were up around 5%. You mentioned that in most markets, we've recovered from COVID. Now that we've reached pre-COVID levels, how much room for volume growth do you anticipate as the markets expand and basic returns have been established?

Yes. It's challenging to pinpoint specifics regarding Industrial. What we're currently observing is a return to pre-pandemic levels, as I mentioned earlier, with certain areas performing exceptionally well. In North America, our URB network continues to maintain very low inventories. The backlog and allocations we have to manage for customers create an interesting dynamic. It's uncertain where this will ultimately stabilize, but I believe we will be in a favorable position moving forward. Rodger, do you have anything to add?

The only thing I'd add, Sal, is we've seen in our tube core business seeing a really nice pickup in the paper side of that business. So Internet sales around containerboard, our containerboard customers globally are very, very strong. We've seen newsprint really bottom out and actually show a little a few gains from here and there. So as you would expect, filing is strong with the economy being strong. The only we think weakness as we've seen is textiles, we feel like that's probably more related to the chip shortage around automotive and some of the other supply chain constraints. So if textiles picks back up to Howard's point, if you look about just all the segments we serve from an industrial standpoint, it was pretty strong going into 2022.

Thank you. Our next question comes from Josh Spector of UBS.

So just to follow up on consumer and the low inventory at the customer level and the supply chain. Just curious if you could quantify that if there was no end market demand how much would the restock be in terms of the benefit from a volume perspective into next year?

I don't think we can provide a numeric answer to that. What I can say is we are fully operational, and they will be as well. Until they achieve full inventory normalization, our expectation is that it will take a significant amount of time to reach that point, likely extending well into next year.

Okay. Fair enough. And maybe just another medium-term one here is just looking at URB prices and where they're at there are relatively high levels versus a few years ago, and I expect you want to continue pushing them higher to recover costs. Just assuming OCC prices eventually decline, what's your view on the reaction of URB pricing and kind of anticipating you're going to say that they stay higher, what structurally would be your supporting points to kind of get you there?

I would say that price is certainly related to cost. Currently, as URB prices are decreasing, the demand remains strong. As mentioned earlier, we are experiencing allocation scenarios in the market that we need to manage. While it's difficult to quantify, we are optimistic that demand will continue to be robust as we enter next year. We will see how OCC affects our cost profiles, but demand and pricing are holding steady.

Our next question comes from Gabe Hajde of Wells Fargo Securities.

I was going to ask something more about the operational side, particularly regarding the energy issues in Europe as we approach the winter months. It seems possible that industrial users might face allocation challenges. So, I have a two-part question. Do you have secondary energy sources or contingency plans for your paper mills in that region? Can these mills operate with reduced energy supply? Additionally, have there been discussions about how the increasing global cost for paper production, especially for containerboard, might make U.S.-produced products more attractive and how your customers are preparing for that in the tube and core segment?

So Gabe, I'll address the first part. From our internal discussions, including input from our Board members based in Europe, we don't view this as a supply issue. We don't anticipate any problems in running our operations. The main concern is regarding inflation. While we're not considering that as a potential issue at this point, if we happen to be mistaken, we acknowledge that transitioning from one substrate to another to operate the facility is not an easy task. However, we do not expect this to be a problem. Regarding the cost curve for containerboard, I'm not sure I fully grasp your correlation and its impact on URB. Would you mind restating that?

No, just I mean to the extent that energy is a big input component to the cost curve or cost of goods sold for product produced in Europe, and even for your own URB, I don't think you have any excess capacity to be exporting URB to Europe. But just if, in fact, it persists, then product produced here in the U.S. would require more tube and core. So just if those discussions are being held.

I'm uncertain how to respond to that. I believe costs will be influenced by relative inflation, not just inflation specific to us. As energy inflation affects the paper systems in Europe, all prices will likely rise there. The issue may be about potentially lower costs in other parts of the world and moving product to leverage that, but I don't foresee that happening, especially under the current circumstances. We are shipping to Mexico and addressing our supply needs in Brazil, but given the current cost of containers, it wouldn't be feasible to consider cross-border or cross-ocean supply chains for this type of commodity until things normalize.

I am considering the potential second and third-order effects of higher energy costs in Europe. Julie, you mentioned a one-time benefit of $0.05. I didn't catch if this was related to operating profit or if it was tied to a Brazilian tax credit during Q3.

We anticipated a $0.05 unique tax item that we booked in the third quarter. Additionally, we experienced a lower tax rate compared to the expected 21.5%, dropping to about 18%. This decrease was primarily due to additional project work, mainly related to R&D tax credits. So Gabe, do you think that addresses the question?

Yes. So I guess to be clear, the $0.05 or $7 million or so that hit operating profit was part of your guidance?

Yes, you're referring to the differences between our GAAP and non-GAAP items. There was a net addition of $0.06, which corresponds to about $11 million due to a few one-time GAAP non-GAAP tax expenses. These were partially countered by some GAAP net gains that affected operating profit, resulting from various items. Overall, there were elements that influenced the GAAP results but were offset by certain income tax items and net gains.

Okay. That was not included as part of the base.

Thank you. At this time, I'd like to turn the call over to Roger Schrum for closing remarks. Sir?

Thank you again, Latif. And again, thanks, everyone, for joining us today. As Howard mentioned, we'll be sending out electronic invitations for our December 10 Virtual Investor Day next week. If you'd like the RSVP for the event in advance, you can contact Robin Hyder in our Investor Relations office at 843-383-3450. And again, we appreciate your interest in the company. And as always, if you have any further questions, don't hesitate to reach out to us. Thanks again for joining us.

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