Sonoco Products Co Q3 FY2025 Earnings Call

Thank you for joining us, and welcome to the Sonoco Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Roger Schrum, Head of Investor Relations and Communications. Please go ahead.

Thank you, Jeannie, and good morning, everyone. Yesterday evening, we issued a news release and posted an investor presentation that reviews Sonoco's third quarter 2025 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website, and we'll post a transcript later this week. If you would turn to Slide 2, I will remind you that during today's call, we will discuss a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, today's presentation includes the use of non-GAAP financial measures which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures is available under the Investor Relations section of our website. Joining me this morning are Howard Coker, President and CEO; Rodger Fuller, Chief Operating Officer and Interim CEO of Sonoco Metal Packaging EMEA; and Paul Joachimczyk, our Chief Financial Officer. For today's call, we'll have prepared remarks followed by your questions. If you'll turn to Slide 4 in our presentation, I will now turn it over to Howard.

Thank you, Roger, and good morning, everyone. Let me start by saying I am incredibly proud of our team's strong operating performance in the third quarter as we achieved record top line and bottom line performance, along with margin expansion despite challenging market conditions, which affected both consumer and industrial demand, particularly in the EMEA region. As Slide 5 shows, net sales grew 57% and adjusted EBITDA was up 37%, while adjusted EBITDA margin achieved a record 18.1% due primarily to improving margins from our Industrial Paper Packaging business. Total adjusted earnings grew 29% in spite of higher-than-expected interest expense. Our Consumer Packaging sales and operating profit grew 117%, and adjusted EBITDA increased 112%. Most of the improvements came from the addition of Metal Packaging EMEA and strong results from our Metal Packaging U.S. business, where we saw food can volumes up 5%. Our Industrial Packaging segment also had an exceptional quarter with operating profits up by 28% and adjusted EBITDA up by 21%. Both operating profit and adjusted EBITDA margins grew significantly during the quarter and registered an eighth consecutive quarter of margin improvement in the Industrial segment. Our industrial team continues to successfully drive our value-based pricing model while achieving solid productivity savings. Paul will go through all the numbers and business drivers for the quarter in a few minutes. As shown on Slide 6, we successfully entered into an agreement on September 7 to sell our ThermoSafe temperature-assured packaging business to Arsenal Capital Partners for a total purchase price of up to $725 million. We expect the transaction to close during the quarter, subject to regulatory review. The purchase price includes $650 million in cash at closing and an additional earn-out opportunity of up to $75 million based on the business's 2025 overall performance. The completion of the sale of ThermoSafe will substantially complete Sonoco's portfolio transformation from a large portfolio of diversified businesses into a stronger, more simplified structure with two core global business segments: Consumer Packaging, which consists of our global Metal and Paper Can businesses and Industrial Packaging, where we have global leadership in uncoated recycled paperboard and converted products. Pro forma for the transaction, the expected net proceeds from the divestiture, excluding any additional considerations, are projected to reduce our net leverage ratio to approximately 3.4x. I'm now going to turn the call over to Rodger Fuller to give us an update on activities and where we are at S&P EMEA.

Yes. Thank you, Howard. Good morning, everyone. If you turn to Slide 8, I'll provide a brief review of Metal Packaging EMEA's third quarter performance and outlook for the rest of the year and actions we're taking to improve performance in 2026 and beyond. Third quarter results modestly improved over the same quarter last year with adjusted EBITDA up approximately 9% and EBITDA margins improving to approximately 18%. Food can units increased 3.5% year-over-year, but unfortunately, business activity was below our expectations due to macroeconomic headwinds and weaker-than-anticipated seafood availability. With the vegetable harvest season substantially behind us, we believe the fourth quarter will likely be weaker than we had anticipated based on our customers' projected demand throughout the EMEA region. In response to these challenges, we're taking actions now to improve our competitive position and drive cost savings to accelerate our performance in 2026. As I mentioned on our last call, our team is making tremendous progress in achieving our targeted $100 million in annual run rate synergies by the end of 2026, with savings benefiting our entire Consumer Metal and Paper Can portfolio. Our team expects to further drive procurement synergies in 2026 after they were delayed in 2025 due to the late closing of the acquisition. In addition, we are rightsizing our manufacturing footprint to match our customers' demand profile and better leverage our operating costs. We're also building out our commercial team and have active growth projects that are focused on increasing our exposure to more nonseasonal products. As an example, we're making capital investments to gain new pet food and seafood business in Eastern Europe, which will improve our mix with our large vegetable can customers. In closing, while I'm not satisfied with our recent performance, I'm encouraged by the receptiveness Sonoco has received from our customers and our team's focus on taking the necessary actions to drive improved performance going into 2026. So I'll now turn it over to Paul for the quarterly financial review.

Thank you, Rodger. I am pleased to present the third quarter financial results, starting on Slide 10 of the presentation. Please note that all results are on an adjusted basis and all growth metrics are on a year-over-year basis, unless otherwise stated. The GAAP to non-GAAP EPS reconciliation is in the appendix of this presentation as well as in the press release. Adjusted EPS was $1.92, representing a 29% year-over-year increase. This improvement was primarily driven by favorable price/cost performance of $43.5 million, the EMEA Metal Packaging acquisition, and continued strong productivity of $11 million, primarily from our converting businesses. These benefits were partially offset by unfavorable volume mix, an increase in the effective tax rate by approximately 180 basis points, and slightly higher legacy interest expense. Third quarter net sales for continued operations increased 57% to $2.1 billion. This change was driven by the acquisition of Metal Packaging EMEA, strong pricing disciplines across all segments, and the favorable impact of FX. Adjusted EBITDA of $386 million was up by an outstanding 37%, and adjusted EBITDA margin improved by 130 basis points to 18.1%. This was driven by strong price cost discipline, continued productivity, and the net impact of acquisitions and divestitures. These benefits were partially offset by volume softness in the Consumer and Industrial segments and an unfavorable sales mix in our all other businesses. Slide 11 presents information on our operating cash flows, which was a source of cash of $292 million during the quarter, up more than 80% over the prior year. Gross capital investments for the quarter were $65 million, and our annual capital spending is tracking below our $360 million target for the year. As we enter our fourth quarter, we expect similar operating cash flow performance as last year as the seasonal build of net working capital reverses. Slide 12 has our Consumer segment results on a continuing operations basis. Consumer sales were up 117% due to the Metal Packaging EMEA acquisition, price increases implemented to offset the effects of inflation and tariffs, and the favorable impact of foreign currencies. This was offset by unfavorable volume mix. Our domestic Metal Packaging business presented higher sales versus the prior year due to higher food can units and price, which was offset by unfavorable mix. Sales for our Global Rigid Paper Can business were relatively flat as favorable price was offset by mix and lower volumes. Adjusted EBITDA from continuing operations grew an extraordinary 112% year-over-year due to the acquisition, favorable price disciplines, continued productivity gains, and the favorable impact of foreign currency exchange rates. This was offset by weaker volume year-over-year. Now let's turn to our Industrial segment slide on Slide 13. Sales were flat year-over-year at $585 million, with the recovery of price offset by volume softness and the exit from our Chinese paper operations. Adjusted EBITDA margins expanded 360 basis points year-over-year in the third quarter and increased by $21 million to $123 million, representing a 21% increase. Adjusted EBITDA was positively impacted by price, improved productivity, and fixed cost savings resulting from footprint rationalizations in North America and headcount reductions in Europe and Asia. Slide 14 has the results for the all other businesses. All other sales were $108 million, and adjusted EBITDA was $21 million. Sales were higher versus the prior year due to higher volumes in ThermoSafe. Adjusted EBITDA improved 2% to $21 million as favorable productivity and fixed cost savings more than offset the negative impact of unfavorable mix and price cost. Transitioning to our outlook for the remainder of the year, as shown on Slide 15. We are tightening our guidance with net sales in the range of $7.8 billion to $7.9 billion. The European market continues to soften, and we are seeing pressures in the North American market with slightly lower demand. From an adjusted EBITDA perspective, we are narrowing our range to $1.3 billion to $1.35 billion, with strength in the performance of our North American businesses offset by the softness in the European and Asian markets. We are reducing our adjusted EPS range of $5.65 to $5.75. This adjustment is primarily driven by subdued market conditions outside of the United States and the deleveraging process occurring across those facilities as sales volumes declined. Reflecting on the third quarter, July commenced successfully surpassing our expectations. However, August and September experienced declines mirroring the market's weakening trend. This downward trajectory is continuing into our fourth quarter, which serves as the primary rationale for the lowered outlook. An additional item of note is our guidance assumes a full quarter of ThermoSafe performance. Given the projected pressures in our sales and operating profit, we are adjusting our operating cash flows range to $700 million to $750 million. Over the next 90 days, we'll be closing out 2025 and getting ready for our Investor Day, which is scheduled in New York on February 17, 2026. We are very excited about the strength, stability, and simplification of the new Sonoco and the competitive advantage it creates in the marketplace. We intend to lay out a road map over the next 3 years to show how we're going to grow our businesses, strengthen our balance sheet, and continue to drive margin expansion. I will now turn the call back over to Howard for closing comments.

Great. Thanks, Paul. As we look ahead at the remainder of the year, our top priorities are to continue building momentum for growth and improving our competitive position by further reducing our cost structure. As the graphic shows on Slide 16, we believe our consumer and industrial businesses have solid funnels in place with several new products and market launches planned in 2026 and beyond. We believe we can continue to gain additional wins with both aerosol and food can customers in North America as we have successfully done through this year with can units up approximately 9%. As Rodger mentioned, Metal Packaging EMEA continues to achieve market wins, which will provide growth in '26 and beyond. Also, we believe our Rigid Paper Containers business is on the cusp of reigniting growth in global stacked chips, and we continue to launch new all paper cans and paper bottom cans for customers looking to substitute with less sustainable substrates. Finally, our Industrial Packaging segment is purposely driving share gains while focusing on new product categories such as wire and cable reels, where we experienced double-digit growth in the third quarter, as well as new markets and applications for URB paper. If you turn to Slide 17, I'll make some final comments with the planned sale of ThermoSafe, we will be entering the next stage of our transformation journey, which is focused on optimizing our operating footprint and reducing future support function costs to align them with the needs of our now simpler portfolio. Our restructurings are never easy. They are necessary if we are to realize the full value of these portfolio changes. As an example, we recently closed a 25,000-ton-per-year URB machine in Mexico City, which eliminates an older higher-cost machine and allows us to better balance our North American mill network. As Rodger mentioned, we expect to continue to drive actions to meet our synergy targets and expect to further optimize our EMEA footprint to better serve our customers and to react to changing market conditions. With a simplified operating model also comes additional opportunities to optimize support functions. We've actioned approximately $25 million in annual savings from stranded costs left from divested businesses, and we're implementing additional actions that will enable our businesses to fully leverage our market capabilities and generate strong cash flow. We've added a save-the-date reminder of our Investor Day in New York on Slide 18 of our presentation. I look forward to sharing our growth plans and the significant savings and value capture we expect to unlock with our simplified focused operating vision. So with that, operator, we will now take any questions.

And your first question comes from Gabe Hajde with Wells Fargo.

Howard, Rodger, and Paul, thanks for all the detail. I wanted to dig into, I guess, the European Food Can business. It feels like there's a couple of mixed signals here. And I'm thinking about you guys talking to win some share, I guess, in seafood. I appreciate you talked about some powdered formula wins. But just maybe more near term, you're talking about Q4 maybe getting a little bit sequentially weaker. I'm curious if that's associated with a shortened vegetable pack or if there's something unique going on there? And then I thought kind of in the second quarter, you talked about Northern Africa, some disappointing seafood trends. I'm just curious, your increasing exposure there. And then last part on the footprint rationalization or consolidation, what's going on there? It felt like that business was pretty well optimized when you acquired it? If you could just elaborate there.

It's Rodger. I'll address all three points. Firstly, regarding volume. In the third quarter, we had initially forecasted mid-single-digit increases quarter-over-quarter for can units, and we achieved 3.5%. The seasonal business in fruits and vegetables met our expectations. The shortfall occurred in Africa, primarily due to issues in Morocco and a plant in Ghana that supplies tuna and other products to one customer, whose projections were overly ambitious, leading to lower numbers. If we exclude Africa, our performance for the third quarter would have comfortably fallen within the mid-single-digit range. Looking ahead to the fourth quarter, based on what we are hearing from our customers, the seasonal business is winding down. We will still see some seasonal activity in October, but it is decreasing. Customers are cautious about inventory levels in light of perceived macroeconomic conditions, which led us to adjust our fourth-quarter volume guidance for EMEA. While this situation could benefit us in the first quarter, our customers are carefully monitoring their inventories, and we are also closely observing the sardine business in Africa. Unfortunately, we haven't seen improvements this year, and we do not anticipate changes for the fourth quarter. As for footprint issues, the primary concern is still Africa. When we look at sardine farming in Morocco and other fish products in Ghana, we recognize the need to reassess our operations and cost structure there, which we are actively pursuing. Additionally, we have started negotiations in France aimed at further optimizing our metal supply across our platform, which aligns with our initial plans following the acquisition. While there has been some confusion, the decline of hundreds of millions of units in the starting business over a few years is a reality we face. It’s not an excuse but a challenge we need to address, particularly regarding our operations in Africa. I hope this clarifies some of the confusion. Howard, would you like to follow up?

Yes, sure. Gabe, thanks for your question. What I would say is, first off, we are really, really pleased with this acquisition, the people, the technology, the market position, all the things that you point out, optimization. As Rodger just said, we see more opportunity there. And yes, we are indeed disappointed in how we're going to finish up the year and what the fourth quarter is rolling to. And again, Rodger talked to the main points there. But we did this to create a global platform. Consumer for the first quarter ever is one product, basically, it's cans. It's cans made from steel, aluminum, and paper. That's it. And so we have clear line of sight, as we've talked about in terms of the synergies associated with the acquisition. But what really excites us is what we can do from one consumer perspective. We are very early in the process, but some of the structural, commercial, and other opportunities that are materializing across our three formats, metal, our legacy rigid paper and steel aluminum are creating some really, really exciting opportunities that we're working now. And so as we talked about February when we go into February, we'll be able to talk more about the different ways to manage, run, go-to-market than we ever even thought about as we started on this journey that are incremental, that, again, we'll talk about in more detail in February.

Thank you for that, Howard. Unfortunately, we tend to be greedy over here, I guess. If we think about big moving parts into 2026, just to make sure we're calibrated properly, and we pick the midpoint $1,325 million. Just to remind us, that does include $50 million TSP contribution in the first quarter. And then assuming that the ThermoSafe transaction closes, that would be another $50 million to $55 million adjustment, again, starting with that $1,325 million. You've talked about actioning about $25 million of stranded cost savings, SG&A, et cetera. I'm not assuming all of that hits in '26, but a decent portion of it. And then we'll make our own assumptions about volume, FX, and price cost. Is there anything else that we should be thinking about? I mean, would you say in the fourth quarter you talked about Rodger throttling maybe production in the food can business to keep inventories in check. Do we have an estimate of order of magnitude what that might be hitting Q4 earnings?

Yes. Gabe, this is Paul. And to answer your question there, too, you're thinking about the stranded costs, you're thinking about TSP and ThermoSafe, exactly correct. I'd say the one element that you probably have to factor into your model for next year is the reduced interest expense that we're going to be using the proceeds from the ThermoSafe sale and transaction that Howard talked about earlier in the call. All of those proceeds will go directly to debt reduction. So I'd say that would be the largest element to change on there, too. And if you think about our Q4 performance that's out there, you can see our operating cash flow guide did come down. That does create a little bit of a strain on the ability to pay down our debt. So that's why we are experiencing a little bit of higher interest rate expense that's out there, too. So as you're modeling in your Q4 projections that are out there, and this wasn't a direct question, but interest expense should be in the range of around $50 million for the quarter. And all the other performance will be a little bit muted just due to the overall consumer demand that we're seeing really in the EMEA regions that are out there today.

Your next question comes from the line of George Staphos with Bank of America.

Congratulations on the progress. I guess my first question, I know we'll get more of this in February, but is it possible at this juncture to quantify some of the cost or revenue synergies you expect to get from having a Metal and Paper Can business together? And can you give us a couple of, for instance, in terms of what you already think you might be able to pick up commercially?

Yes. George, you want to do your follow-ups now?

No, let's start first with that question if it is possible.

Yes, I understand, and I dislike that you started off accurately. It's too early for us. I truly mean it. It has only been the last month or so that we've really engaged with this, and things have begun to stabilize from an integration standpoint. As we step back, we realize that we have facilities on top of facilities worldwide. We are considering how to manage geographically and how to handle substrates that are very similar. We have a target in mind, but we need to refine that further. However, we are actively working to be in a position to start realizing savings as early as the beginning of next year. But...

What do you think the long-term EBIT growth is for the consumer business as it's currently constructed? And look, the reason behind the question, we recognize all the M&A, heavy lifting that's been going on at the company in the last 1.5 years, 2 years. Having said that, this quarter, you're very happy with the platform. You love the structure, et cetera, but sardines don't swim, the pack is late, and the volumes wind up being really not particularly good, and nor is the earnings, and you spend a lot of capital to build out this platform. And so that's kind of the reason behind the question. So if you had a view on what you think the long-term EBIT growth is for the combined consumer business, that's what's driving the question. If you had a view at this juncture, if not, we can move to the next question.

Yes, we have a positive outlook. I can't provide a specific percentage right now, but our efforts are aimed at increasing the company's profitability. While I can confidently say I have strong skills as a fisherman, I can't promise I'll catch fish every time I go out. The focus should be on what we can control rather than what we can't. Rodger mentioned the importance of getting properly structured. When you inquired about commercial opportunities across substrates, it became clear how many customers purchase from us and how we could significantly benefit from that. Every discussion and action we are currently taking aims to align with your expectations of sustained profitability growth in the long run. We have substantial growth opportunities ahead of us, and this is true even without considering alternative market approaches or plant structures that could enhance our positive outlook. I regret that I can't specify a projected percentage like 8.75% going forward, but we will revisit this topic in February.

Okay. Understand, Howard. I guess next question I had on cans again in the U.S. I want to say little on the 2Q sort of commentary kind of into the third quarter, the commentary was that maybe it'd be a late pack, but you'd see an uptick in the fourth quarter. What in particular is driving the weaker volume? And then as regards to third quarter, food cans being up 5%, but I think overall, the performance in metal for the third quarter in the U.S. was down low single. That's just mix, right? That's pet food versus other end markets or something else behind that?

Yes, that's just a mix. Overall, it was a good pack season, and that success has continued into October in North America. We are anticipating a reasonable fourth quarter for food cans in North America. However, I must address the situation with paper cans globally. We're currently facing a temporary issue with a key customer that is significant for us both internationally and in North America. This situation has been disappointing as we approach the closure of this particular transaction, yet there is excitement about the future potential of this business. In the fourth quarter, we are observing a drawdown in inventory, which is factored into our forecast. I view this as a temporary challenge.

Last one quick one. OCC prices are really low right now. That's probably helping you a bit on margin. Hopefully, OCC heads up in 2026 for macro reasons and the like. Any way you will try to avoid any margin pressure ahead of time? Or will it be really the same sort of mechanisms you've had in the past in terms of pricing and the like? Your pass-through mechanisms and just you'll manage it on the way up just like you always have.

Yes. Thanks, George. We're going to do what we've always done, but I did just highlight one example in my prepared remarks about preemptively making the right moves in terms of the balance of supply in North America. So if you listen, we've taken 25,000 tons out, and it's a really smart thing to do just in and of itself, replacing coming off of a 25,000-ton machine. And here, we're sitting in South Carolina with a 180,000-ton machine with a different cost profile. So we'll do what we have to do, what we've done traditionally as it relates to price cost management, but we're going to control those things that we can control as well and make decisions like I just announced.

Your next question comes from the line of John Dunigan with Jefferies.

I really appreciate all the details here. If I could start with the URB mill in Mexico City that you just touched upon. What does that do to your operating rates for the business? And what I'm thinking about is, is cost going to end up going up because you have to still supply those same customers. So freight may be more of a headwind next year? And then if you could touch upon a much larger price/cost spread in both Industrial Packaging, which obviously you had the price increases go through for URB. OCC continues to slide a bit. But overall, still quite a bit ahead of where we're expecting. Same with the Consumer Packaging business. I know there was pricing to help cover some of the tariffs, but price/cost spread again seemed outside of our expectations. So maybe you can touch upon price/cost for both those segments going into 4Q and 2026 and how we should be thinking about that?

Sure, John. Let me start with your comment about the mill network. First off, we're operating in the low 90s. We have been proactive and aggressive to maintain a balanced portfolio. Regarding Mexico, this is a math decision along with capacity control; it simply makes more sense. The numbers indicate that 25,000 tons coming off the mill across the border is less advantageous compared to what we can achieve with our larger facilities here. So it’s purely a mathematical assessment. Moving forward with price and cost, we will see how things unfold, as this relates closely to the question George raised. It wouldn't be surprising to see OCC increase, as markets are expected to remain tight. This is an indication of tightening market conditions affecting price and cost, which has two components: one linked to indices and the other related to efficient cost management. Looking ahead, we have a significant quarter for our industrial segment, and while we anticipate some fluctuations into next year, we expect levels to remain consistent with the past three to four years, which are significantly higher than our previous performance at Sonoco.

Yes. John, add one real question on the URB mill closure there, too. This is really to get us to be maintaining operational efficiencies in the 90s. So this is balancing the overall portfolio. As we started to see, we had redundant capacity across the network and structure, and we wanted to make sure we maintain that because at that efficiency rate, we had to balance out logistics costs and everything else like that to make sure that the net transaction actually was a benefit for the overall company. But our goal is to maintain all of those facilities in the 90s, and we started to see the trend of starting to be a little bit overcapacity in the market space. So just to give you a little bit more context on that. And the total cost of the transaction after is down, just to be clear on that.

That's helpful. I have a couple more questions regarding the bridge in 2026 that Gabe mentioned earlier. I expect we will gain more insights in February. Considering the various factors in S&P EMEA, what do you anticipate regarding the $100 million synergy run rate by the end of next year? How should that be progressing? Sorry, I'll stop there.

Yes. And John, Rodger mentioned too, we're on track to getting the $100 million of synergies, and I want to stress by the end of 2026, that would be the full run rate. Year-to-date, we're kind of expecting to have a run rate of $40 million by the end of '25. And the goal would be to achieve that full run rate of $100 million. Now you could say that's a $60 million more run rate you have to go get. And then timing of this, as you can imagine, in Europe, it does take longer to take those costs out and those stranded costs and other synergies that are out there. So you can split the difference and say roughly $30 million will be actually realized in 2026 with the remainder coming into '27 and beyond.

Your next question comes from the line of Anthony Pettinari with Citi.

You talked about potential reacceleration in RPC, which I guess was down low single digits in 3Q and is expected to be down that much in 4Q. In terms of the reacceleration, is that just a large customer getting to kind of a deal completion? Or are there new projects that are in the pipeline? Or are you seeing anything in terms of inventory? So I'm just wondering if you could give any more detail in terms of what drives that inflection? And is that something maybe we see in the first quarter, the first half of '26? Or any further detail there?

Yes. Anthony, the simple answer to that is all of the above. What I can tell you is that the reacceleration of our Snack business is something that can have an immediate impact when it occurs. We expect it will happen, and it's a global trend for us. We're continuing to succeed with our paper solutions in Europe, and we are incorporating those capabilities in the U.S. These are more incremental improvements that build on the size of the business. Winning 50 million units may seem small, but over time, we are observing a positive trajectory that will lead to continued growth. I want to emphasize that we are very optimistic about the paper can aspect of our business, and when you combine that with the synergies from the metal side, we are looking forward to next year and beyond regarding the potential of these businesses.

Okay. That's helpful. And then just switching gears to capital allocation. You talked about getting leverage down to 3.4x by year-end, debt pay down next year. I'm wondering if you could talk a little bit more about the capacity for share repurchases in terms of when you'd be able to really buy back at scale in terms of timing or leverage threshold? Or is there an opportunity to maybe pull that forward given the valuation of the stock? And then I guess, related question, the $100 million run rate synergies that you're going to get in '26, is there a cash cost associated with that that we should think about when we think about that '26 cash bridge?

Yes, Anthony, I'll start with the capital allocation. And that strategy, we were really laid out in our February meeting, but I want to reiterate to you is we are committed to as an organization to getting our debt structure down. We talked about our last call getting our debt leverage ratio to 3x to 3.3x by the end of '26. You can see we'll be at 3.4x by the end of this year. So very strong performance. Once we are at that level, it does offer us the optionality to go do things like share repurchase and other activities. But debt in the near term is going to be our primary capital allocation strategy that's out there. And I'm not kind of delaying the question, but I really want to wait for that road map in February to give you the full capital allocation story that's out there. Now the $100 million of synergies and cost-outs, we have put in a significant amount of money in restructuring charges already to date. We will have to allocate some capital to that in '26. That amount has not been released, and we haven't disclosed that. But I will say there will be capital definitely allocated towards that as a priority to hit those synergies and run rate.

Your next question comes from the line of Mike Roxland with Truist Securities.

Congrats on all the progress. I just wanted to follow up on Europe again. And can you give us some more color on EMEA, S&P EMEA and the cost savings that you're looking to achieve? It seems like the business is facing headwinds that you think are structural given the cost actions you're pursuing and the end market realignment. So any additional color you can provide on the cost you too to take out dollar-wise and whether you think there's a structural shift in EMEA relative to your initial expectations?

Yes, Mike, thanks. This is Rodger. I think if you look at what we've implemented, first, there are the synergies that Paul mentioned, so I won't go over that again. Then there are the additional cost reductions we're currently working on due to insights we've gained in the marketplace. Typically, and we will share more details in February, we are achieving one-year returns on these cost reductions. This includes consolidating our footprint and cutting costs to align with our observed volumes in regions like Africa. We're seeing full one-year returns. In Europe, we're primarily advancing plans that were already in place, focusing on consolidating our metal end production into low-cost facilities. We are also enhancing our capabilities in Eastern Europe where there is growth potential for products like fish and pet food. Overall, we're aiming for balance. In Africa, for instance, we are targeting major cost reductions at our small plant in Thailand and managing inflation concerns in Turkey, all while ensuring profitability aligns with our established European business. I wouldn't say there is anything exceptionally different from our initial plan. The strategic rationale behind the acquisition remains strong, with a commitment to service quality and a robust operational team. Looking ahead to next year, as I mentioned earlier, our focus will be on enhancing our commercial capabilities and excellence. We're expanding our talent in the regional sales team, having brought in new hires in France, Italy, and Germany. By the end of the year, we will have a new commercial leader joining the organization, which I am very optimistic about. Our aim across all aspects of commercial excellence will focus on maintaining price discipline and gaining market share. This is where we will dedicate our efforts, driving the improvements we are targeting for 2026.

How much, given your close involvement in the business, do you think the weakness in EMEA is related to end markets versus commercial capabilities and possibly not having the right talent in key positions at this time?

I don't believe that's the case. When I consider those comments, I think in the long run, it will definitely benefit us. We have some exciting growth initiatives set to launch in 2026. My focus is on recovering from all forms of inflation, sticking to our disciplined approach to capture market share. This year, we've encountered some surprises, including issues like sardine availability in Africa and reduced business in Turkey due to very high inflation. I maintain that the volume this year has unfolded as expected, and it is not a reflection of our commercial capabilities since we have upcoming wins. What matters more is enhancing our service quality, being recognized as the technical service leader, and ensuring we receive fair compensation for the value we provide in the market. The unexpected decline in volume has been discussed, and those factors are now factored into our fourth quarter guidance, which we will expand on in February regarding our outlook for 2026.

Got it. And then just one quick follow-up. Can you help us understand the procurement benefits you expect to receive next year from integrating both the U.S. and EMEA steel procurement teams into a single globally focused organization? The company originally mentioned $20 million from reducing support functions. Is that still the target? Is there any potential upside to that? Any details would be appreciated.

Yes. From the procurement, we said from the very beginning that procurement savings of the $100 million synergies would be about 60%. We said $20 million will come from synergies around support functions. That's still a really good number. What Howard has been talking about and Paul has mentioned before as far as future restructuring, that would be on top of that. But you're right, the numbers you called out are exactly right. Procurement is about $60 million of the full $100 million run rate and other support cost is about $20 million. And then the final $20 million is supplying ends to our Paper Can business that we have not supplied before and other one-off moves that we're making. Again, we're fully confident we can get that $100 million run rate by the end of 2026.

I think, Mike, your comment related to mine about the $20 million that we've expanded costs that we've taken out through the course of this year. That's going to be rolling into next year. And then what I alluded to was that we're on the cusp of looking at even more opportunities corporately. I think, well, it's corporate as well as operationally that we'll be talking about as we go into next year.

Your next question comes from the line of Ghansham Panjabi with Baird.

Given the various factors affecting your portfolio, Howard, can you provide your perspective on the operating environment for both consumer and industrial markets as we approach the fourth quarter and early 2026? I'm interested in how this compares to the trends we've observed in consumer and industrial markets over the past few quarters. Are there any noticeable changes, or are we likely to see a continuation of current trends?

Yes. Ghansham, I appreciate your comments about all the moving pieces. We've been busy for the last 5 years setting our current portfolio. I want to clearly state that this process is complete. This is the first quarter of the third quarter during which you can actually assess our future consumer business, focusing solely on cans. The industrial sector remains as it is. Regarding the consumer side and the outlook into 2026, I don't foresee any significant global stimulus at this time. We've primarily discussed the EMEA region, and I touched on the consumer aspect as it relates to metal, but paper can volumes are stable right now compared to last year, which is influenced by a specific customer situation that we all recognize. Therefore, we are not expecting a notable increase in consumer volumes moving forward. Typically, when there are macroeconomic slowdowns, history shows that consumer spending tends to shift towards supermarkets rather than restaurants. We'll see how this develops. In North America, the industrial sector is relatively flat quarter-over-quarter, and I don't anticipate a significant improvement next year based on current observations. As for Europe, we have noted the situation in EMEA looking towards the fourth quarter. While we usually see a decent uptick in our industrial business as we transition from the August holiday season into September, this time that lift was absent in September, indicating some challenges. There are indeed signs that conditions are not ideal. On the consumer front, this has positively influenced shopping behavior, but it's too early to make any definitive conclusions at this stage.

Okay. Howard. And then in terms of the industrial margin expansion of 380 basis points year-over-year for the third quarter. Was there anything unique that boosted the quarter? I mean it seems like margins were quite a bit higher than the trend line over the previous quarters, just given the price cost that has benefited. Just more color on that would be great.

Yes. Price cost is certainly a factor in this. I want to take a moment to reflect on our industrial business margins, starting from Project Horizon to our current state where we focus on being the world's leader in URB and converted URB products. The investments we made four to five years ago have consistently led to improved margins, particularly this quarter, with price cost playing a role. I must also highlight that our North American team has completely restructured their approach to managing the business. We no longer separate our paper division from our converting division; they now operate as one unit. This has provided a fresh perspective on optimizing our supply chain between the paper mills and converting operations, leading to reduced costs. While there is some consistency in the improved margins, it is important to note that price cost will fluctuate. I am very proud of our team. If I had told you five years ago that we would be operating in the 16%, 17%, or 18% margin range, you would have wondered when it would drop to 13%.

Your next question comes from the line of Mark Weintraub with Seaport Research Partners.

Two quick follow-ups. One, on the synergies or really actually the purchasing synergies. I remember last year, the deal closed a bit late. And so you didn't end up getting them in 2025. I would have thought you would have gotten most of that $60 million in 2026. But the way you talked about maybe like $30 million in total for synergies, it seems like that might not be correct. Can you explain why the purchasing synergies, how much have already come and why more of it wouldn't come quickly in 2026?

Yes, Mark, that's a great question. If you consider the sales cycle throughout the year, procurement accounts for 60% of the total savings. We did see some procurement savings in 2025, so we won't achieve the full $60 million in savings with additional increments in 2026. That's why I provided a midpoint estimate to be cautious, and we'll clarify the complete synergies and roadmap in February 2026. The $30 million figure reflects a conservative approach.

Yes. Mark, remember, we're not just people immediately go to tin plate, but we're talking about all purchasing, so compounds, coatings, indirect, freight and the like. So many of those, we were able to start realizing some synergies this year.

Congratulations on achieving an all-time record quarter. However, your stock doesn't seem to reflect the strong financial performance. I was a bit surprised that there wasn't a clearer communication regarding the share repurchase opportunity. It seems to me that buying back stock could provide a cash benefit greater than your after-tax interest expense, especially since you wouldn't be paying out dividends. Is this hesitation related to debt maturities you need to consider? Why not take advantage of the opportunity presented by the mispriced stock, given the financial performance you're delivering and are likely to continue delivering?

Mark, I would say that stock buybacks are definitely part of our strategy, but we are also considering various options. One of these is to engage in stock buybacks more aggressively, while another is to focus on paying down debt, and the third is to reinvest in the business and restructure. We are weighing these factors to determine which option will provide the best long-term benefits for our shareholders. We have discussed our restructuring plans, and we're starting to see significant business opportunities that may require a substantial capital investment. Our current strategy is to stay the course, continue reducing our debt, and pursue these opportunities. At the appropriate time, we will assess our capital projects, consider share buybacks, and implement restructuring while ensuring we maintain the level of debt that our shareholders expect from us, making the best decision when the time is right.

Your next question comes from the line of Matt Roberts with Raymond James.

Following to Anthony's question earlier on RPC. Any indications on when new international capacity, specifically Thailand will begin to ramp? How many points of incremental volume is expected from that? Or is customer merger timeline still a drag into 2026 and potentially delaying any benefit there?

Yes. So we're ramping up. We are starting up as we speak. So first line is up and running, going through qualifications with the customers. So things are moving forward. What I'll tell you is it was when first presented to us and we've mentioned it to you guys, the intent is this will be the world's largest paper can facility in the market. So we've got to see this transaction close. The expectation would be that, that would remain the objective. But at this point in time, we're just kind of starting up and on hold. So we've got a new facility that's ramping up pretty aggressively in Mexico, and we've got capacity additions that are fully ramping up right now in Brazil. So Matt, I wish I knew. It's all quiet right now until things clearer through their process.

Yes, capital is currently in progress and will extend into the first quarter of next year. You can expect growth to start in the second quarter of next year. Currently, fish and seafood, as well as pet products, each hold about 15% to 17% of our overall market. The pet segment is growing rapidly, and we anticipate it reaching 20%, along with seafood. Both markets are showing promising gains, although our seasonal business, while strong, is quite seasonal and helps us better leverage our operations. Regarding EBITDA margin in that sector, it remains average. We approached 18% in the quarter, which is slightly better than our usual margins, but with the additional investments set to ramp up at the beginning of the second quarter next year.

That concludes our question-and-answer session. I will now turn the call back over to Roger Schrum for closing remarks.

Again, I want to thank everybody for joining us today. And do please save the date for our February 17 New York Investor Day, and we'll be providing you more information on that in the future. Thank you again for your attention.

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