Q3 2021 Graphic Packaging Holding Co Earnings Call
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Okay.
Hello, everyone and welcome to the graphic packaging third quarter 2021 earnings call. My name is Harry and I'll be your question Tonight.
If you'd like to ask a question during the Q&A session. You may do so by pressing star followed by one on your telephone keypad.
We respectfully ask that you please limit yourself to one question and one follow up as time is crushing it.
I'll now hand, the call over to your host Vice President of Investor Relations Melanie Ski just mentally. Please go ahead.
Good morning, and welcome to graphic packaging holding company's third quarter 2021 earnings call joining us on our call today are Mike Doss, the company's president and CEO, and Steve Scherger Executive Vice President and CFO.
Help you follow along with today's call, we will be referencing our third quarter earnings presentation, which can be accessed through the webcast via self directed side and also on the investors section of our website at Www Dot graphic PK G Dot com before I turn the call over to Mike. Let me remind you that today's press release and the presentation.
<unk> made by our executives include forward looking statements as defined in the private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties and include but are not limited to the factors identified.
And their belief and in our filings with the Securities and Exchange Commission.
Now, let me turn the call over to Mike.
Thank you Melanie and good morning to everyone joining us on the call and webcast. This morning.
Four months in the quarter was strong we successfully navigated a complex supply chain and labor environment, we raise prices where necessary to offset accelerating commodity input cost inflation. We received the required regulatory approvals for our packaging acquisition and made significant strides towards completion of our <unk>.
Information on CRB platform optimization project.
All of these accomplishments are aligned with the goals, we established for vision 2025, and have us on track to meet or exceed our long term aspirations for the business.
Demand for more sustainable and circular packaging options continues to accelerate globally, the ongoing evolution to practice and promote more environmentally responsible behaviors as evidenced by the increasing number of new pledges made by global corporations to eliminate waste and increase our focus on recyclability.
We're supportive of commitments to lowering carbon footprint. Examples include proactive announcements by retailers around the world moving to minimize the impact that packaging has on our planet.
Consumers are making their preferences known and companies that are serving them are responding to.
The fiber based packaging solutions, we are developing and the role we play in providing consumers with packaging choices to promote a more sustainable and circular economy provide our employees with an immense right.
This shows through our continued innovation and new product development initiatives, along with service levels, we provide our customers in today's very challenging supply and labor environment.
We establish vision 2025 in September of 2019, and have demonstrated a very real pivot to organic growth since that time.
Q3 organic sales declined slightly we still expect to deliver organic sales growth in 2021 at the high end of our 100 200 basis point annual target on top of the 4% organic growth we generated in 2020.
On slide three let me cover additional highlights from the third quarter, we have been successful in positioning the company to capture growth opportunities in this very strong demand environment.
Growing with existing customers, we're ramping up with new ones and new markets momentum for fiber based consumer packaging solutions is materializing at a time when we are experiencing unprecedented inflation supply chain bottlenecks and labor market challenges, we estimate that the constraints in supply and labor markets resulted in a.
Approximately $25 million in delayed sales in the third quarter, we delivered strong adjusted EBITDA growth of $284 million up 14% year over year EBITDA growth was driven by positive price realization of $53 million and favorable net performance of $79 million, which.
That helps.
Commodity input cost inflation of $88 million experienced in the quarter.
The current environment with all its twists and turns is not turning us from the focus on meeting or exceeding our vision 2025 goals and capturing global demand for sustainable packaging solutions are dedicated teams who are working tirelessly to keep customers in supply or backlogs remain elevated across all our paperboard subsea.
As a result of the continued inflation in commodity input costs, we have taken swift pricing actions to recover the price cost dislocation we are experiencing this year.
We committed to you that price would offset commodity input costs over time and that any dislocation would be short lived we are delivering on that promise as we've.
Just with you over the past several quarters, we have implemented a number of initiatives to reduce pricing recovery legs with customers and had been negotiating positive modification of other business terms.
The inflation, we are experiencing this year is one for the history books, we're doing what we said we would do approximately $650 million and pricing initiatives have been implemented and will be recognized over the 2021 and 2022 time horizon.
We recently published our latest comprehensive ESG report and we outlined the many initiatives underway to further drive sustainability across operations and innovation and product development with the end customer in mind, we intend to continue to invest in innovation and promote progress and sustainability to support the migration to a more.
Circular economy.
As noted earlier, we have been pursuing the required regulatory approvals for the <unk> packaging acquisition, we announced in May of this year I am pleased to report that we have received the final necessarily regulatory approvals. This month and we are working towards a November one close in addition, our CRB platform optimization project remains on track.
For a start up of coated recycled paperboard production on our K two machine in the fourth quarter.
Turning now to slide four you will see the innovation powerhouse that the combination of packaging will create large distributed footprint of our packaging twenty-five converting facilities across eastern and western Europe add significant scale and cost efficiency benefits. The completion of this transformational.
Acquisition extends our global reach expands our service offerings and advances our commitment to sustainable packaging solutions for customers around the world.
We intend to share our growth plans and milestones for the integration of <unk> packaging, along with an update on vision 2025.
Our fourth quarter and full year 2021 results. We will do this had an investor meeting on February 17th in New York City, where we look forward to hosting many of you in person while also providing a webcast for those of you who will need to attend remotely.
Turning to slide five and our second extremely impactful and well time strategic initiatives you can see the picture of our new state of the art K two CRB machine. Our team is executing a significant investment in our paperboard capabilities, the buildout and startup of the K two machine in Kalamazoo, Michigan is the largest component of our CRB.
Platform optimization project and we are on track for paperboard production to begin in the fourth quarter, we are well into their operational readiness phase we have our teams in place and we are completing the most extensive training effort in our company's history. We look forward to bringing this world class lower cost higher quality CRB platform.
Investment to life over the coming quarters, working with our customers to grow their commitment to the recycled fiber based solutions, while generating the returns we are committed to achieving.
Turning to slide six I will provide a few additional remarks on the current environment for pricing and the positive momentum we have to offset historically high commodity input cost inflation.
We have executed $63 million of positive price that has flowed through the business over the first nine months of 2021, and we expect to realize approximately $77 million of positive pricing during the fourth quarter. We're currently targeting $510 million of pricing in 2022 based on implemented and recognize.
As pricing initiatives.
The price actions are intended to fully offset the inflation, we are experiencing across a wide array of commodity input costs. In total at this point, we expect to execute approximately $650 million and price actions over the 2021 and 2022 time horizon.
And then shifting today global demand for fiber based packaging solutions continues to grow on slide seven let me touch on the steady and consistent nature of the value paperboard substrates have earned over time over the 15 year period captured here you can see the steady increasing pricing for our paperboard substrates. This can be.
<unk> to a healthy underlying demand for paperboard solutions supply levels required to meet customer demand and the introduction of new packaging solutions driving growth in existing and new addressable markets.
Before I turn the call over to Steve for a more in depth discussion of our financials and guidance I would like to take a minute on slide eight to reflect on the organic growth. We have generated since 2019, we surpassed our net organic sales growth goal in 2020, delivering 4% growth and we expect to deliver at the high end of our talk.
You did 100 to 200 basis points call. This year, notably this year's expected net organic growth of approximately 200 basis points reflects growth on top of the very strong growth. We drove in 2020 the year to date picture on the slide tells the same story net organic sales have experienced growth of 2%.
Compared to the same period in 2020, and the two year compounded annual growth rate for organic sales. Since 2019 is 3%. This trajectory is consistent with our organic growth expectations for the business as we continue to see conversions to fiber based packaging solutions.
We are positioning the company to capture growth opportunities in the years ahead, and we've accomplished a great deal. So far this year, we look forward to closing the acquisition of <unk> packaging and the next week and the startup of our K two machine in the fourth quarter simply put we're running a different race. The strategic priorities. We are focused on an X.
<unk> are redefining our leadership in the industry with that I will now turn the call over to Steve.
Thanks, Mike and good morning.
Moving to slide nine focused on key financial highlights net sales increased 5% or $84 million from the prior year period to $1 8 billion.
The year over year increase in sales was driven by higher pricing flowing through the business and acquisitions.
Adjusted EBITDA increased 14% to $284 million, resulting in an improved adjusted EBITDA margin of 15, 9%.
Adjusted earnings per share grew 31% to <unk> 34, a share.
Finally, our integration rate increased to 73% as we continue to internalize more pay.
Per board into our converting operations.
On slides 10, and 11, you will see our revenue and EBITDA waterfalls.
Drivers of the 5% year over year increase in sales were $53 million of pricing $20 million of higher volume mix and $11 million a favorable foreign exchange.
Adjusted EBITDA increased $34 million or 14% year over year to $284 million in the third quarter versus the prior year period.
The increase is notable given accelerating commodity input cost inflation that materialized in the quarter.
Adjusted EBITDA growth was driven by $53 million in price $3 million in volume mix and $79 million and improved net productivity.
Adjusted EBITDA was unfavorably impacted by $88 million of commodity input cost inflation and $13 million of labor benefits and other inflation on slide 12, you will find additional financial and market detail.
Our foodservice business has continued to recover from last year.
And 11% year over year.
While food beverage and consumer sales improved 3%, including acquisitions.
Mike pointed to $25 million in delayed sales, resulting from supply chain and labor market constraints during the quarter.
The supply chain bottlenecks impacted all areas of our business.
Labor availability challenges were more specific to our foodservice business as we continued to ramp up production from the declines experienced in 2020.
Without these delayed sales net organic sales growth would have been flat for the quarter in line with our expectations.
<unk> industry operating rates were strong again in the third quarter CRB was 95%, while Sps improved sequentially and was 96% at the end of the quarter.
Our C U K operating rate continued to be well above 95%.
These operating rates reflect a strong demand environment for paperboard.
<unk> third quarter data also showed continued declines in industry inventory levels with balances at multiyear lows.
Backlogs are elevated at eight plus weeks across the U K in CRB, and our six plus weeks and Sps.
We ended the quarter with net leverage of 397 times.
I will discuss our cash generation expectations with you shortly.
We have clear line of sight to bring leverage down to three five times or lower at the end of 2022 after leverage peaks in the fourth quarter due to the financing for our packaging acquisition.
Liquidity was $1 $8 billion at the end of the third quarter.
How do we fund and complete the airbag gene acquisition, our global liquidity will remains substantial with approximately $1 billion available.
Turning now to full year 2021 guidance on slide 13.
We have updated guidance to reflect additional price actions higher commodity input cost inflation higher net performance.
The assumption <unk> packaging as part of our business effective November one.
2021, adjusted EBITDA is projected to be in a range of 104 to one 6 billion.
The largest component of the EBITDA guidance change is the accelerating commodity input cost inflation occurring in the second half 2021.
As Mike mentioned, we are actively taking the price actions necessary to offset this increased level of inflation.
We anticipate cash flow will be in a range of $100 million to $150 million for the year.
Capital spending has increased modestly driven by inflation across raw materials and the labor required to complete critical strategic projects on time.
On slide 15, I will wrap up my prepared remarks with a look into 2022.
We continue to be very confident in the guard rails, we provided last quarter for adjusted EBITDA in the $1 $4 billion plus range importantly on this slide you can see the components and the walk to the substantial estimated EBITDA growth, we will be driving next year.
Our packaging in America are expected to contribute $160 million and $30 million synergies respectively.
For the base business. It is reasonable to assume at least $20 million from our traditional EBITDA drivers of volume mix and net performance more than offsetting labor benefits other inflation and FX.
First $50 million of incremental EBITDA from our Kalamazoo project and a minimum recovery of $170 million of 2021 price cost dislocation provides a clear step change higher to adjusted EBITDA of $1 4 billion plus in 2022.
Significant expected growth in EBITDA, coupled with our commitment to meaningfully lower capital expenditures next year following the large capital project at Kalamazoo.
Absent significant cash flow generation the.
The material EBITDA growth and cash flow generation projections give us line of sight to year end 2022 leverage at three five times or lower.
Look forward to provide you with more detailed 2022 guidance when we meet with you in February.
Thank you for your time. This morning, I will now turn the call back to the operator for questions.
Thank you and as a reminder, if you'd like to ask a question today.
They do so by pressing star followed by one on your telephone keypad now.
In the interest of time, we respectfully ask you. Please limit yourself to one question and one follow up H.
I'm on the parent to ask a question. Please ensure that youll find is on mute locally.
And our first question comes from Mark will do you think of Montreal Mark. Your line is open now if you'd like to proceed with your question.
Mark Your line is now open if you'd like to proceed with your question.
February appears to be having some connection issues with market. What we'll do then I'll move on to our next question is from Mark Weintraub from Seaport Research partners.
Mark Your line is now open if you would like to proceed with your question.
Thank you.
Last quarter I believe you had indicated that the rollover impact from inflation at that point in time too.
<unk> 2022, you would have gauged it roughly 50 to 75 million if I remember correctly.
If you were to update that number today.
Where would it stand.
Hey, Mark it's Dave Good morning, Yes.
Obviously for this year the inflation now mid <unk>.
Point of $310 million, then the rollover effect.
Is it the $100 $25 million range, assuming everything stays as is and so the cumulative.
Two year inflation right now is in the $400 million to $425 million range. Obviously, we shared with you today that our cumulative price activity over that same period of time as the $650 million that we shared with you today.
Okay, great and so just to make sure I fully understand that so.
I think you had just trying to get to the side here. We go. So you talked about 510 million on the pricing side for 2022, recognizing that theres certainly can be a lot more inflation or not from from where we are today.
If we think about the price cost if things were to be fixed today can.
Can we take the 510 and subtract the 100 to 125 and that would be.
Starting number for 2022 again, recognizing that we can get more inflation from here is that fair.
Fair or am I missing something.
Well I think the way you want to make sure you think about it Mark is we have very clear line of sight to $510 million of pricing next year based upon known and recognized activities, that's roughly $250 a ton across the three primary substrates along with our.
Cost models.
And so then if you compare that of course to the flow through on inflation, you've got <unk> 10. This year, another $100 million to $125 million next year, leading into the low four so we need to and what we committed to on the slide with the walk to the $1 4 billion clause is that well first recover the $170 million of debt.
Location this year.
And whatever inflation comes next year, obviously, we have plans in place to recover that as well.
100, $125 million is what would be known carryover today does that give it to you as specific like.
That does thank you. Thank you very much.
Okay, Great and just lastly, if I could.
Level of confidence in getting that five turn on on pricing is that.
Is that pretty contractually established how much work is needed to achieve.
Bringing those numbers to the bottom line.
What level of confidence should investors have about that at this point.
Yes, good morning, Mark it's Mike if I should say of a high level of confidence in this this is contractually driven these are multiyear contracts. So it's flowing through.
And execution of the contractual terms of those agreements.
Super I appreciate it.
Thank you Mark.
Okay.
Thank you Mark and our next question will be coming from.
Ghansham Panjabi.
Contributed your line is open now if you'd like to proceed with your question.
Yes. Thank you good morning, everybody just as a follow up to Mark's question can you comment on the velocity of inflation that you're seeing a turn versus did you kind of get granular with the various constituents I know theres a lot going on with the OCC freight labor and random shocks like the China curtailments that are impacting other industries, but at this point are you starting to see a.
Plateauing sequentially.
Yes, good morning, Ghansham I'll start, Steve and Mike can add on and I think certainly what we saw throughout the quarter was an acceleration of inflation and as we talked during the quarter on the occasions, where we had the opportunity to do so when we saw more inflation, we took more pricing action in that kind of flowed through.
And the incremental $100 million of inflation from the last time that we spoke and it was pretty widespread I mean of that 100 million half of it is well chronicled relative to chemicals energy resin are all moving up we also saw OCC move up that was another significant part.
Of the 100 million and then of course the.
Ongoing challenges on the logistics front.
Just in terms of rates for truck and rail as well as ocean. So it kind of all moved through.
The $120 million that we're guiding to for Q4 is representative of what we're seeing.
At today, and obviously, we don't try to hypothesize well they'll move up or down from here, Mike anything you want to add to that no I think the.
And what you've seen ghansham.
Is that like an OCC, it's kind of.
Went up 11 months in a row in the last couple of months, it's kind of peak and so we watch those kinds of things, but as Steve said, it's it's pretty difficult to try to forecast out what inflation is going to do as you know it seems like every month there is a new commodity that somehow gets challenged and so we're dealing with those things and I think the point that investor.
We should look at here as Steve has outlined is with pricing actions. We've taken we're in a really good spot relative to how inflation develops as we go into next year, both in terms of the carryover and.
<unk> inflation that we could incur in as we've demonstrated here.
Since our second quarter call when we see more inflation, we will take more pricing actions to offset them.
Okay. That's very helpful. Thank you for that and then for my second question. You know every inflation cycle customers trying to mitigate price increases to consumers by reducing packaging size and also D content in material to some extent how do you see that dynamic playing out in the current inflation cycle, which is much more severe and the magnitude and do you see the light weighting and you know packaging size shift.
Is a volume risk for you in 2022, thanks, so much.
Yeah. Thanks for that question I appreciate it and I think if you look at packaging in general across a wide swath of different packaging.
Packaging mediums theyre, all inflating at relatively similar rates and so.
The substitution piece of that is going to be pretty minimal based on how we see it in terms of light weighting and packaging optimization. Those are things that we deal with our customers all the time it actually create some opportunities for us, particularly on the fiber based side. So we would actually see that probably has more of an opportunity than a threat going forward.
Okay, great. Thanks, so much.
Thanks Scott.
Thank you Ghansham context.
Our next question comes from George Staphos from Bank of America.
George Your line will be open now if you would like to proceed with your question.
Thanks, very much hi, guys. Good morning, Thanks for all the details I wanted to.
Hey, two questions generally one on volume and then the other on Kalamazoo, So in terms of volume.
Documented pretty well in terms of what was affecting you in the third quarter of the lost revenue.
A lot of that effect hitting you in foodservice what comfort do you have that the supply chain issues and labor issues that were affecting you will moderate here such that volume should be as expected in the fourth quarter and aside from foodservice can you talk a bit about where you are.
Seeing particular strength.
For your products, especially the new products Mike.
And I asked that partly with some content recently that I've seen where one of the major kyocera changes is moving from a poly coated paper Cup back of plastic so where do you stand with.
Your defense of that with a with a pill a coated cup.
Yes, so thanks for that George I think if you kind of take a step back and we kind of outlined this little bit in our prepared comments, but it's good to spend a little bit of time on a two year to date through the second quarter, we saw our volumes up 3% across the board and as you recall, we reiterated at that point in time that we'd be at the high end of our 100 to two.
A 100 basis points, so as Steve mentioned in his comments, we actually saw a little bit of this come in in Q3, and an anticipated relative to the guide that we gave on the second quarter. There are really four things that hit us in the quarter.
Relative to <unk>.
Organic volumes being down 1% first and you've seen this from a number of our customers that are already released our customers were having some challenges with their supply chains and obviously, if they don't make a.
The package, we don't sell a box and so there was some of that going on.
Labour ability availability on the foodservice side.
Our end use markets as well that's been pretty well chronicled in our case the ramp up of foodservice is just they are.
We had to add over 200 people back and W think about when the pandemic hit we actually had to rightsize that business real quick and we did but as the volumes come.
Back in a strong way like we saw them happen.
Here in the second and third quarter, adding that many people in a rapid fire fashion just isn't easy in this environment.
So our labor issues are fairly discrete in our foodservice business, yes, we see it really across our platform, but in terms of the impact on <unk>.
Volumes it would have been in the foodservice business. So we have the demand the issue is getting the people. There. So we can actually execute and we've made some progress in our third quarter as we go into the fourth quarter. So that's part of the comfort that you hear from me. We also lost a facility.
About two months in the northeast as a part of Hurricane idle. It just got flooded out and die. So we had to move all that volume around and and you know that cost a little bit of sales in the quarter and then lastly.
Some of the open market paperboard that we buy in Europe, just became difficult to get.
In some cases and so you know.
That slowed us down a little bit in the European platform again, we have plenty of demand. The issue is getting the materials that we need in order to process them, but actually get them out the door. So when you put that all together.
We see some of those things abating as I mentioned is we're in the fourth quarter here and we expect to return more towards the higher part of that 100 200 basis points to finish the year strong and George just to add to mikes point around the momentum on the innovation front I mean overall, our momentum for fiber based conversions.
Whether it's a phone comps continuing to convert over to fiber based solutions or Youll clip solutions in Europe, expanding globally or paper steel solution are gaining significant traction around meats and cheeses and other perimeter of the store activities those items as we've talked quite a bit.
Give us confidence that 100 to 200 basis points of organic growth that we've experienced over the last two years will continue as we move into 2022.
Okay.
I guess, Steve I was hoping maybe if you had a quick update on PLE.
Coated cups, if you have one maybe you'll save it for the the analyst presentation in February and then my second question just quickly with Kalamazoo coming up quickly congratulations on that being on track and earlier frankly than your initial budgeting.
Budgeting and guidance.
Some reports about the reaction in the community to the growth of the Kalamazoo project can you comment on how you are being received in the community Theres also been some discussion about.
Your tax benefits that youre getting the facility anything that we should be aware of in terms of how that project will drive return and growth for graphic going forward. Thank you guys.
Yes so.
Thanks for the question I'll deal with mentioned Kalamazoo here in terms of our project. Yes. We're on we're actually on our original schedule, we expect to make paperboard here in the Q4.
Towards the end of the quarter.
And it's important that we do because we absolutely need that paperboard to operate our business. We've got a lot of demand from customers that we actually need that tonnage coming online relative to some of the reports.
Come out around some of the.
Order compliance I think is what you're referencing I'd characterize those as kind of normal course, we're dealing with those.
Through normal channels and there is really from a return standpoint on the project and we're investing well over $600 million as you know, it's a state of the art facility and it'll have the capability to be a great citizen in that community and ultimately.
Drive the jobs and additional production that we committed to when we started.
George very briefly after cycle, we'd like the customer Trialing, that's going on we've got good momentum that we'll share more with you as we kind of embarked ground.
Into 2022, I'm sure, we'll talk about that specifically when we describe our overall innovation effort when were together in February 2017.
Sounds good thanks, guys. Good luck in the quarter.
Thanks George.
Thank you Josh next question is from Mark <unk> from Bank of Montreal, Mark. Your line is now open.
Proceed with your question.
Yeah. Good morning, Mike Good morning, Steve.
Michael I just wanted to start.
You could help us unpack what's gone on here in the CT market over the last three to six months, because it's really been a very sharp turn in the market just trying to get some sense.
How you understand that the pick up in domestic demand, but perhaps set against maybe some.
Difficulties, bringing imported bleach board or imported tenants CRB into the market.
Yeah. Thanks for that Mark I think you've answered part of it I would also add as you know in 2019 and early 2020, there was some capacity taken out of the market one of our competitors shut in Sps mill down another one shut a paper machine down.
No. We obviously shut down a small recycled paperboard mill in conjunction with our project in Kalamazoo and at the same time, you've got strong demand I mean take a look at our demand were up compound at 3% on volumes and over that two year period of time, we've got a high market share as you know approaching 40%.
And so when you look at some of the dislocations and shipping challenges that some of the importers have had to deal with that.
That is created.
Real desire for your domestic production and thus the operating rates being above 95% in some cases 97 backlogs at multiyear highs.
Industry inventories as Steve mentioned in his prepared comments, they aren't really down across all three grades and so that's really the dynamic that is going on and again why our startup of our mill in Kalamazoo is so strategic the timing of it just couldnt be better relative to the demand. We see you out there because we will have.
Tons that will be able to help our customers meet their objectives and this.
There will be some of the highest quality lowest cost CRB tons in the world. So we like that project better today than we did when we announced and we liked them when we announced it so.
I think that gives you a little color on what we see here.
Okay, and then just a couple of questions around Europe, you know last year, you had some delayed machine placement. So I'm curious about how you sit on that and then the impact.
Of these European energy price spikes, either on your existing business as well as on the <unk> business.
Yes, thanks for that Mark in terms of our machine placements that rolling along well, we're able to get our technicians and now I think on keel clip side, we're up almost 60 machines that we've played.
Placed in our installed and operational and Thats on top of other machines that do wraps and baskets that just general movement. There on the beverage side out of plastics and enter into paperboard.
That's been a real source of growth for us this year in regards to energy rates in Europe. As you know, we're converting only over there even with our packaging, they're converting only so the actual impact of that gas on our direct operations is relatively small obviously, we buy the paperboard and you've seen kind of rapid fire a bunch of <unk>.
Greece's in surcharges that have gone up by European producers on that material and the weight of our contracts those will be passed along that we would tag onto the increases there as we talked about when we announced the deal where they are those tenders tend to be shorter duration and have more frequent openers because the vast majority of people who make.
All in cartons in Europe are not integrated.
Okay. That's helpful I'll turn it over thanks, Mike.
Okay. Thanks Mark.
Thank you very much Mark and our next question comes from Gabe <unk> from Wells Fargo.
Your line will be open now if you would like to proceed with your question.
Alright, good morning, Mike Sue Thank you.
I hate to harp on the inflation point here, but to be clear I guess, you're in industry efforts to maintain or.
Even enhanced margins.
Price increases is pretty encouraging, but if I want to sort of stress tests. The assumption that you gave us kind of for the fourth quarter in terms of inflation and then heading into 2022.
Even in just in the fourth quarter in the second half I don't want to say, it's going to be around.
<unk> hundred 20 million for fourth quarter of $2 10 for the second half, but you were telling US a 100 to 125 for next year.
So I'm curious if that's if there is timing and something related to the cadence of that.
That.
It says, okay, maybe things taper off in the back half of 2022, and then on the labor and benefit bucket that is kind of consistently running at $50 million range.
And this is maybe around a little bit harder next year and I. Appreciate the magnitude is not nearly as big as <unk>.
As an input cost, but maybe $60 million, just given where labor and benefit markets are today.
Yeah, Gabe, it's Steve <unk>.
You answered the second question.
As you did I think we will likely see our labor and benefits inflation to be at the higher end of our range next year.
And that's kind of been the guardrails that we provided just given some of the realities that we've been talking about relative to labor availability in some.
Wage inflation, but to your commodity input cost inflation question as we've talked we're not we're not forecasting 2022 inflation at this point, but what we are sharing is that yes, if everything kind of stayed as is and a lot of this acceleration error occurred in the second half. So you are right you got to.
Hundred plus million dollars in the second half of the year, if things stay where they are and you and you compare them to the prior year. The rollover is about 100 $125 million range, mostly because most of the acceleration drew acceleration as occurred in the second half of the year and so most of the inflation on the carrier.
Over would be occurring in the first half of next year and again about a forecast that's important but it is the carryover in terms of azure pressure testing it.
Okay, and then I guess again sticking with inflation I apologize.
To the extent that I mean I'm hearing.
Food and beverage.
Land owners talk about potentially.
Potentially 2025% inflation.
As they roll this disinflation through the grocery channel et cetera.
How consumers might respond.
You know when they are spending their dollars on that what is your experience when you've seen this this kind of an inflation.
In terms of I guess demand elasticity for the products that you serve.
Do you see any kind of potential that consumers trade down and is that a net positive.
For your or potential risk as we head into 2022.
Sure Gabe Thanks for the question. It's a great question I think look I can't tell you that we've seen this exact experience relative to the amount of inflation that's flowing through at least not recently.
A couple of decades since we've seen this kind of input cost inflation.
No shocks I mean, I think the thing that I point to for our graphic and what positions us uniquely in the marketplace at 95% of everything we do is food and beverage base. So you are right. There may be some trade downs, maybe instead of buying branded I go to store brand, but it's a physiological human need that I have to eat and drink and we make those kind of packages that go.
And to those kind of products so.
And we've got a diversified portfolio as you well know relative to foodservice and.
The at home consumption, so relative to our revenue makeup.
It's a nice balanced and really gives us the ability to benefit regardless of how that develops and the environment there, but it's definitely going to be inflationary going forward Theres no doubt about it and Dave just to add onto that is the occasions, where for whatever reason the economy comes to a slower slower position to either due to inflation or other.
Other activities our business has been very defense in the past as Mike mentioned and so yes, there may be there could be some headwinds out there.
Overall, the trading down actually can be sometimes net favorable and even if there is large dislocation on true consumption patterns. They tend to be quite modest on a percentage basis.
So I bottom line is I guess today to summarize that our confidence level in our vision 2025 goal of growing 100 to 200 basis points between now and 2025 is high based on the projects, we see and what our customers are telling us.
Thank you guys. So we're just trying to remain vigilant over here.
Yeah absolutely.
Thanks Gabe.
Yeah.
Thank you Jason Our next question comes from Adam Samuelson from Goldman Sachs.
Adam Your line will be open now if you'd like to proceed with your question.
Yes. Thank you good morning, everyone.
Good morning.
So I guess first I was hoping to get a little bit more color on the performance in the quarter.
The net performance line, which was a positive $79 million contribution in the third quarter.
That is.
As far as back as I can see one of the bigger quarterly.
Quarterly results that you guys have posted maybe if you could dissect that a little bit because I think through some of the prepared remarks that you've made earlier.
Talking more about headwinds and challenges around labor around you had the mill in the northeast.
Rather than productivity benefits and so I'm, just hoping to get a little bit more color on kind of how you.
How have you been able to mitigate that.
Some of these cost headwinds operationally.
Yeah, Adam it's Steve I'll be glad to most of the headwinds that we've talked about kind of rolled through in terms of the waterfall the impact of volume mix because of the volume not necessarily being there. So that's where those headwinds showed up we were very pleased with our overall productivity.
In the quarter and Youre right. It was a very substantial number two primary drivers there one just very good core productivity in that $30 million to $40 million range Thats kind of our expectations and then on a year over year basis, we had significantly less maintenance downtime year over year, we had quite a bit last year much less this year.
And our teams executed against that exceptionally well so that's positive for us.
In the quarter. So those are the two big primary drivers of our positive there youll see that return back to more normalized in Q4, and as we look out over time, our $50 million to $70 million of core productivity, the right kind of range for the business, but no. It was a very strong performance.
<unk> relative to <unk>.
Overall productivity.
In the quarter.
Okay.
That's really helpful and there's been a lot of discussion on the price cost dynamic on the call, but maybe just as we sit here today and we're evaluating kind of the future progression.
Some of these commodity markets.
Have you seen anything start to come down, particularly from on the chemical side are you seeing anything more plateau versus where the specific pockets that are have been much more challenging through the second half of the year.
Yeah, Adam it's Mike.
Well the comment.
As I mentioned earlier, we have seen at least the last couple of months that it would appear that the secondary fiber has dipped a bit.
We're not calling that it won't go up again, but you asked the question. So that's couple of months in a row after seeing that March higher for 11 months straight.
Some of the polyethylene like low density polyethylene, we've seen them move down slightly now materially was still elevated quite high on a year over year basis, almost 100% on some of the grids we buy.
They have gone down they've ticked down just slightly so we're watching those things.
On the other side of things, we've seen some wood inflation.
Ed.
As you know growing particularly on hardwood and some of the baskets were in but that's that's all in the guide that Steve gave you and it's all consistent with the inflationary expectations, we outlined for both Q4 and the carryover into 2022.
Okay that color is really helpful. I'll pass it on thanks.
Thanks, Adam.
Thank you Adam our next question is coming from Michael Robertson from tourists Bank.
Your line will be opened now if you would like to proceed with your question.
Thanks, very much good morning, Mike, Steve Melanie and I. Appreciate you taking my question good morning, Michael.
Just quickly on.
Especially the nuclear club.
<unk>.
I wanted to just quickly on labor and like you mentioned.
Particularly being a headwind in foodservice.
But the thing is you had some layoffs and you're trying to book business is becoming critical in that backdrop can you just talk a little about what the company is doing to attract labor.
And have you know with the rollout.
<unk> mandate has that impacted the labor. So I just wanted to try to get a sense of what that can be specifically doing and whether the vaccine anytime actually impacted.
The attraction of labor as well.
Yeah I appreciate the question Michael So we're doing a number of things to attract talent that we need to operate those facilities that I mentioned and we're doing it differently than we've done in the past we've got some pretty big sign on bonuses that we put in place for people you employee referral.
Typebar no bonuses that we're offering.
Because if they know different people in the community and suggest to them Hey. This is the place you should take a hard look at.
Given given his track record and.
So those things are actually making a difference in some.
Some cases, we've had to look at wage rates, particularly for some of our entry level positions.
We're doing those types of things to continue to take a look at how we are the employer of choice in the communities, where we operate so it'll be a combination of all of those things, we're staying very close to it and I'm confident that over the next quarter or two we'll be able to get our staffing back to the levels, we needed to be but as I outlined the foodservice.
<unk> is really the most profound for us just given the magnitude of the Enel X amount of people that we had to hire back after after the layoffs.
Doesn't suit you following the pandemic.
Got it that's helpful. And then just quickly on sustainable packaging solutions.
I'll have to cycle paper steel.
I would just add.
I Wonder if you could just talk about commercialization, where those products stand from a commercialization vantage points is maybe incremental revenue EBITDA I think that the more you can share with respect to your focus is sustainable packaging, that's really would help us and help investors get their appreciation.
How you're guiding.
Growing the business.
On those sustainable packages that can be helpful.
Yeah.
Again I appreciate that question, Michael I think it all comes back to our three big growth platforms that we talked about so it's around plastic replacement opportunities enhanced cooking solutions and strength packaging, we've got a big addressable market as we as we showed you when we were together kind of pre hey, our packaging at seven $5 billion and we will update.
Get that for you when were together in February.
In New York City kind of giving you an outline on what that looks like it's going to grow we see more opportunities to actually go faster and that give Stephen a lot of confidence in our 100 to 200 basis points of true organic growth and to your point, we'll be able to show additional examples of products that we've got there when we're together kind of giving you an update.
On our enhanced vision 2025 goals.
Thanks, Good luck in the quarter.
You bet. Thank you.
Yes.
Thank you Michael.
Our next question comes from Colin Watts from Deutsche Bank.
Call your lines will be open now if you'd like to proceed.
Hey, good morning, Thanks for taking my questions just wanted to go back to the 2022 bridge.
And is it possible to break out what you expect from your core productivity and that $20 million grouping that you have I know you had some weather events. This year that you should lap and then also how do outages next year compared to this year.
Yes, Colin Steve Obviously in February we will provide you with the details I think whats there as we talked about in the prepared remarks, we've got a long history of our productivity and the organic sales growth that we were just talking about that those items will more than offset the labor and benefits.
The inflation that we're experiencing obviously any any FX headwinds.
And also there'll be synergy capture that will be in there. So current line of sight to $20 million plus fuel is clear to us obviously, we'll provide more details on that in February I think the intent here is good long history of synergy capture overall performance organic sales growth more than offset.
Are those other items and our confidence as we head into 2022 that that will occur.
Hi.
Got it and then on the Kalamazoo project are there any startup costs associated with bringing that up and should we expect the $50 million benefit to begin rolling through and <unk> on kind of a flatline basis or will it take some time to kind of ramp up.
There'll be a little bit of ramping call I think modest benefits in Q1, and then we would expect to see more as we kind of roll in the onetime cost of redundancy costs are relatively modest and we'll call those out.
If there are any of any substance, but we're looking forward to starting up.
Here in Q4 and be making product in Q1, but I think the benefits themselves will be a little more weighted Q.
Q2, and beyond as production and high quality production ramps up.
I appreciate it I'll turn it over.
Thanks Kyle.
Okay.
Thank you Karl next question is from Anthony Sorry, Anthony Pettinari from Citi. Anthony Your line will be open if you would like to proceed.
Good morning.
Good morning.
Capital E on capital allocation, you know Youre closing a are soon and you have a capex cycle that rolls off next year I'm. Just wondering if you could talk about.
The appetite or the ability to pursue additional acquisitions as you integrate a R. R is now sort of time for kind of a natural pause and then just kind of remind us where you'd like to be from a leverage perspective, maybe next year.
Yes, so I'll take a shot at that and let Steve.
Little color too Anthony Thanks for the question.
From our standpoint, we love to set up we've got going into 2020 to look at the catalysts, we've got in front of us between our packaging tiny.
Timing of that looks excellent with the growth in consumer fiber based packaging, we've got Kalamazoo, starting up we've got to deliver on.
$100 million of.
EBITDA growth there $50 50 over the next couple of years so yes.
And when you look at all of that.
Leverages is going to be elevated here at year end, because we will take that onboard.
<unk>. So I think what you should think about us in 2022, it's a heads down year for us focused on kind of taking advantage of the investments we've made in delivering on those we've got clear sight of line of sight in terms of what needs to happen as Steve mentioned in his prepared comments, we feel confident we'll be at three five times.
<unk> Levered at year end 2022 or lower.
And when we did <unk>, we told you that.
123, we want to be at three times so.
That's kind of where we're focused on it's not to say that we wont look at something if it came up but.
Our capex is going to go back to a more normalized rate we've got the projects.
I've outlined in front of you that give us good synergy things to work out and the value creation for shareholders and we want to stay focused on that stuff at least into 2022.
Okay. Okay. That's helpful.
And then just just following up on Mark <unk> Mark <unk> question on the global box Board market, assuming you know freight rates are ocean freight rates kind of improve or normalize at some point next year do you think it's the case that you know significant import pressure could come back and Sps and maybe CRB or do you think it's more of the case.
That you know some of this capacity is either no longer running or maybe not in the cost position to impact the U S market and I guess I'm thinking about the Chinese shutting down some capacity in the Europeans dealing with some of these cost issues just kind of curious what your take is.
Well I guess as I sit here today first off I don't see ocean rates coming down materially. So maybe some of the congestion will cleaned up but.
We expect.
Freight as we've told you for several quarters now to be structural in nature, both in terms of.
<unk> rail and truck and that really nervous to our benefit given the wide platform that we operate and how we built the company. So.
I'll start with that point and then in terms of what's happening in Europe.
As I mentioned with what we're seeing on the beverage side, there's even more growth of consumer fiber based packaging in Europe, replacing single use plastics in that market. So those producers over there, particularly with higher freight and dislocation on shipping costs.
Going to want to service that market first and as you answered part of that question.
Think about what's happening with Gd board in that market compared to what their version of recycled versus some of the Virgin grades you've got natural gas prices approaching $30 an M. Btu, so theres going to be a lot of demand for fiber and naphtha <unk> and Doug to the degree those producers can move it into that market.
I'm sure they'd want to just like we would want to do that here domestically. So.
In that market now in a material way as I mentioned to you where they are packaging will be the largest purchaser of paperboard. So we've got good knowledge of what's going on.
And that's going to help us drive our agenda going forward here.
We'd like to positioning that we've established for the company on a combined basis.
Yes.
Okay. That's very helpful I'll turn it over.
Thank you very much Anthony.
Okay.
Sure.
Thank you Anthony and that concludes today's Q&A session I'll hand back to Mike just for any closing remarks.
Okay. Thank you for everyone for joining us today, we look forward to seeing many of you on February 17th in New York City, where we will outline our fourth quarter results and full year results.
A detailed outlook for 2022 and update you on our packaging integration and growth opportunities. Finally, we wanted to be able to spend some time talking about our updated vision 2025 milestones incorporating the catalysts that we discussed today with that hope you have a great day, and we look forward to talking to you again soon.
Okay.
Thank you to everyone who has joined US today. This concludes the call and you may now disconnect your lines.
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