Pactiv Evergreen Inc. (PTVE) Q3 2022 – Earnings Call Transcript

Pactiv Evergreen Inc. (NASDAQ:PTVE) Q3 2022 Earnings Conference Call November 8, 2022 8:30 AM ET

Company Participants

Dhaval Patel – Head-Investor Relations & Strategy

Michael King – Chief Executive Officer

Jonathan Baksht – Chief Financial Officer

Conference Call Participants

Thomas Digenan – Baird

Arun Viswanathan – RBC Capital Markets

Kieran De Brun – Mizuho

Adam Samuelson – Goldman Sachs

Mark Wilde – Bank of Montreal

Kyle White – Deutsche Bank

Bryan Burgmeier – Citi

Operator

Good morning, and welcome to Pactiv Evergreen Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Dhaval Patel. Please go ahead.

Dhaval Patel

Thank you, Operator, and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our third quarter 2022 earnings call. With me on the call today, we have Michael King, President and CEO, and Jon Baksht, CFO. Please visit the Events section of the company’s Investor Relations website at www.pactivevergreen.com and access the company’s supplemental earnings presentation. Management’s remarks today should be heard in tandem with reviewing this presentation.

Before we begin our formal remarks, I would like to remind everyone that our discussions today will include forward-looking statements, including statements regarding our guidance for 2022. These forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by our forward-looking statements. Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as well as our upcoming quarterly report on Form 10-Q for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today’s date, and we disclaim any obligation to update any forward-looking statements, except as required by law.

Lastly, during today’s call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance. Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation to the most directly comparable GAAP measures is available in our earnings release and in the appendix to today’s presentation. Unless otherwise stated, all figures discussed during today’s call are for continuing operations only.

With that, let me turn the call over to Pactiv Evergreen’s President and CEO, Michael King. Mike?

Michael King

Thank you, Dhaval. Good morning, everyone, and welcome. Yesterday, after the market closed, Pactiv Evergreen released solid third quarter 2022 results, and as a result, is raising its 2022 full year guidance to $760 million to $780 million. Coming off the company’s best quarter in its history as a public company, in Q2 we’re continuing to show positive momentum and stability on several fronts, including de-levering the balance sheet and continuing to enjoy improvements in our operational performance.

The company reported revenues of $1.6 billion, a 2% decline versus the prior quarter and up 15% versus the prior year quarter. Adjusted EBITDA was $187 million for the quarter, a $62 million decline from 2Q 2022 levels and a $68 million increase from the prior year quarter. Our volume declines are due to a combination of shifting consumer trends, the impact of inflation on consumables, and our continued focus on value over volume as we have improved our ability to service our customers.

During the quarter, we completed a number of actions that continue to improve our balance sheet and our net leverage ratio. We closed the sale of our Evergreen Asia business and received gross proceeds of $336 million. We also completed another pension lift out to transfer $656 million of gross plan liabilities. This marked our third successful lift out, and we will continue to explore additional opportunities to reduce the liabilities. We are now at a net leverage ratio of 4.5 times versus closing 2021 at approximately 7.6 times. We remain committed to lowering our leverage and reiterate our goal of sub-4 times net debt-to-EBITDA.

Since last year, we have discussed the challenges of the tight labor markets and the overall lack of availability of labor impacting the industry. This has impacted our business and the ability to service our customers. We have also provided steady progress on our actions to improve the labor situation.

Today, we are at target staffing levels in almost every area of the business. Our operations, as indicated by our results, are now stable, and we are in a proactive state managing our labor needs in unison with our customer demand.

In addition, operationally, the company has seen improvements in our overall equipment effectiveness and production throughput. There has been continued improvement in reliability and production in our paper mills as well as our converting operations.

Finally, we have restored our inventories to target levels and improved our overall service and delivery with our customers to pre-2019 levels. Our customers understand the value we provide and appreciate the strides we have made to support our mutual businesses together. By securing labor and improving our production output, we’ve been able to partner with our customers to get the needed support through pricing to enable us to favorably navigate the on-going inflationary environment to a mutual benefit.

As you’ll hear during this call, we are excited about our progress and the business momentum under a strong management team despite the on-going macroeconomic environment. I am pleased to share we have shifted rapidly from a reactive state to a more proactive state in all segments. This is enabling us to favorably diagnose and proactively navigate the on-going challenges across our markets.

I will now turn it over to Jon to give you a more detailed overview of our results before my discussion on outlook and closing remarks. Jon?

Jonathan Baksht

Thanks Mike. I’ll begin by reinforcing Mike’s comments regarding the strength of the quarter and provide a few highlights starting on Slide 7. This year we’ve seen inflationary impacts affect many aspects of the business, most notably in wages, input materials and logistics. Our hourly wages are beginning to moderate, and we’re not seeing the steep increases from earlier in the year. However, employee retention remains problematic as we’re still seeing elevated turnover with new employees at lower skill level positions.

Resin prices for polypropylene are coming down, while we’ve seen some increases in other polymers. The resin costs are mostly passed through to our customers, albeit with a lag. Other input material costs such as energy, chemicals, and wood, have generally continued to rise throughout the year, which has impacted our margins, particularly in the Beverage Merchandising segment. We’re starting to see transportation costs softening following the run-up from earlier in the year.

The inflationary impacts we’re seeing are felt across the industry, and we’re generally seeking to recover the increases with our customers. You’ll note we’re seeing some declines in volumes, and as Mike mentioned, pursuing a strategy of value over volume to preserve margins and returns.

Our outside spending to replenish our inventory from last year’s depleted levels has wound down with a $35 million inventory build this quarter. This is down from $154 million last quarter. We are now at target inventory levels and expect smaller quarterly movements going forward.

Our cash position benefited from the sale proceeds Mike mentioned but was impacted by working capital outflows from a decline in accounts payable of $66 million, largely driven by the paydown of invoices from our recent inventory build. I expect a portion of this to reverse next quarter. Despite these outflows, the company generated $20 million of free cash flow in the quarter and has generated $72 million of free cash flow year-to-date, while also spending approximately $300 million to build inventory.

With LIBOR rising from 0.1% at the beginning of the year to its current rate of 3.86%, interest expense has become a headwind to our cash outlays. While the future path of interest rates remains uncertain in either direction, we’ll look to mitigate some of that volatility. Presently, every 100-basis point change in LIBOR has a $22 million annualized impact to interest expense.

As a reminder, the Fabri-Kal acquisition closed on October 1, 2021, impacting prior year comparisons. I’d highlight that during the quarter, we integrated ERP systems and have largely completed the integration of the two companies. Our synergy targets are well ahead of schedule with annualized synergies this quarter close to $50 million. For future comparison purposes, the Asia business sold contributed $23 million of adjusted EBITDA on a trailing 12-month basis from the closing on August 2, 2022, which implies a 14.6 times sales multiple.

During the quarter, the company committed to divest the remaining closures businesses in Hungary, Spain, Egypt, and Bahrain and has moved these assets to held for sale. The sales proceeds and any future financial impacts are not expected to be material. A final note before walking through the financials, the planned mill outage we referenced on our last quarterly call originally scheduled for Q4 was pulled forward and successfully completed in Q3, further accentuating the operational success this quarter.

Now I’ll turn to Slide 9 and review our financial performance in the quarter versus the prior quarter. Net revenue was $1.609 billion, down 2% versus the prior quarter as price/mix was up 2% due to material cost pass-throughs and other pricing actions, while volumes were down 3% due to the market softening and the inflationary pressures and seasonal trends in food service and food merchandising.

Adjusted EBITDA was $187 million, down $62 million versus the prior quarter due to higher material costs net of pass-throughs, lower sales volumes, and higher manufacturing costs. Our free cash flow for the quarter improved to $20 million versus negative free cash flow of $18 million last quarter, primarily due to the completion of our strategic inventory build.

Moving to Slide 10, we provide a more detailed bridge of our results from the prior quarter. The $31 million sequential decline in revenue was primarily driven by $40 million lower in sales volume and $25 million lower due to divestitures partially offset by $35 million higher price/mix. The $62 million of adjusted EBITDA decline from 2Q to 3Q was primarily due to $72 million from higher material and manufacturing costs and a $23 million impact from lower volumes, which partially offset a $34 million increase from price/mix.

Continuing on Slide 11 and our results by segment for Q3 versus the prior quarter. Our Foodservice segment saw net revenues down 4% due to lower sales volume due to the market softening and inflationary pressures as well as seasonal trends. Adjusted EBITDA for the segment was down $52 million or 32%, due primarily to higher material and manufacturing costs and lower sales volume.

Our Food Merchandising segment saw net revenues up 2%, driven by 6% favorable price/mix, primarily due to higher material costs passed through to customers and pricing actions, partially offset by 4% lower sales volume, primarily due to the market softening and inflationary pressures and seasonal trends.

Adjusted EBITDA for the segment was down 10% due primarily to lower sales volume and higher manufacturing costs, partially offset by favorable pricing net of material cost pass-through.

Our Beverage Merchandising segment saw flattened net revenues with price/mix up 1% and volumes up 5%, primarily due to higher liquid packaging board volumes from sales to the former Asia operations, which replaced a 6% decline due to lower beverage carton sales arising from the disposition of the business.

Adjusted EBITDA for the segment was down 10% to $26 million due largely to higher material costs net of material cost pass-through, partially offset by lower manufacturing costs.

Next, I’ll review our financial performance in the quarter versus the prior year period starting on Slide 12. Net revenue was up 15% compared to prior year as price/mix was up 17% due to material cost pass-through and pricing actions, while volumes were down 8%. Volumes were impacted by a tough comparison to strong sales volume last year as businesses and restaurants reopened post COVID-19 lockdowns in foodservice as well as the market softening amid inflationary pressures in food merchandising and the exit of the coated groundwood business in beverage merchandising.

Adjusted EBITDA improved by $68 million to $187 million due primarily to favorable pricing net of material costs pass-through and the benefit of the Fabri-Kal acquisition, offsetting higher manufacturing and employee-related costs as well as lower volumes. Our free cash flow for the quarter improved by $20 million due to stronger cash earnings combined with lower CapEx, which was partially offset by net working capital outflows.

Moving to Slide 13, we provide a more detailed bridge of our results from third quarter 2021 to third quarter 2022. The year-over-year revenue improvement was driven primarily by $242 million from price/mix and net benefit of $88 million due to Fabri-Kal acquisition, net of the divestiture of our Asia business.

These positive factors were partially offset by a negative impact of $109 million due to lower volume. The $68 million of year-over-year adjusted EBITDA improvement was due to a $236 million benefit from price/mix and $23 million due to Fabri-Kal acquisition and the divestiture of our Asia business, partially offset by a negative impact of $126 million from material costs and $42 million due to higher SG&A and other costs, driven primarily by employee-related costs and $23 million from lower volumes.

Continuing on Slide 14 and our results by segment for Q3 versus the prior year. Our Foodservice segment saw net revenues up 27%, driven by higher pricing to recover material and other cost increases as well as the impact from the acquisition of Fabri-Kal, which more than offset the impact of volume declining by 8% due to the dynamics around businesses reopening that we previously noted.

Adjusted EBITDA for the segment was up $49 million or 77% versus the same period last year, primarily due to favorable pricing net of material costs pass-through and the impact from the acquisition of Fabri-Kal, partially offset by higher manufacturing costs, lower sales volume and higher employee-related costs.

Our Food Merchandising segment saw net revenues up 16%, driven by favorable pricing, primarily due to pricing actions and higher material costs passed through to customers, partially offset by lower sales volume, primarily due to the market softening and inflationary pressures.

Adjusted EBITDA for the segment was up 43% versus the same period last year due primarily to favorable pricing net of material cost pass-through, partially offset by higher manufacturing and employee-related costs and lower sales volume.

Our Beverage Merchandising segment saw net revenues up 5%, driven by 16% favorable pricing, primarily due to pricing actions and higher material costs passed through to customers, partially offset by 6% decline due to the impact from the sale of the Asia business and 5% lower sales volume, primarily due to our exit from our coated groundwood business.

Adjusted EBITDA for the segment was $26 million versus $16 million in 2021, a 63% increase. The key drivers were higher pricing net of material cost pass-through and the prior year cost of $7 million from Tropical Storm Fred, partially offset by higher manufacturing costs, which included $8 million related to a scheduled coal mill outage during the quarter, which we originally expected to be a fourth quarter event.

Next on Slide 15, I’ll highlight our significant deleveraging over the course of the past year due to a focus on adjusted EBITDA improvement and net debt reduction. We ended Q3 with $559 million in cash and $4.2 billion in total outstanding debt. Our cash position benefited in the quarter from the proceeds of the sale of the Asia business. Our net debt at the end of the third quarter was around $3.7 billion. We ended Q3 with a net debt to LTM adjusted EBITDA ratio of 4.5 times, declining for the third consecutive quarter. Additionally, we continue to evaluate our alternatives to reduce our debt levels.

I’ll now pass it back to Mike for further comments.

Michael King

Thank you, Jon. If I could turn your attention to Slide 17 as we move on to our ESG updates. I want to take a minute to talk about our social responsibility key initiative, which covers much of our work under the environment, social and governance umbrella. As we continue building a values-driven business, we are reminded that aligning purpose and performance creates value for companies, their employees, and their communities.

What better way to illustrate our purpose of packaging a better future than to give a big tip of the hat to hundreds of employees who participated in our first Pactiv Evergreen Month of Action. Across North America, our teams organized over 170 volunteering events and food drives for non-profits and food banks in their communities.

In Kalamazoo, for example, our employees gathered well over 5,000 pounds of donations to help relieve food insecurity. And near our headquarters in Lake Forest, over 20 teams participated in packing events with a Northern Illinois Food Bank. We’re still tallying the donations, but I couldn’t be prouder of our people coming together ahead of the holidays to package a better future for many of our neighboring communities and families.

In the last quarter, we also committed to set near and long-term greenhouse gas emission reduction targets. We plan to establish these targets in line with science-based target initiatives. And by doing so, we are doing our part in addressing the global challenge that is climate change.

As it relates to our products, we continue to innovate to meet our customers’ needs. We’ve been working to develop an effective replacement for PFAS, a chemical used in some of our molded fiber products that provides oil and grease repellency. We expect the new line of BPI-certified compostable PFAS-free molded fiber containers and tableware to be released later this year, in time for our customers to comply with a growing number of state regulations banning PFAS in food packaging. As of today, less than 1% of our SKU offerings contain PFAS chemicals, with an ultimate goal to eliminate PFAS from our offerings altogether.

Finally, we’re pleased with the steps we’re taking to build a more ethical, resilient, sustainable, and profitable company. This quarter, we started to look beyond our own operations and expanded audit program for our strategic suppliers and collaboration with Sedex, one of the world’s leading ethical trade membership organizations. These audits should help to give confidence with our customers and inform a sustainable procurement strategy for the future. To learn more, we invite shareholders to view our latest disclosures, including our 2022 CDP disclosures released in July, at investors.pactivevergreen.com in the ESG section.

Now please turn to Slide 18. As we have stated, we are updating our full year guidance range to $760 million to $780 million from the previously communicated range of $750 million to $770 million. This modest increase reflects our confidence in stabilized operations across the organization, along with a cautious view of the current macroeconomic environment. There’s currently less visibility into end market demand due to varying factors including inflationary pressures, along with actions by the Fed to reduce inflation and the impact these actions will have on the broader economy. We plan to stay vigilant and continue to focus on executing our strategy and servicing our customers while generating attractive returns for our stakeholders.

In closing, I would like to thank all of the Pactiv Evergreen workforce for their continued commitment and hard work. I would also like to thank our valued customers and vendor partners for their continued commitments to our mutual success.

With that, let us open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Ghansham Panjabi from Baird. Please go ahead.

Thomas Digenan

Hi thanks. This is actually Tom Digenan sitting on for Ghansham. If so, could you provide more detail on segment volumes in terms of what categories outperformed and underperformed? And then any color on early 4Q trends would also be helpful.

Michael King

Sure. I’ll just comment that by each one of our businesses. The first thing I would say, from a volume trend perspective, there’s no real systemic decline, but there’s really just some things that need to be understood in terms of just kind of three points. In our Foodservice business, we talk about volume for value. And as we’ve improved service levels, really looking at where we’re best to serve customers that are supporting us through price and helping us through the inflationary timeframe that we’re in. We’ve been able to enjoy, as you see in the margins, that support, and we’ve exited low-margin business throughout not just this Q, but prior Qs. That overarch is not just our Foodservice business, but all three of our segments.

And then Q2 versus Q3 from a comparable, I would say the thing to note there is that there is a bit of seasonality in all three of our businesses. And that’s really the large difference with the summer builds. And then from a year-over-year, obviously, Q3 was the start of a large reopening in the U.S. and so difficult comps year-over-year for us in terms of just inventory replenishments and the reopening that started largely in Q3 last year. Food merch [ph] is very stable. I would tell you that, as I noted in Q2, our beverage merchant business is still largely oversold on all products. Hopefully, that helps.

Thomas Digenan

Yes, that’s helpful. And then just for my next one, how should we think about the different cash flow variances for 2023 just in terms of CapEx, cash interest and working capital?

Jonathan Baksht

Yes, good morning. For 2023 we’re not guiding to anything from a cash flow basis for next year, so stay tuned for our next call. We’ll give you some more guidance into next year.

Thomas Digenan

Well good. I’ll turn it over.

Operator

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

Arun Viswanathan

Hey thanks for taking my questions. Congrats on all the progress as we see a nice quarter there. Maybe you could just help us understand, do you expect kind of elasticity impacts across most of your businesses? It seems like you’re holding up pretty well from a resiliency standpoint. We had heard about some weakness in Foodservice. And then along those lines, is your portfolio well positioned in case there is a little bit of a trade down with the consumer? Thanks.

Michael King

Yes. I just want to be careful that for us, as I stated in the last question, we do view our Foodservice underlying demand as stable. While there is some softness out there in other channels, I would say our business largely is stable outside of decisions we’ve made. And I would say that, yes, we are positioned very well for what we’re calling the trade down. Where people are dining out and enjoying the takeout experience, certainly as people’s wallets get tighter, there is a trade down, and we are well positioned to enjoy that with our position in the chains and QSRs.

Arun Viswanathan

Okay, thanks. And then if I could just ask one more on the restructuring actions that you’ve taken, could you just provide an update I guess on how some of those are going? Maybe if you’ve had any new learnings within beverage packaging? I know that you consummated the sale of the asset there, but any other further actions that you’d expect along those lines? Thanks.

Michael King

Yes. We’ve taken a number of actions dating back to the closure of the coated groundwood. We’ve had the divestitures, as you’ve noted. We continue to look for opportunities, certainly. Nothing to share in terms of further decisions in that regard. I would tell you that the challenge is two-pronged. Obviously, as the controllable internal work that we need to do and have continued to do to improve our operations and our mill performance.

But also, commercially, as we get fitness in terms of customer contracts and pricing, we’ve seen that improvement come along as well. We’ve seen great progress in the throughput and the operating efficiencies in our mills. We certainly have invested there, no secret, both in talent and in CapEx, as well as really put a focus on what’s core. And you’re seeing us really look at tightening that business up and staying and trying to tighten our focus to our core assets. And I’d say that’s our strategy, overarching strategy, and that hasn’t changed.

In terms of further divestitures or anything around the strategic review, again, as I’ve stated before, it’s an iterative process. As decisions are made and we do decide to move forward on things, we will be open about those. We just have nothing further to share at this time on that.

Arun Viswanathan

Thanks.

Operator

Thank you. The next question comes from Kieran De Brun from Mizuho. Please go ahead.

Kieran De Brun

Hi, good morning. Just I was wondering if you could talk in terms of pricing initiatives and what you’re seeing in terms of the input costs. And on the raw material front, how some of those raw materials have maybe changed in 3Q versus 2Q? And then what your kind of pricing pipeline looks like through the rest of next year and your ability to maintain some of that price if we do get into a softer kind of volume environment with your customers? Thank you.

Michael King

Yes, just to level set, so we — twofold. Obviously, we have our contractual pass-throughs, which we continue to recover 100%. And as far as our ability to continue to stay elastic in terms of inflationary recovery, we’ve made great strides in all three of our businesses to continue to stay whole in that regard. As it relates to our input costs, Q3 I think we continue to see largely in our food businesses, particularly resin stabilizing to falling off in some regards in terms of cost.

And then I think we continue to expect the same throughout the end of the year. As it relates to beverage merchandising, a bit different. We continue to see a delta between our costs continue to go up in that business in terms of our input costs. It’s a little bit different than what you’d see in our food businesses. All the fiber energy and input costs that do impact natural gas, that impact that business, continue to go up and are headed in a different direction. We still have a delta on that recovery, albeit indexed and fully recoverable.

Kieran De Brun

Great. And then just a quick follow-up on the current debt profile. You’ve done a really great job of getting that down to 4.5 times. It seems to be trending towards that kind of 4 times below level within the next year potentially. How do we think about your capital deploying priorities post kind of hitting that lower I guess below 4 times target on a go-forward basis? Thank you.

Michael King

I’d say our deployment targets are largely not different than today. I would say that our focus continues to be on returning EBITDA returning projects. The geography of our capital is largely around areas of automation. For instance, certainly looking at growth capital where we’re able to take profitable volume and partner with our current customer portfolio and new customers as well as really look at, similar to what we’ve done recently with Fabri-Kal, if the right opportunity presented itself, we’d certainly want to be at the ready and continue to have an ear to the wall on what other assets might become available for us to grow inorganically as well. That is all — and Jon, I’m sitting here looking at Jon, who is certainly — I’d be remiss if I didn’t say that’s all — the umbrella overall, that would be we do wish to continue to de-lever. In terms of usage, that’s our priority is to get to that below 4 times.

Jonathan Baksht

And I’ll just expand a bit on the deleveraging front. There’s two components of the leverage. This point is obvious, but growing EBITDA is one way to achieve that. As we look at those capital projects that Mike just mentioned, we are looking to grow that EBITDA, increase our margins and our returns in that process. So that’s one aspect of the equation. But the other is just the absolute debt levels. We do have some cash on the balance sheet that’s certainly in excess of what it takes to run the operations, and so we’re looking at alternatives that we can use some of the excess cash to continue to bring the absolute debt levels down as well.

Kieran De Brun

Thank you very much.

Operator

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

Adam Samuelson

Yes, thank you, good morning. I guess the first question is just thinking about the updated guidance, which for the fourth quarter implies a sequential decline of $5 [ph] million to $45 million or so of EBITDA. And I just was hoping to get some clarity on kind of the key moving pieces within that relative to the third quarter performance. I presume there’s some seasonality. I don’t know, it’s been hard to parse that from your historical results in the last couple of years given all the other external factors going on. But help us think about kind of expectations on volume, price, cost, other discrete factors that would be driving that kind of sequential decline in the fourth quarter.

Michael King

Yes. I’ll give the — yes. If you go back to kind of Q3, Q4 of 2021, certainly coming out of the pandemic, and you talked about external factors. Certainly, that masks any seasonality that our business would normally have. So typically, our Q4 is our softest quarter of any calendar year. And in the recent Qs, we’ve seen some choppiness in what normal looks like really driven by the consumer.

And that grand reopening that happened last year with a lot of the mandates coming off and mobility increasing drove a spike in two things. A spike in our customers’ pull-through because they were trying to right-size inventories, and also a spike in certainly usage, and so the consumer was very active. That’s largely the reason for the Q-over-Q change. This year, I would say the guidance increase is largely not volume driven, but it’s really more around our move to put the — we pulled an outage ahead in our beverage business, and so having reliance on our improvements in the operations, we certainly wanted to make sure we shifted that. It’s a modest increase. And we’re also cautiously optimistic about volumes in Q4 as well. While we’ll see some normal seasonality, we still have, as I’ve mentioned previously, stable segment volumes, stable demand in every one of our segments.

Adam Samuelson

Okay. And then just as a follow-up, given the actions that you’ve taken this year on kind of getting your own inventory back in a better position and I think the way you framed it is value over volume. Can you just quantify kind of the level or the amount of foregone sales this year from those actions as we think about kind of lapping that internal rebuilds in 2023?

Jonathan Baksht

Yes, Adam, I don’t know if we really cut the business that way in terms of foregone sales. I would — the broader piece that I would tell you is that it is a strategic decision as we’re looking at targeting, as Mike said, targeting the right customers. Those that will help us with managing through the inflationary environment we’re in and really doing that value over volume selection. But in terms of those customers that — or the piece that is falling away, it is a lower margin business, and so it’s not overly impactful from an EBITDA standpoint as it is just a volume perspective would just be my broader answer to that.

Adam Samuelson

Okay, all right. That’s helpful. I’ll pass it on, thanks.

Operator

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

Mark Wilde

Thanks, good morning Michael. Good morning, Jon.

Jonathan Baksht

Good morning.

Mark Wilde

Jon, just curious for my first question, as you think about that increased guidance for the full year, is there anything in there incremental that came from just your view of potential cost benefits here in the fourth quarter, particularly with resin coming down?

Jonathan Baksht

No. From a year standpoint, not particularly from that beat. I think the beat, as we’ve talked on, is probably more of an operational basis that we’ve been able to continue to improve on that front. A lot of the resin pricing declines is something that we’ll see probably more pick up into, going into next year than seeing it in Q4.

Mark Wilde

Okay. And then I’m just curious, over in beverage merchandising, we’ve just had a dizzying number of price increases announced on kind of bleach paperboard and paper. I’m a little surprised that you’re not seeing kind of better margins in that business with all of those increases. And I’m just curious, how much of a lag is there in terms of raising price on kind of both internal and open market sales in that business? And is that a factor in kind of margins still being down here in the mid-single digits?

Michael King

Yes. We haven’t disclosed the lag effect in that business, but we are not on the right side of price cost just because we haven’t caught up in terms of that recovery, I can say that. And just as I’ve said it in other calls and just for transparency, we certainly do have more work to do on the commercial front with contracts falling off and some of the legacy commercial deals that were done in that business that will allow us to get back to what you’ve identified as a margin, yes.

Mark Wilde

And then finally, Michael, just any color on this closures business? I have to say, I was a little surprised. I didn’t realize the offshore extent of that closures business.

Michael King

Yes. I mean not knowing what color you’re looking for, but I can just tell you that noncore business for us, certainly a legacy set of orphan facilities that really we are managing very insignificant in terms of our earnings and really was about getting it in the right hands and not really about us continuing to be distracted with it.

Mark Wilde

That’s all. Thanks very much.

Operator

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

Kyle White

Hey good morning. Thanks for taking the question. A question for you, Jon. Now that you have almost half a year under your belt here, where do you see the most opportunity to create value for the company? Where do you see the most room for improvement? And what might be your focus going forward?

Jonathan Baksht

Sure. Good morning, Kyle. I think that’s a great question. It’s — there’s a couple of different aspects. One, and I’ll build on a comment Mike made earlier around capital deployment, really having a really focused approach to capital deployment, returns-based methodology to really prioritize those projects and focus on things that are going to continue to grow the business, but at a better return and a better margin. I think that’s one area.

In terms of just operational improvements in terms of the core businesses, continue to evaluate those. But there are areas where we can certainly run the business more efficiently and continue to build margins. And frankly, just streamline some of our operations. Operational kind of enhancements I would say in that area.

And then I think lastly, just around some of the things we’re talking about in terms of deleveraging the business, I think working on ways to reduce our cost of capital, which is a bit challenging with some of the external macro headwinds in the market in terms of rising interest rates, but trying to reduce that cost of capital, reduce the volatility in the business.

And I think nothing to announce right now, but there are some things that we’re looking at in terms of ways that we can reduce that variability in the business. And I think I’ve talked about it with you and others as I’ve entered the company, this business does have a very recession resilient, reliable cash flow stream.

But the volatility in the cash flow from quarter-to-quarter doesn’t necessarily represent the underlying stability and strength in the business. And so very much focused on continuing to drive ways that we can reduce that volatility in the cash flows from a quarter-to-quarter basis to help reduce the volatility and then lower our cost of capital.

Kyle White

And then just a point of clarity on the maintenance. Just trying to understand, was the cold mill outage originally planned for the fourth quarter? And then was that total impact $8 million related to this? Or is there more that drags into the fourth quarter?

Michael King

I think you’ve got it right.

Jonathan Baksht

It was completed in Q3.

Michael King

It was scheduled for October, and we did it in August.

Kyle White

Perfect. I’ll turn it over.

Operator

Thank you. The next question comes from Anthony Pettinari with Citi. Please go ahead.

Bryan Burgmeier

Hi, this is actually Bryan Burgmeier sitting in for Anthony. On the last call, I think you mentioned $200 million free cash flow guide for 2022. I’m just wondering if that’s still a good number to use. Just thinking about your inventory levels into yearend, which seem normalized now, but I’m not sure if Pactiv will see a cash benefit from lower resin prices.

Jonathan Baksht

Yes. Good morning, Bryan. Let me just clarify something from the last call. I don’t believe we guided to $200 million of free cash flow for the year. We did make some comments and provided just a general area of mid-100s as probably an area where we would see free cash flow. As we stand today, again, reiterate a couple of components. One, we did spend $300 million on building inventory. But — and we’re $72 million free cash flow positive year-to-date, so three quarters in. As we stand today, we are still targeting being north of $100 million in free cash flow. I’m not sure if I would guide to the mid-$100 million, but we’re somewhere north of $100 million.

And I think the real piece there that’s probably a delta quarter-over-quarter is just the working capital components and seeing how that ends up the year. Given the build in inventory that we saw last quarter, you might have seen this quarter, and I mentioned this in the prepared remarks, there is a bit of a payables piece that is a bit of a catch up that hit us this quarter. I am looking for that to unwind this quarter to more normalized non-inventory working capital levels, and so that piece is where we should see some more free cash flow generation in the back — in this last quarter.

Bryan Burgmeier

Got it. Thanks for the color there. Yes, I made a mistake on the $200 million, so thanks for clearing that up. And then just for a follow-up, Foodservice volumes are down like mid-single digits year-to-date. And I’m just wondering if it’s possible to parse out maybe how much of that is just from Pactiv’s internal inventory decisions versus how much of that is due to declines seen at your customers’ demand levels?

Michael King

Yes, we’ve not disclosed that. I would say generally, the volumes at our customer levels are pretty stable. You could say the lion’s share of those declines are really self-inflicted or choices we’ve made generally?

Bryan Burgmeier

Thanks. That’s it from me. I’ll turn it over.

Operator

[Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back to Mr. Michael King for any closing comments.

Michael King

Yes. Thank you, Stephen. So I’d just like to personally thank everyone for joining today’s call. We certainly are excited about the progress we’ve made thus far and recognize that we still have much to do on several fronts. We certainly recognize that there’s a significant amount of value that we continue to unlock and can unlock and that is creating the kind of momentum and the culture in this business. And we’re winning today versus where we were just a short 12 months ago. This management team is very committed to our strategies. Our strategies are paying off. And as I’ve noted on today’s call, it’s great to be in a proactive state versus just a short 12 to 18 months ago. With that, again, we thank you for your support. We thank you for following and being a part of the journey. And as always, thank you for supporting Pactiv Evergreen. That will conclude today’s call.

Operator

Thank you. The conference has now concluded. Thank you for attending the presentation. You may now disconnect.