Welcome to the Second Quarter 2021 Sunoco Earnings Conference Call. At this time, all participant lines are in listen only mode. After the presentation, there will be a question and answer session. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to Roger Schrum, Vice President of Investor Relations.
Thank you, Liz, and good morning, everyone, and welcome to Sunoco's 2nd quarter investor conference call. Joining me today are Howard Coker, President and Chief Executive Officer Roger 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 sunoco.com. In addition, we will be referencing a presentation on our 2nd quarter results, which was also posted on our website this morning. Before we go further, let me remind you that today's call and presentation contains 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 let me turn it over to Julie.
Thanks, Roger. I'll begin on Slide 3, We see that earlier this morning, we reported a 2nd quarter loss on a GAAP basis of $3.34 per share And base earnings of $0.84 per share, which is just shy of the midpoint of our guidance range Of $0.82 to $0.88 per share. Despite strong volume growth in many of our businesses, Our 2nd quarter operational results were challenged by unparalleled raw material and other operating cost inflation That did outpace our significant price increases and solid productivity results across our portfolio. In terms of the $4.18 difference between base and GAAP EPS, by far, the largest item was the $4.04 Non cash charge related to the settlement of approximately $1,400,000,000 of U. S.
Pension liabilities As our pension termination process substantially wrapped up in June, this charge was just below the estimates that we've been communicating for a while. The next largest item also relates to a unique transaction in the Q2. In May, We completed a tender offer for a portion of our 5.75 percent bonds due in 2,040 That resulted in a debt repayment of $63,000,000 This transaction also resulted in an after tax loss On the early extinguishment of debt of $0.15 per share. Next, you see our adjustments for normal Non operating pension costs at $0.06 per share as well as $0.02 related to net favorable restructuring and asset impairments. The last item, all other, at $0.05 per share is mostly composed of A $0.03 foreign exchange hedge gain on our euro denominated loan repayment and another $0.03 gain On a favorable foreign VAT refund plus interest.
So moving to our base income statement on Slide 4 And starting with the top line, you see that sales were $1,383,000,000 up $138,000,000 or 11 from the prior year period. I'll review more details about key sales drivers on the sales bridge in just a moment. Gross profit was $263,000,000 $15,000,000 above the prior year quarter. This performance resulted in a 19% gross profit as a percent of sales, which was 90 basis points below the Q2 of last SG and A expenses net of other income were $134,000,000 An increase of $13,000,000 year over year. This increase was expected and key drivers were Higher expenses for normalized management incentives, increased group medical spend and higher costs for property insurance Net interest expense of $17,000,000 was $2,000,000 lower than last year due to reduced debt balances and a more favorable mix of fixed and floating rate debt.
Income tax expense of $30,000,000 was $1,000,000 Higher than last year due to our higher pretax profits somewhat reduced by a modestly lower effective tax rate. Our current quarter's base effective tax rate was 26.4%. Moving down to net income. Our Q2 2021 base earnings were $85,000,000 compared to $80,000,000 last year. Now looking at the sales bridge on Slide 5, You see volume mix was higher by $95,000,000 or 7.6 percent for the company as a whole, With our Industrial segment and all other businesses seeing widespread recovery from the pandemic, somewhat reduced by lower volumes as expected in our Consumer segment.
Consumer Packaging volume was down $12,000,000 or 2.1% as our global rigid paper containers demand declined almost 6%. This was partially offset by solid growth in our plastics food businesses, which were up nearly 5% And modest recovery in our flexibles volumes, which was partially offset by an unfavorable mix of sales. Moving to industrial paper packaging, volume mix was up $65,000,000 or over 14% With a surge in post COVID economic recovery across most of this business. Our global Tubes and Coors Franchise rose over 13% and Global Paper grew by nearly 4%. In addition, Our cones and protective fiber businesses saw outstanding rebounds in demand.
And finally, our all other group saw volumemix growth of $42,000,000 or 32% When excluding D and P Display and Packaging from 2020. This significant recovery was very broad across these businesses. Now moving to price, you see that selling prices were higher year over year by $89,000,000 As we increased prices to battle inflation globally, this was mostly driven by our Industrial segment As we work to recover escalating OCC, freight and energy costs, we are proactively increasing prices in our Consumer segment and all other group, the timing of contractual price resets pushes some recovery of cost inflation Into the 3rd and 4th quarters. Moving to acquisitions and divestitures, you see a top line Negative impact of $80,000,000 which is driven by the recent divestitures of our Display and Packaging, European 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 $34,000,000 With the primary driver being foreign exchange translation 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 $95,000,000 Combined with the impact of mix had a positive impact on operating profit of $28,000,000 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 Q2, we had $26,000,000 of unfavorable price cost With most of this impact falling in our Consumer Packaging segment. Within our Consumer businesses, The inflation of resin pricing is much greater than expected and resulted in higher material costs of Approximately $15,000,000 in the 2nd quarter. In our all other business group, resin is also a key raw material And this inflation drove almost $10,000,000 of higher costs. In our Industrial segment, we were chasing higher OCC pricing during the Q2, but were slightly positive in price cost due to sales price increases.
As usual, there is a slide in the appendix that shows recent OCC price trends and you'll see there that Southeast OCC official board market pricing started the quarter or came into the quarter in March at $90 per ton Until market pressures cause a jump to $125 by June, resulting in an average of $107 per tonne In the Q2, this represents a $7 increase relative to the Q2 of last year And importantly, a $20 sequential increase over this year's Q1. Next is the impact of productivity, which includes all results from our productivity actions, including manufacturing, Procurement and fixed cost. You see that our total productivity was a solid $22,000,000 year over year With a favorable impact across all three segments, our productivity actions remain a very important focus area across our business The $6,000,000 decrease in operating profit is the net impact from the display and packaging divestitures and the Can Packaging acquisition. And finally, the operating profit change in foreign exchange and other Was unfavorable by $16,000,000 with various moving pieces, but mostly within SG and A expenses. Moving to the segment analysis on Slide 7, you see that consumer packaging sales were up over 4% Driven by higher selling prices, positive foreign exchange translation and the addition of can packaging, Somewhat reduced by lower volumes as COVID eat at home behaviors have moderated from the pandemic driven highs of last year.
Consumer segment operating profits fell by 29% driven by significantly unfavorable price cost and the softer demand. Our Consumer segment margin declined to 10% versus the Q2 of last year when the margin was a very strong 14.7%. Our Industrial segment's sales grew by almost 34% Due to year over year price increases, strong recovering demand as well as the impact from positive foreign exchange translation, Industrial's operating profit surged by 74%, driven by the significant global turnaround in demand And the associated leveraging impact on manufacturing productivity. The segment's earnings were also lifted by favorable price cost and procurement productivity. Our Industrial segment's operating profit was 9.5%, A strong 220 basis point increase when compared to 7.3% in the Q2 of last year.
And finally, all other sales declined by nearly 19%, driven by the sale of our display and packaging businesses, but significantly offset by the great demand across this segment's businesses. Despite the sale of Display and Packaging, Operating profit increased by 23% due to the strong demand and the associated positive impact on productivity. Operating margins improved to 6.2%, 2 10 basis points higher than the prior year's 4.1%. For the total company, sales were up 11% and operating profits improved by 1.6%, resulting in a company wide operating profit margin of 9.3%. Moving to cash flow on Slide 8.
In the middle of this slide, you see that our year to date Q2 operating cash flow was $102,000,000 compared with $282,000,000 last year, a decrease of $180,000,000 The primary driver to these lower cash flows was our contribution in the Q2 of $133,000,000 related to our pension settlement and termination process. In addition, we consumed $19,000,000 more cash In our net working capital balances, which was driven by both inflation and increased level of business activity, Overall, our management of net working capital remains very strong. So back to the top of this slide, We had year to date GAAP net loss of $262,000,000 compared to a profit of $135,000,000 in the prior year period. Most of this decrease was the $406,000,000 after tax non cash settlement charge related to our pension termination process. Moving down to our year to date CapEx spend.
Our net spend was $93,000,000 so far this year compared to $72,000,000 for year to date at Q2 2020. This $21,000,000 increase is mostly due to spending on Project Horizon. We do expect our CapEx spend to ramp up Over the balance of this year, as we progress on Project Horizon and other important projects. Howard will be providing additional comments about Project So this takes us to free cash flow of $9,000,000 compared with $210,000,000 For the same period of last year, again, mostly driven by the pension termination process, increased working capital and higher CapEx spend. Finally, we paid cash dividends of $90,000,000 year to date this year compared to $86,000,000 for the same period last year.
On Slide 9, you see that our balance sheet And our liquidity position remains very strong and reflects several strategic actions executed during the Q2. Our Q2 2021 consolidated cash balance was $264,000,000 A $301,000,000 decrease from year end 2020. This decrease was driven by significant deployment of cash, which included The accelerated share repurchase of $150,000,000 the tender offer for our 2,040 bonds, which retired $63,000,000 of principal The repayment of our maturing $180,000,000 euro denominated debt And finally, the $133,000,000 of pension contributions. These cash usage were somewhat offset By the display and packaging U. S.
Gross proceeds of approximately $80,000,000 and operating cash generated by our businesses. Our consolidated debt at the end of the second quarter was approximately $1,600,000,000 a decrease by our return to the commercial paper market. Finally, on Slide 10, For your reference, we've included our quarterly earnings history for the last two years at the top. You can note that the now divested display and packaging businesses Contributed 0 $0.08 $0.09 of EPS in 2019 2020, respectively. But focusing on this year and our Q3 guidance, you see that our range for Q3 base EPS It's $0.87 to $0.93 per share.
As Howard will describe further in his comments, this guidance assumes continued Solid demand for our products, but also continued inflation headwinds. I'll highlight that our base earnings effective tax rate in the Q3 is estimated at approximately 21.5%. Embedded in this assumption Our approximate 26% tax rate on base earnings and the positive impact from a unique one time $5,500,000 release of a reserve for uncertain tax positions. Specific to our expected full year effective tax rate, We continue to assume a rate of approximately 25%. This is unchanged since our original guidance in February and has always included the impact of this $5,500,000 benefit.
We were previously uncertain of the timing, but now have visibility for the Q3. You also see on the slide that we are not changing our full year base earnings per share guidance Range of $3 to $3.60 I'm sorry, $3.50 to $3.60 And we're also not changing our full year free cash flow guidance of $270,000,000 to $300,000,000 which does exclude the $133,000,000 of pension contributions made in the Q2 to fund our U. S. Pension liability settlement. So this concludes my review of our 2nd quarter results and our outlook for the Q3 and full year.
So I'll turn it over to Howard.
Thank you, Julie, and good morning, everyone. Let me provide you with my thoughts on our Q2 performance, also give you a brief update on Project Horizon And our new sustainability commitments. I'll close with what we see entering the second half of the year. Our balanced portfolio of consumer and industrial businesses did well in the Q2 as we were well within our guidance range Despite unprecedented inflation and some lingering effects of COVID-nineteen, where there remain lockdowns in parts of Asia, Europe And Latin America as well as hotspots here in North America. Our Industrial segment and all other group of businesses Experienced double digit volume growth during the Q2 with demand returning to near pandemic levels.
As we anticipated, consumer volumes normalized from the pantry stocking record set during the Q2 of last year, Although demand remains above pre pandemic levels. As Julie mentioned, our biggest challenge in the Q2 and frankly, the rest of 2021 It's battling significant raw material and nonmaterial inflation. In our consumer business, we have seen some resin prices Nearly double from last year's level, while film, metals, paper, packaging and freight are up mid single to double digits. Old corrugated containers, our largest raw material have moved up from $85 a ton in January $145 a ton in July. We now expect our external expenses excluding OCC and label to rise an additional 2.5% over our prior estimate made just last quarter.
This means our costs globally will increase approximately 8%. In addition, as Julie noted, We've seen S and A expenses increase due to higher property insurance, more normal medical and incentive costs and additional BT costs. Having said that, I'm extremely proud of how our global team has worked to pull all levers to cover these costs, including driving productivity, controlling expenses, Implementing necessary price increases to fully recover all commodities and other cost increases. The fundamentals of our business are in good shape. Volume, productivity, working capital, cash management, All are exceeding expectation.
Inflation is the issue. Now let me switch gears and give you a brief update on Project Horizon. The $115,000,000 conversion of our number 10 corrugated medium machine to a state of the art uncoated recycled board machine With approximately 180,000 tons of annual capacity, we now expect the conversion to be completed by the end of the Q2 of 2022 And there are a number of significant construction projects underway that will modernize the infrastructure of the entire complex and allow for more efficient handling of raw materials and finished goods. A key element of Project Horizon is construction of a new stock prep system to Approximately 6.50 times per day of recycled fiber to the rebuilt number 10 machine and other harsh roll cylinder machines. The new stock prep system will allow for increased consumption of lower cost mixed paper along with OCC.
We expect this system to be operational by the end of October. As previously announced, we expect to exit the corrugated media market by early 20 22 to allow time for the conversion and our strategy is to keep our URB capacity neutral at approximately 1,200,000 tons. As a result, we recently announced that we expect to permanently shut down our Hartsville number 1 and number 9 machines, Which will reduce annual capacity by approximately 70,000 tons. The exact timing of these closures will depend on market conditions As well as the start up of the converted number 10 machine. As a reminder, last year we permanently shut down a 30,000 ton per year and our 95,000 ton per year Trent Valley, Ontario paper mill, which That particular machine produced both recycled linerboard and URB.
Project Horizon is expected to Drive approximately $30,000,000 in annual cost savings by 2023, ensure the long term viability of the Hartwell Paper Mill Complex I placed our U. S. And Canada Mill Systems into the top quartile of performance from cost perspective. More and more investors are asking us about sustainability, so I thought I would provide some updates regarding new commitments we have made to reduce our environmental footprint. I think we can all agree that packaging plays a fundamental role in providing sustainable, safe and hygienic delivery systems for food, medicines and other essential products around the world.
As a top recycler in the U. S. And the global leader in the production of recycled paperboard, along with providing a diverse mix of consumer, Industrial Healthcare and Protective Packaging. We believe it is our responsibility to address environmental challenges such as climate change based on data driven scientific criteria. While we have reduced our normalized greenhouse gas emissions by approximately 25% since 2009.
We're committed to doing more. After much research and planning, We have set ambitious new targets to reduce our global greenhouse gas emissions in line with the Paris Climate Agreement To limit global temperatures to warming to well below 2 degrees C above pre industrial levels. Specifically, we've committed to reduce absolute scope 1 and 2 greenhouse gas emissions by 25% by 2,030 from a base 2020 baseline. We have also committed to reduce absolute scope 3 greenhouse gas emissions by 13.5%. In addition, we're actively studying necessary operational changes, technology developments and market changes that would Be required to achieve net 0 greenhouse gas emissions by 2,050.
I'm pleased that our targets have been reviewed and validated by the science based Target initiative. To drive compliance of our goals, we'll begin incorporating our sustainability and environmental metrics into each of our business units' plans and management's incentives. To help our customers achieve their sustainability targets, we continue to expand our EnviroSense line of more sustainable packaging that incorporates increased recycled content and improved recyclability. EnviroSense is represented across our portfolio from rigid plastics to flexibles to our iconic paper containers. In fact, we're working with customers in Europe to transition their products into our Envirocan paper containers today.
We expect this trend to continue. We'll be providing more detailed information on all our environmental, social and governance activities, both from a commercial and corporate perspective, next week We published our Annual Corporate Responsibility Report. We hope you'll take some time to download and better understand our commitments to our purpose, our people And our planet, which happens to be the title of our new report. Let me close by going over some of the things we're seeing heading into the second half of the year. It's been said that the only thing we know about the future is that it's going to be different.
Clearly, what we were expecting just 6 months ago around inflation It's different than what we're seeing now. As we enter the Q3, we remain confident that our business will continue to benefit from the post pandemic economic In our consumer related businesses, we expect volumes to remain above pre pandemic levels despite more Normalized demand for food packaging as consumers moderate their at home eating patterns. However, we also expect certain COVID impact markets such as confectionery, foodservice and even construction products should continue to benefit. We also expect further recovery in our industrial markets as illustrated by the historically high backlogs for our paperboard globally And demand for global tubes, cores and cones, which are strengthened strengthening to pre pandemic levels. Our biggest challenge will continue to be managing and recovering escalating raw materials and nonmaterial inflation.
We believe prices for most resins are nearing a peak and prices could begin to ease into the 4th quarter. Recovered paper prices on the other hand may still rise this quarter due to strong domestic demand. That said, we still believe OCC prices will follow historic patterns and likely decline in the Q4 as collections improve and demand should slow. We're currently behind the price cost curve in several of our businesses. However, price recovery mechanisms, including announced price increases, should allow us to fully recover these costs over time.
We believe Sunoco is well positioned given our resiliency over the last year and improving trends in our primary served markets. Our strong financial position supports our value creation strategy to invest in ourselves to drive growth and margin improvement, while consistently Returning cash to shareholders. Now with that operator, we would be pleased to review any questions.
Our first question comes from George Staphos with Bank of America.
Hi, everyone. Good morning.
Good morning, everyone.
Thanks for taking my question. Thanks for the details. Just a quick question maybe to start for the Q3, Howard And Julie, could you give us your rough approximation of what you think price cost will be either In 1,000,000 of dollars or just from an EPS standpoint. And related to that, just for comparison purpose, I think you said The net Display and Packaging divestiture divested businesses were something around $0.08 or $0.09 a quarter, if I heard you correctly. Would that be Fair as an adjustment factor we should look at for the Q3 as well or let me know what should be the case there.
So that to start.
Yes. I think you're right on the D and P side. But based on specificity, I will pass on to Julie.
Thanks, Howard. And hi, George. Yes. So yes, you're right. The divestiture of D and P, we had a little bit of offset from the Can Packaging acquisition, so call it all of our M and A There is about $0.08 of kind of a call it a headwind, a pullout from Q3 of last year.
And from a price cost perspective, I'd say we are expecting that to continue to be slightly negative In the Q3, as we obviously, and Howard and Roger can provide more color, obviously, a lot of dynamics going around Contract reset timing around price increases as well as just open market price increases. But, I think nonetheless With the inflation we continue to expect, still slightly negative year over year.
Okay. But that implies that you'll see some fairly good improvement sequentially in price cost 2Q to 3Q. And should we assume that both industrial and consumer are slightly negative on price cost? Or can industrial keep its net positive as it was in 2Q, on a price cost basis in 3Q?
Yes. We are expecting industrial to stay slightly positive price cost, although, I mean, there's It could be neutral again, the OCC headwinds. Roger and Howard can talk a little bit more about that. Obviously, kind of uncertain there, but upward price increases. And so it's I think puts and takes quite frankly across the segments, it really is going to depend on The continued inflation in resins and OCC, especially, but I don't know if Roger or you want to add any more color on that?
On the consumer side, George, as you would expect, fairly significant price increases going through in July. Most of our major CPGs in the consumer business, we have March, April, May increases. We calculate in June. We put that in force in July. So we saw more increases in June July.
So we will still see some negative price cost in consumer around resin. In the Q3, we expect
Okay. Thanks for that, Roger. My last one and I'll turn it over. Can you reflect on what you've learned about your Consumer Packaging businesses And kind of the top 2 or 3, 1, as we look out the next several years, right, paper cans, composite cans At a surge and now they're normalizing, obviously, there's a lot of margin in that business. Flexibles has remained somewhat Pressures from a volume standpoint, although a lot of that is the convenience angle and confectionery and you're seeing growth in consumer.
What do you think is the right growth outlook for those businesses looking out the next couple of years? And how much do you think the consumer has Maybe readopted, what increment to growth normalized do you think you've gained in that business relative to what would have been the case pre COVID? Thank you very much and good luck in the quarter.
Thanks, George. I'm not going to try to forecast the exact percentage, but just talking generally, If you talk about our paper can business, as we noted, volumes are ahead of 2019 levels. We do think there's been continued adoption here in North America in some of the categories. What's really exciting at this point in time is what Seeing on an international perspective, the anti, let's just call it sustainability efforts, Where our funnel is continuing to build and drop through in terms of folks wanting to Switch over to a paper container from another substrate. And it really is an exciting Opportunity.
If we look at on the can side of Asia, we've seen double digit growth just quarter over quarter over quarter for a number of years now, And we expect that to continue as well. Flexibles, trays, the plastic tray business, We're really happy with how that business, specifically Flexibles is being managed right now. Relatively flat in the quarter, but we saw really good productivity throughout the business. We're going to see pickup, I think, As we head into the future where we saw softness in confectionery, other convenience and holiday related Products, it was actually a bit of a drag on that business. So we expect that to be on a positive slant as we move forward.
And I noted quickly about our plastic food frozen sector. That's the one that's really interesting that it's actually The volume has actually tracked ahead of last year during the pantry stocking. I think that one's carrying probably more long term New consumer activity than any other. And the work from home, They will settle down, but there will be more people working from home than ever. And I think that just because these consumers They've been driven to the market through pantry stocking.
They're finding the product is good. They'll be working from home. They'll be grabbing frozen Out of their freezer. So really feel very, very bullish about the consumer Sector in totality, not through just the end of this year, but into the future.
Thank you very much.
Our next question comes from Josh Spector with UBS.
Yes. Hey, guys. Thanks for taking my question. Maybe just to follow-up on some of the sequential bridging. I guess if I listen to what you're saying about volumes being consistently strong, You're talking about things getting better.
You're getting pricing in the second half, but your updated guidance kind of implies Flattish operating income in 3Q and maybe similar for 4Q. So what are the incremental negative factors in the second half Which hold back you from perhaps lifting guidance versus prior expectations?
Josh, really it's just the continuation and lag of Recovery of this hyperinflation period that we're in right now. I think Roger did a good job in explaining, particularly resin. I mean, that's the one that As escalated the most, we have solid recovery mechanisms. It's just timing. And I think as Roger pointed out that it's on average, we get 3 months in arrears with the 4th month or the month prior to the quarter is the calculation month.
So as we look at Q2, 2, inflation that we saw in June is going to carry into Q3, And we still are expecting to see inflation in early Q3, with that Moderating as we end that quarter and go into Q4, and that's how we're expecting things to play out.
So just so I understand, that GAAP doesn't get any better sequentially, it still remains similar to what it was in 2Q and 3Q because of that catch up?
Yes. That's exactly the point.
Okay. No, I appreciate that. And just one other question just On the rigid plastics side, we're reading more about some challenging growing conditions for certain fruit, vegetables and specialty crops in the West Coast North America specifically, is that something that you are seeing have an impact on your rigid plastics demand or could have an impact? And is anything from that perspective Baked into your guidance for the second half?
Josh, it's Roger. We are seeing some impact on the crops primarily in the Northwest of the United States. We built that headwind into our sales forecast for the second half of the year. Same story there. PT since the 1st of the year is up 30% -ish.
So we're moving prices in that business as well. But any headwinds from weather or fires and all that we have built that into But the answer is yes. For some specific crops in the Northwest, we have seen some impact.
Okay. Thank you.
Our next question comes from Mark Wilde with Bank of Montreal.
Great. Good morning, Howard. Good morning, Julie, Roger. Hey, Mark. Good morning.
I wanted just to start out, you've done a good job of kind of walking us through some of the lag there in Consumer Plastic Packaging. Anything you can do to help us with just the cadence of kind of price, cost catch up in other parts of the portfolio?
I'll turn it over to Roger, but what I would say the headline here is related to resin. And when you say other parts of the portfolio, if you look Cross where you see that resin influence really hit us hard in the all other category, which is effectively a resin based Business and of course as we've just said on the consumer side, but Roger Any further thoughts?
No, I think that's right. If you look at the other freight inflation, packaging, you name it, Mark, as you know, they're all Escalating faster than expected. We're out on a regular basis with increases in those areas Outside of our normal price change mechanism, so that's happening. I'm sure we'll come on to OCC and our industrial side In a minute, but as you're aware, we've announced our 4th $50 increase for URB, which went into effect July 15 that went well We'll follow-up with a 6% to 7% Tubing core increase, which has gone well. So we're trying to stay out in front of industrial and that's part of the reason we announced that when we did.
We're expecting more headwinds in OCC in the second quarter with an upward bias to OCC prices throughout this quarter.
Okay. That's helpful. And is there any difference, Roger, in sort of the both the order of magnitude of cost increases on OCC in your European business versus North America? And also any timing difference between kind of North America, Europe and the other markets?
Well, Europe's run up faster. If you convert the European euro metric ton to U. S. Short term They're up to about $175 a ton on average. But the team there has done a really nice job of staying on the front of that.
So I'd say their run up has happened in front of the U. S. I'm not sure that tells us exactly where the U. S. Is going, but that's the comparison.
But again, our team has done a good job there recovering so far.
Okay. The other question I have is, I guess, probably for Zulily. And I'm just curious if I heard you correctly, it sounds like you're going to stop medium production at Hartsville at the end of 4th quarter, but the ramp up on the URB is not until the end of Q2 next year. And just Kind of looking at the corrugating medium market this year, I'd assume that, that machine has to be Quite profitable this year. So I'm just curious if you can give us any help as we think about next year, the move into next year And what the earnings impact of the phase out of corrugating medium and the ramp up of URB, what that may be on a Year over year basis?
Yes. Good question, Mark. In fact, it's probably going to go down latter part of the Q1 of next year And we'll be down for 6 to 7 weeks as we make that conversion. We're not at a point at this point in time where we have Even sat down and looked at the overall impact and how that Would be reflected in our 2022 assumptions. So it will be coming, but it won't be a 2020 it won't be this year.
It'll be a lot of part of the Q1 and into the Q2 of next year.
And Howard, without trying to lead you too far on this, but Would it be reasonable to assume that you might take a little bit of an earnings hit in 2022 just because you're going to give up Very profitable medium production this year and you're going to have a not only a period where the machine is not running, but you're going to have kind of a startup curve after the rebuild?
Sure. That's a fair assumption, but you got I guess where I'm coming from, we'll have to see what the entire corporate Roll up looks like and how meaning and material that is going to be. But anytime, yes, you're starting up a new process, new Plant new equipment, you've got to walk through that.
Okay. Last one real quickly for me. How's the Halloween season looking In the flexible packaging business?
Actually, you need to get your trick or treating stuff ready because the CPGs Our acting is business as normal.
Okay. All right. Sounds good. Thanks, Howard.
Our next question comes from Ghansham Panjabi with Baird.
Hi, good morning. This is actually Matt Krieger sitting in for Ghansham. How are you doing today? Great, great. So I was hoping that we could touch on volumes for the back half of the year.
So What are your embedded volume assumptions on a segment basis for the second half of twenty twenty one? And what type of underlying market environment are you kind Projecting within these assumptions, if you could provide any detail by region or by product line, on a kind of the major product basis that would be really helpful.
To kind of share with you from a macro perspective, it might help to talk about where we thought we were going to be this Which is about 2% for the year and we've seen Q1 up 4%, Q2 is up 8%, and Our forecast now for Q3 is just over 5% with the bulk of that well, Our consumer side, slightly up 1% to 1.5%. The industrial side continuing to trend upward 7.5% to 8% or so and the all other category showing the biggest ramp up in this particular quarter To about 12%. I don't know if we're prepared to really talk about each individual business within And the sectors that we do expect to see volume to be very positive going forward.
Great. That's helpful. And then, I guess I just wanted to touch on, maybe Any incremental cost to service customers in an out of pattern manner from a freight or supply perspective? If you had any challenges in gaining access to raw materials in any specific markets or instances?
Yes, Matt. Yes, so all of the above. Inventories are tight, particularly in the mill system where it's driving More changeovers, which does impact productivity. But then again, across the company, very pleased With how we've managed productivity, but it certainly has been a very dynamic Situation for us on an income and a raw material perspective, yes, it's tight. We're managing literally, particularly resin based, and that's resins, that's adhesive.
We're having to manage that almost on a well, we are not almost daily, if not a 7 day a week type situation. Outbound freight, similarly, we're working weekends to make sure that we've got trucks that can come in and Make the shipments that we've committed to our customers. So, it is a very interesting dynamic situation right now. But again, I can't tell you how pleased I am with how well our team is managing through this.
Understood, understood. That's very helpful. Just one follow-up and then I'll drop off. Is there any timeline for normalization there that you could Feel it's reasonable or is it just kind of a day to day assessment?
It's It's a macro issue. It's not a Sunoco issue. It's throughout North America. We're managing it on a day by day basis. I really couldn't forecast out what we're saying.
These type of costs And the issues that we're facing are going to continue for some time to come. Our biggest lever that we're going to be With all of the headwinds that we're facing is getting this material cost recovery from our customers And just managing the rest of it, the best we can.
Great. That's it for me. Thanks.
Our next question comes from Adam Josephson with KeyBanc.
Howard, Roger, good morning. Hope you're well. Good morning, Howard. Howard or Roger, can you just on resin and OCC, just a little more Clarification, if you don't mind. So as of last quarter, I think you were expecting 10% present cost inflation for the year.
Would be interested in knowing what that expectation is now. On OCC, I think in last call, you were thinking OCC It would go up to 120 by June and you nailed it and it went up by another 20 in July. And I think Julie or Roger said you expect Further upward pressure, can you just put a little more meat on that bone? And then lastly, on freight, just can you remind me what your expectations were For the year and are now.
Hi, Adam. It's Roger. I'll give it a shot and then Howard or Julie can add Yes, on resin, if you look at what we're expecting now for the calendar year of 2021 and this is expecting some Moderation and potentially slight reductions at the end of the year, we're expecting a 30% increase for the year. As you know, I mean, if you go year over year, in many cases, As I think Julie said, resins have doubled, polypropylene is up 140%. So we buy a basket of resins.
We buy about £120,000,000 a quarter. About over half of that's PE based, about 30% is Propylene and a bunch of all others. So we're looking at a 30% increase now, but again that and that's assuming we get moderation in The back of the year of 2021. OCC, as you know, has already moved to 140 45 in the month of July. And what I said earlier is there is an upward bias.
The container mills are still pulling very heavily. We're seeing premiums in the marketplace. So at this point, I wouldn't tell you exactly what it's going to do in the coming months, But there is an upward bias and that's the way we're looking at it today. On freight, I believe we said 6% to 7% for the year. And then in the Q1, we're now at 9% to 10%, which is not that significant a move.
But the comments Howard made, For me or even more important is the availability of trucks and trailers and drivers and the added cost of changing schedules that this has been a bigger headwind That's more color. If you need more, we can answer it.
No. Thanks, Roger. And just one follow-up on the cost issue, which is I think you mentioned in Europe, OCC is up. The U. S.
Equivalent of $175 I forget, I forgot what time frame you were talking about. But in the U. S, Year to date, Southeast prices are up 60, I believe. So are you would that lead you to think that there's a lot more to go In the U. S.
Or how are you thinking about that relationship between Europe and the U. S. In terms of the year to date inflation?
Yes. I'll just say the equivalent price of what we're paying today in Europe in U. S. Short tons would be $175 a ton.
I'm sorry.
Yes. So that was the point. So and again, I'm not saying we're going to go to 175, but that just shows you the demand globally. And again, containerboard Mills are pulling heavily, so we do see upward bias in the quarter.
Yes. Adam, I'm not so sure you can totally Create a correlation between Europe situation and the U. S. To make an assumption that whatever levels they are, we may be heading to. I don't think we've seen that historically.
It's basically independent market and market dynamics.
Yes. Thanks, Howard and Roger. And on Demand by region, can you just talk about what you're seeing? Obviously, U. S, Brazil have been exceptionally strong all year.
Europe's gotten better. China is getting worse. Depending on what you read, markedly worse. So can you just talk about what you're seeing by region? What you think is going on in China?
Obviously, Southeast Asia is having COVID problems. China is having other problems. Just What you're seeing by region and your expectations along those lines as embedded in your guidance?
Yes. And I think you covered it pretty well actually, If you look at Latin America, on the industrial side, very strong, same dynamics we're seeing here, order backlogs, etcetera, on our mill system. South America, as you noted, same. Our consumer business in South America is also very strong. Just as Footnote, I mean, we're actually having to and this is part of our challenges here in North America in terms of mill capacity that we're actually shipping board Out of the U.
S. To supplement our mills in South America. So really and in fact And it's rolling to the bottom line as well. The South American business is performing exceptional on both sides, industrial consumer. You talked about Europe is somewhat similar to here, very, very strong.
Our mills are full. Demand on the tube and core side is where we would hope it would be. On the consumer side, which is Mostly our paper can business, I made comments earlier to George's question that very, very solid Current demand and pending new orders. Asia, as we look at, it's The small force in the full scheme from COVID a year ago to today, we're extremely pleased with The turnaround, I think our cone business as example is about 97% of 2019 that was dropping from about 40% this time last year. So we're still somewhat enjoying The recovery, but no doubt about it, we're seeing that we expect when things settle down that there's going to be more pressure As it relates to just the overall macroeconomic conditions in China.
And I guess lastly, I'd just point to Southeast Asia. COVID It's a real issue for us. It's showing in Indonesia where we have our fairly large paper complex, But probably the biggest hit has been our consumer business where we've got our largest Asian Paper can facility that has been down for weeks now due to government mandates and new lockdowns and that continues. This is the Q1 that I can remember, I noted earlier when we're seeing double digits just Quarter after quarter in Asia was actually flat because of that reason that we had a major complex down for the period.
Terrific. Thanks so much, Howard.
Our next question comes from Kyle White with Deutsche Bank.
Hey, good morning. Thanks for taking the question. I wanted to go to rigid paper containers and food packaging. Are you able to provide any kind of cadence or on how volumes trended throughout the quarter on a month to month basis and into July here. Just trying to understand what impact you're seeing as markets reopen And the kind of at home consumption trend weakens here a bit?
Yes, not within the quarter. I think we noted that In total, we were down about 5%, but we were above where we were in 2019. Julie, I really don't have that data in front of me.
Yes, not as much from a monthly But I think so I think basically volume trends during the quarter were, I'd say, relatively steady and I don't think anything unusual on a month To month basis during the quarter, as Howard just mentioned, I think maybe you're talking about global cans being down about 6%. And but again, it was a really tough comp. Again, the plastics food business had a very solid like We began year over year growth after a very strong Q2 of 2020. And so that volume growth continues to Be very solid. So but I'd say, I don't think there's anything terribly unusual monthly during the Q2.
Got it. And then going to all other, what are you seeing or expecting in terms of the flu season this year for that business? And then what are you hearing from your customers
It's Roger. Flu season, we're expecting a good flu season. We typically capture over half of that volume $15,000,000 to $20,000,000 One thing that we are seeing is the main customers are pulling early Pulling earlier with some concerns about supply constraints as we get into the fall. So we saw some of that volume come in, in the Q2. We'll see the balance In the Q3, so we're expecting a normally pretty solid flu season.
From a COVID vaccine standpoint, it's playing out almost like we talked last quarter To the point of we see this turning into more of a vaccine type similar to the flu season. As we get in now to booster shots, as we get into some of these shots for younger children 5 to 11, What we're hearing from our customers is it's going to turn into more of a standard, thermoSAFE package or temperature control package. And we expect about $15,000,000 to $25,000,000 impact on an annual basis for COVID vaccine. So really no change to the guidance from the last quarter.
Got it. Thank you and good luck for the balance of the year.
Thanks.
Our next question comes from Salvator Tiano with Seaport Research Partners.
Yes. Hi. Thanks for taking my questions. So firstly, Ken, I know you mentioned the tough comps in rigid paper containers globally. But as we look at kind of the end market demand, can you tell us a little bit about the trends?
Why are you Seeing essentially the deviation with the rigid plastics specifically, even though both benefited from pantry loading?
So, Sal, to make sure I understand your question, you're asking why plastics?
Essentially, white plastics are outperformed rigid paper containers this quarter,
I guess. Yes,
I understand. I think it's just the nature of the products that we're serving. Back to my earlier points, with the frozen well, QSR opening up The fast food has certainly been a benefit, but equally so is that Truly, the acceptance of the consumer of frozen meals that they some of the consumers were reintroduced or first time Concerned through COVID are continuing to go back And continue. So we're actually seeing the frozen side slightly up over the peak of last year. If you look at the can business, a lot of that is related to snacks and other items, refrigerated doughs.
And we just saw a bit of a pullback here in North America. Again, Europe was in good shape, Actually, just slightly up and then I've already talked to the scenario in Asia as it relates to the shutdown that we have there.
Okay, great. I wonder if you can also elaborate a little bit on the margin differential between the two because think when we think about the $15,000,000 negative price cost for the Consumer Packaging business that you mentioned, that leaves a pretty steep Operating income declined year on year given the just 2% volume. So I can I would imagine the rigid paper cans have a much higher margin? Was that the reason for the, I guess, the decremental margins being so high?
Julie, you got that?
It's interesting the dynamics among between those kind of 2 there are really several parts of our Consumer business, you've got different dynamics in productivity and labor challenges as well as the different Inflation, whether it's very resin oriented in the plastic food business and flexibles versus other types of inflation being more prevalent in the Anne's business. So I think there's no simple answer there, quite frankly. The dynamics around, again, the different raw materials across All these businesses and depending on COVID impact, labor availability, etcetera, obviously impacts productivity. And so Just lots of moving pieces that really we won't be able to now get into any more granularity about that with the dynamics of What's impacting the margins in the different key parts of our consumer segment?
Yes. I'd say, Sal, just in summary, the inflation that we're seeing is Really, as we said, in our resin based businesses, and so we're getting hit really hard. Even the volumes are up On the plastic tray side, we're back to this whole price cost Capturing that resin inflation.
Okay, perfect. Just quickly, can you provide a little bit more color on The inflation, the cost differential between what you're seeing in the Consumer Packaging business and the other businesses the other segment, I guess, because Obviously, a $10,000,000 price cost headwind for other, it's super substantial for such a small segment. So Can you elaborate on the differential in terms of pass throughs and resins that you use in the other segment versus Consumer Packaging?
It is exactly that. It's back to the resins. All other is almost 100% resin Based business is embedded in there. So, it's just as simple as that really. That's what's driving that large number.
Okay, great. Thank you very much.
Our next question comes from Gabe Hajde with Wells Fargo Securities.
Howard, Julie, Roger, good afternoon, I guess. Thanks for taking the question, late in the call. I was curious, there's been a lot of Sort of exogenous factors influencing OCC, I'll say over the past 18 months in terms of China's actions, Obviously, the COVID impact and then what we're seeing right now in terms of, I think, mill operating rates and stuff like that. But I'm curious if there's anything that you would view as instructive in terms of Kind of what the new normal might look like for OCC and really the genesis or what's behind the question is, I'm looking at a list of 25 to 30 recycled pulp projects across the globe. And it seems like China kind of has reached The upper limit in terms of what they can maybe collect domestically and obviously we know they're not going to be importing OCC, but potentially obviously recycled pulp.
So Just curious if there's potential for OCC to remain, I don't know, above $100 a ton or something like that in the foreseeable future.
The potential is certainly there. And if it does, it's really about stability, right? Right now, we've seen, what, 9 Consecutive months of increase in OCC, it eventually will reach its plateau And hopefully get back to a normal type trending. If it's 100 at plateau's at, so be it. If it's 150, so be it.
But We've caught up, price has been passed through I mean, cost has been passed through and you're back in a normalized situation. What is really The issue today is just that. It's month after month after month after month. It's the chase. In terms of How the global market is going to settle, really, really hard to say.
Okay. Just curious, I know it's difficult in terms of visibility, but I guess from some of the work that we've done, it appears as if your customers' inventories are starting to normalize, Where before it felt like they were living kind of hand to mouth a little bit. Any visibility there In terms of where customer inventories are at? And then real quick on CapEx. I think you talked about incurring most of Project Horizon spend this year, call it $100,000,000 such that $15,000,000 would fall in the next year.
I know you're not giving guidance for next year, but Directionally in that $200,000,000 of CapEx for spend knowing what we know today?
That's what we've modeled out as an incremental Finishing up, when we on our free cash flow guidance, I think you can go to the bridge that Julie provided that we're assuming that we will spend to that 300 level. I can tell you that with the delays we've seen associated with COVID, Etcetera. That could push out into next year. It's too early right now for us to make that call. I By the time we're together in October, we'll be able to really have pure visibility in terms How much of this CapEx is going to fall into this year or maybe even bleed into next year?
So on
the other and we think yes, this is Roger. On the customer side, as you said on the food side, you're right. I think Our customers are saying their inventories have stabilized, so we're not seeing anything there. Just like us, they're struggling with some raw materials, but I would say on average, they're back to more normal levels. Any customer that's dealing with, like appliances and automotive, the chip shortage we're seeing it, although in both cases, our sales of Customers were up obviously significantly over the Q2 last year.
We could have sold more and our customers could have sold more appliances. Appliance sales were up 23% Year over year, but they could have been up higher. Automotive sales, you all know the story there. So I think in anything to do with housing
Okay. Thank you and good luck.
Our next question comes from George Staphos with Bank of America.
Hey, guys. Sorry to come in late here. I'll make it real quick. So could you, Howard, remind us With Project Horizon, the cost of the project has moved higher over time to the current level of whatever $150,000,000 How much of that is just inflation in the construction materials? And how much of that is flexibility that perhaps you're building into the system, Maybe optionality that even though you're net neutral on capacity with all of the closures that maybe if URB Grows on a more secular basis coming off some very strong growth that we're seeing now that you'd have the flexibility to hit that demand If that happens.
And then the second question I had, just what preparation, if anything at all, other than trying to get pricing up, Are you doing in advance of hurricane season, which always brings a little bit of volatility to resin? Thanks guys. And again, good luck in the quarter.
Thanks, George. Yes, we did increase the original capital of Horizon, but that was really built on the backs of incremental Opportunity that the team had identified as we had after completion of the first capital submission. And So, the incremental $30,000,000 that brought it up to that $115,000,000 range was where A very justifiable and a good return opportunity presented itself to basically redo not just the paper machine, but the complex In terms of raw material flow, outside warehousing, so when you come to the campus next, you'll see a new one 120,000 foot warehouse, you'll see how the flow of OCC now does is appropriate to the back end of the machines. So that's where that incremental amount came from and it was again justified on the savings we would achieve by spending that. The second question was around the demand profile.
As I noted in my comments, we've announced the close of a couple of machines, but that's all pending on market conditions. So we'll see What things look like, hopefully, the demand that we're seeing today will continue and that may lead us to continue operations First, it's Frank Val Machines, but the closure timing that I shared with you earlier today It's just our communication to our internal team, giving them an annual notice, so that we can make appropriate our employees can make appropriate Choices, but it could be. Hopefully, we're saying we're going to we've got the new machine going and the other ones are full too and we're going to Keep that situation for whatever time period that goes. Hurricane Prep, look, We've talked a lot about and for us Hurricane Prep is not an operational issue, but more of a supply chain issue. We should all be concerned about that, yes.
Inventories, as Roger spoke to, are low. Supply chains are being managed on a day to day basis. So you're not seeing Within the Gulf Coast supply chain, the normal pre build of materials In anticipation of such an event. So, it's something that we should all be concerned about, But we'll let's see what mother nature brings us there.
All right. Thank you very much.
Our next question comes from Adam Josephson with KeyBanc.
Howard, thanks so much for taking my follow-up. Just really quickly, on that hurricane issue, just to be clear, are you I know it's impossible to forecast hurricanes, but what if any Supply chain disruptions are you expecting in your updated full year resin cost forecast? And then in In terms of your OCC assumptions, I think you're expecting OCC prices to go down in the Q4 as collections improve and demand slows. But obviously, with E commerce box demand has been exceptionally strong in recent 4th quarters. So I'm just wondering why you would expect demand to slow and therefore OCC prices to go down seasonally in the Q4.
Thanks very much.
Yes, Adam, it's this is Nothing new. We have never really built in any type of forecast of what could happen if we have a hurricane. But forever, we have always managed to maintain stock In the event that our suppliers go down for a week or whatever period of time, they may go down to ensure that we have raw materials My only point here and it's something I could never I just cannot forecast, we'll figure a way, we always do. But We and I assume others, including our suppliers who typically push material out ahead of the season, that's not happening this year. So there's no way to forecast what the ultimate impact of that would be.
With OCC, Roger, you may want to talk about it. I think you spoke with Johnny this morning, but we're just following the traditional seasonal trends. I will say one thing and whether it will carry through the Q4, I don't know. But we have seen that exports are starting to drop as prices have risen, As we're seeing India and others starting to pull further back out of the market, that's creating more supply within North America. As you know, it's a very complicated dynamic market, but that is our expectation at this point in time that we should
I'm showing no further questions in queue at this time.
Well, thank you, Liz, and
thank you, everyone, for joining us And again, if you we certainly appreciate your interest in the company. As always, if you have further questions, please don't hesitate to Contact us and we'll be glad to talk further. Thanks for the call today.