Q1 2022 Graphic Packaging Holding Co Earnings Call
Right.
Yes.
[music].
Hello, and welcome to today's graphic packaging first quarter 2022 earnings call. My name is daily and that will be the moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference over to many of these can you just vice president of Investor Relations Madam. Please go ahead.
Good morning, and welcome to graphic packaging holding company's conference call to discuss our first quarter 2022 results.
Speaking on the call will be Mike Doss, the company's president and CEO , and Steve Scherger Executive Vice President and CFO .
To help you follow along with today's call, we will be referencing our first quarter presentation, which can be accessed through the webcast via self directed slides and also in the investors section of our website at www Dot graphic pag Dot com.
I would like to remind everyone that statements of our expectations plans estimates and beliefs regarding future performance and events constitute forward looking statements such statements are based on currently available information and are subject to various risks and uncertainties and that could cause actual results to differ materially.
From the company's present expectations.
Information regarding these risks and uncertainties is contained in the Companys periodic filings with the Securities and Exchange Commission and your reliance should not be placed on forward looking statements as such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statements except as required by law.
Mike I'll turn it over to you.
Thank you Melanie.
Good morning to everyone joining us on the call and webcast. This morning.
Off to a great start in 2022, and I'm pleased to share with you a very strong first quarter, we're operating well and doing what we said, we would do including delivering another quarter of net organic sales growth pivoting to a positive price to commodity input cost relationship driving margins higher and executing a very significant step up in adjusted EBITDA.
We'll spend some time on today's call discussing these positive results and operating model, we've put in place to drive continued profitable growth and returns to our stakeholders.
On slide three let's briefly walk through the key highlights from the quarter adjusted EBITDA was $350 million, an increase of 46% year over year adjusted earnings per share excluding amortization of purchased intangibles improved 78% to 48.
Net sales for the quarter were a record $2 2 billion.
Up 36% year over year, driven by a 3% net organic sales growth successful execution of pricing initiatives and contributions from acquisitions.
Notably the first quarter marks the eight out of nine quarters that we have delivered net organic sales growth building on our track record of consistent long term organic sales growth performance.
During the quarter, we advanced to transfer Native company investments, we initiated to extend our global leadership in fiber based packaging.
Both have recently been completed bringing months in the case of calendar two years of hard work to fruition. After closing the <unk> packaging acquisition in the fourth quarter of 2021, we continued to actively integrate our expanded European platform in the first quarter. Our dedicated teams have been working collaboratively meeting early integration.
<unk> targets and are on track to deliver $40 million of synergies over the next two and a half years separately, our new K two machine in CRB platform optimization investment in Kalamazoo first announced in 2019 came to life during the quarter. The <unk> machine is operating and continues to ramp up production to start.
<unk> is meeting expectations.
The investment in our CRB platform will yield substantial quality and efficiency enhancements provide environmental benefits, including lower greenhouse gas emissions and water usage and deliver a $130 million of incremental EBITDA over the next three years $50 million of incremental EBITDA is expected this year.
Finally before moving on from this slide our comment on our financial strength, while we are clearly operating in unprecedented times, we continue to see robust demand for innovative fiber based consumer packaging solutions.
Given the strong underlying demand company specific initiatives driving expansion and profitable growth and overall excellent performance globally. We are reiterating our 2022 financial guidance provided at our Investor day in February .
We have a strong business, we are quickly deleveraging and we have greater than $1 billion in global liquidity.
While we are performing very well as a company, we arent operating in a vacuum and I would be remiss not to acknowledge the geopolitical events that are impacting our global communities as humanitarian and global citizens. We are living in very unsettling times, our hearts go out to the people of Ukraine, and all of those standing in Harm's way.
On slide four let me provide an update on the business we acquired in Russia in the fourth quarter of 2021 as part of the our packaging acquisition our business in Russia consists of two folding carton facilities, one in St. Petersburg, and the other and Tim will share with.
The converting facilities, primarily serve multinational foodservice and tobacco customers for local Russian consumption the businesses small accounting for roughly 1% of total sales and less than 1% of annualized EBITDA.
We're adhering to all U S and European Union sanctions and are currently operating to meet existing customer contractual commitments, where possible. We are not making any new investments in the region nor are we entering into agreements with new customers. We will continue to explore all options for the business is existing customer agreements expire.
Turning back to the quarter and expected full year 2020 to financial results on slide five I will discuss pricing actions implemented and recognized over the 2021 and 2022 timeframe in Q1, as we guided we pivoted to a $46 million positive price cost relationship.
$222 million and offset a $176 million.
Dollars of commodity input cost inflation importantly in Q2 pricing momentum continues and we expect to pop.
Positive price cost relationship to expand into the range of $80 million to $100 million.
We made further headway recovering the price cost dislocation experienced in 2021.
You can see on the right hand of slide five.
Are implemented and recognized price actions are expected to result in approximately $850 million of positive pricing flowing through the business in 2022, our current price expectations are $150 million higher than our original guidance the untrusted.
So that inflationary environment in which we are operating continued throughout the first quarter. Accordingly, we have increased our 2022 inflation range by $150 million to $450 to $650 million. We continue to forecast the pricing initiatives were more than offset commodity input cost inflation.
And the range of $200 million to $400 million in 2022 more than fully recovering the 2021 price cost dislocation.
Turning to slide six and the integration of our recently expanded European platform. The new leadership team in Europe is in place and has made a equally of graphic packaging and packaging executives with strong packaging and sustainability backgrounds customer relationships and commercial and operating expertise the team has <unk>.
<unk> immediate chemistry quickly coming together as a cohesive group focused on results with the best practices of both organizations leverage we are realizing efficiencies while strengthening our global innovation engine, we are energized as interest from existing and new customers is on the rise and we are identifying customer and geographic.
Expansion opportunities our dedicated employees have maintain a steadfast approach to integration activities and we are on track to deliver $40 million of synergies over the next two and a half years.
With approximately $2 billion in annualized sales our European business has scale vast resources and is benefiting our entire global book of business by leading in the sustainability supported packaging innovation, while also delivering on trends that we believe will continue to drive organic sales growth around the world.
The second transformative investments being successfully executed a source of anticipated large scale benefits for customers and returns for stakeholders as our new K two CRB machine and platform optimization project on slide seven you will see a snapshot of the new K two machine haul during the final stages of our startup.
We began operating at scale during the quarter and are continuing to ramp up production new paperboard produced on the <unk> machine is being integrated into our converting facilities and customers are delighted with the formation quality and profitability of the paperboard. We are continuing to ramp up to service the increased demand for CRB, we are experiencing this.
In turn we will continue to drive company integration rates higher.
$50 million of the expected $130 million and total incremental EBITDA from this investment will be achieved in 2022 as we bring down one of the higher cost mill locations designated in our original optimization plan in February we notified our Battle Creek employees that we will decommission the mill over the coming months.
The K two ramp up progresses on plan I am extremely pleased to report that some of our Battle Creek employees will transition to calendar <unk> to support the volume we will be producing on our expanded campus I want to personally. Thank all of the hard working men and women in the Battle Creek Mill that supported this project and ensured continuity for our.
<unk> as we made this important transition.
I will wrap up my comments on slide eight with an update on innovation and organic growth. We see is our new and evolving suite of fiber based packaging solutions are adopted globally, we launched pay per <unk> in 2020, a new barrier lying fiber based packaging alternatives to plastic trays for fresh meat cheeses and salads from.
Its original innovation, we introduced new iterations, including paper seal slice paper steel wedge and paper steel Cook broadening the number of customers and markets served to include fresh pasta deli meats and frozen items.
Customer adoption of pay per sale following similar sustainability adoption trends around the world was first commercialized by major retailers across Europe , and Australia with the POS the package showcase tier for new seasons market a gross around the west coast. We are now commercial in the United States.
New seasons market with the first mover in the U S. Adapting paper steel to replace plastic clam shells and in effort to shift to more sustainable packaging with less waste.
As typically occurs once new packaging innovation is commercialized by a first mover in the market.
While harvest in the U S. In the third quarter of 2021 gained great interest from producers and grocers Eagle to learn more about its sustainability benefits. We're excited to see that our produce tech tenant line, we will be launching with a very large grocery REIT.
Taylor in the U S. During the second quarter.
As you can see we've been working hard and remain laser focused on servicing customers and executing our strategic initiatives. We are focused on results and remain on track to achieve our enhanced vision 2025 goals.
With that I will hand, the call over to Steve for a review of financials, Steve over to you.
Thanks, Mike and good morning.
Moving to slide nine focused on key financial highlights net sales increased 36% or $596 million from the prior year period to a record $2 2 billion.
The year over year increase in sales was driven by 3% net organic sales growth.
Higher price flowing through the business and contributions from acquisitions.
We delivered 100 basis points of margin expansion on higher sales as a result of ongoing disciplined pricing actions to offset the inflationary environment.
Higher volume mix and strong operating execution.
Given the operating leverage we are driving adjusted EBITDA increased an even greater 46% year over year to $350 million.
Adjusted earnings per share excluding amortization of purchased intangibles grew 78% to <unk> 48 a share.
We are including an adjustment for purchased intangibles in the adjusted EPS calculation moving forward.
Is it more accurately reflects the operating earnings and cash flow capabilities of the company and is a metric used by investors.
Finally, our integration rate increased 200 basis points year over year to 73%.
As we internalized paperboard into our global converting operations.
As a reminder.
We currently purchase 1 million tons of paperboard to support our global converting operations.
On slides 10, 11, you will find our revenue and EBITDA waterfalls the.
The drivers of the 36% year over year increase in sales were $222 million in pricing and $385 million of higher volume mix from organic sales growth and acquisitions.
Slightly offset by $11 million of unfavorable foreign exchange.
Adjusted EBITDA increased $110 million or <unk>, 46% year over year to $350 million in the first quarter versus the prior year period.
Commodity input cost inflation increased sequentially from Q4 by $34 million to $176 million in labor and benefits and other inflation was $19 million.
Despite the larger inflationary headwinds in Q1, we produced significant growth in EBITDA, driven by $222 million of positive price.
$68 million of volume mix and $14 million of net performance.
On slide 12, let me dive deeper into our quarterly performance.
Solid quarter by any measure.
Our recent acquisitions are performing well and delivering expected returns.
Our foodservice business continued to recover year over year with sales up 30% driven by price and organic sales growth.
Our food beverage and consumer businesses grew sales, 14% year over year before acquisitions also driven by positive price and organic sales growth.
As it relates to paperboard market data.
We will be reporting industry operating rates for the first quarter on April 29.
We continued to experience strong demand for our products.
Backlog have increased across all three substrates.
With all that 10 plus weeks at the end of the first quarter.
Our paperboard inventory levels remain low.
Focusing briefly on capital allocation pro forma net leverage at the end of the first quarter was four six times.
We continue to expect year end net leverage to be between three and three five times as we utilized significant cash flow generation to reduce debt, while adjusted EBITDA and EBITDA margins grow substantially year over year.
Finally, we continue to maintain significant liquidity in the business at over $1 billion.
Turning now to full year 2022 guidance on slide 13.
Given the first quarter financial results and the confidence we have in the critical initiatives, we're executing this year.
We are reiterating our guidance today for adjusted EBITDA cash flow sales and year end leverage.
The EBITDA and cash flow year over year details have not changed.
Pricing will more than offset commodity input cost inflation acquisitions will meet our expectations are.
Organic sales growth will continue to be at or above our 100 to 200 basis point commitment and performance, including the ramp of Kalamazoo will drive real benefits to EBITDA and cash flow.
On slide 14.
I'll wrap up my prepared remarks, with our guidance for adjusted EPS, excluding amortization of purchased intangibles.
Adjusted earnings per share growth during the quarter was significantly up 78% year over year.
We remain on track to deliver adjusted earnings per share for the year in a range of $1 75.
To $2 25.
That concludes.
<unk> our prepared commentary this morning.
Let me now turn the call over to the operator for questions operator.
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Our first question today comes from Ghansham Panjabi Baird. Please go ahead. Your line is now open.
Thank you and good morning, everyone. Congrats on a strong start to the year.
Can you just give us an update on <unk>.
Hi, good morning, maybe.
Maybe you could just give us an update with what youre seeing as it relates to operating and supply chain efficiency. The way you see it at this point I mean in the past you've called out labor constraints that had an impact on you along with your customers.
And trucking et cetera.
Just give us a high level assessment.
Thanks.
The status at this point.
Scott.
Kind of talk about the inflationary impact of that and I'll give you a little color commentary on what that means operating backdrop.
How are you.
Within the quarter.
We certainly did see continued acceleration on the commodity input cost inflation of 170.
<unk>.
We have an inflation in Q1.
We saw continued increases $34 billion.
And then in the prepared commentary.
Q4 to Q1, and so some of that was certainly our suppliers continuing to.
<unk> main challenges we saw about 20%.
$2 million of inflation across the big categories of our spend fiber paperboard that we acquire chemicals energy and logistics. So it certainly showed up in the form of the inflation in Q1, which we discussed here and then I'll talk a little bit about the supply chain.
Got it thank.
Thank you look at labor.
January like most gross struggling a bit.
With the overrun.
Barry.
Net impacted some of our operations.
Did some of our suppliers as well, but that pretty much abated in February March was a clean month, we ran well one of our biggest challenges was rebuilding our labor force back in our food service.
We are as you know that.
That's a very hard during the pandemic, but we saw that volume come back very strong starting really in Q4 and into Q1 as a matter of fact, our Q1 volumes were actually slightly ahead.
Pre pandemic levels. So we're pleased about that it was a bit of a scramble we still got some work to do on efficiencies in terms of how we operate our locations, but we're able to get product out and I would expect as we grind through the second quarter and into the second half of the year.
<unk> made progress along those lines.
Okay, great. Thanks for that Mike and Steve and then for my second question as it relates to the U S. Natural gas prices were just starting to break out words multiyear highs just remind us as to how are you.
Sort of approach managing exposure to those commodity.
You may just become much more volatile than it has been.
Okay.
No Youre absolutely right. We certainly are seeing that volatility play itself out for so we will absorb some of that.
The impact of that.
I think our.
User around $22 million range currently.
That's for <unk>.
The scale of it relative to the financial impact, which is obviously included in our.
An archive, we can talk about that a little bit along the way here as well and maybe just a little finer point on that guidance and we continue to look for opportunities bernbach biomass and our Virgin mills that allow us to.
Use labs Nat gas.
And our new Kalamazoo platform, obviously is going to be more efficient.
Paul or bill so finding ways to use less so.
<unk>.
Managing that kind of input cost.
No inflation.
Perfect. Thanks, so much Mike.
You bet.
Thank you.
The next question today comes from George Staphos from Bank of America. George. Please go ahead. Your line is now open.
Thanks, very much good morning, everybody and thanks for the details Steve.
Steve and Mike I, just if you could could you go back through where youre seeing the input cost pressure and to the extent possible and to the extent prudent on our call quantify it I heard some of your answer with caution, but the connection on the call at least from my side wasn't so.
So good and Relatedly on price cost.
Where or what would you think currently.
Now on pricing that's already been implemented this year might look like for 'twenty. Three so if you are getting 850 or so this year in millions of dollars could that look like perhaps another couple or $300 million I haven't done the math on it but if you had any thoughts on that we've taken and I had a follow on on volume.
Yes, George it's Steve I'll take the inflation work for you and then Mike can talk a little bit about pricing. So let me just provide a little bit of detail.
We're looking for as I mentioned, the $176 million placement.
Place in Q1.
A bit of a high watermark up $34 million from Q4 to Q1 and it was really across the board in terms of all of the major commodity what we currently see in place in Q2 should be around the $150 million. So we'll see some modest decline.
Year over year basis, as we start to begin to lap some of the inflation that was occurring last year, which will put us at the midway point in the year of inflation in the low 300 range.
$5 billion or so.
Our current mark to market, which we tend to talk about where are we currently if everything kind of L. A that is.
For the year is approximately $475 million.
It's at the lower end of our range of four.
<unk> hundred 50.
Certainly we've all seen oriented extremely unusual in it.
It's volatile times like we were just discussing on Nat gas and other and other commodities. So we feel like we've got an appropriate range for the year at $4 50 to 650.
And as we've all seen we've seen some possibilities of some abatement, but generally speaking commodities really just continue to.
To move up and that's inherent in the full year range.
We've provided but the mark to market is roughly $475 million for full year 'twenty, two currently and Mike talks about price yeah in terms of price George Hi.
I think if we just kind of take a look at.
The pricing actions.
Announced and executed on here year to date, we've they've all been recognized in full so what we're doing right now.
Youre pushing goes.
Our conditions through our contracts do you saw that we increased our <unk>.
<unk> for the year by $150 million two.
Of course now of $850 million for 2022, we're certainly on track to deliver that and what our plan was.
As to quantify what's our preliminary accused of 'twenty three it would be at our mid year, Mark which would be July like we did last year for you give you a preliminary look into what that looks like it's meaningful from a carryover standpoint, we'll make sure that you've got that but as is our case, we will do that midyear.
Understood, Mike and thanks for that actually for my second question.
Switch it up from what I. Initially thought are you seeing any kind of.
Demand destruction or any pushing off of innovation launches pilots at your customers were going to go ahead with on the paperboard side because of the pricing that you've needed to put into the market. Obviously, given the inflation you're talking about or is it really not from your vantage point, having <unk>.
Effect, yet on commercialization trials pilots and alike and on the margin do you think theres any pre buying in your numbers in <unk>. Thanks, guys. Good luck in the quarter.
Okay. Thanks, George I'll take the pre buy upfront given the backlogs we have.
Yes.
And by that graph that's for sure you saw organic volumes of three 3% in the quarter, Steve talked about and frankly, our four mills.
Our sold out through the summer and into the fall.
Alright in terms of what the demand looks like.
I have to point to one area it would probably be the opposite cycle.
It's a great technology.
Allergy that by way of reminder, George replaces polyethylene side of it.
It's a great product, but many of them getting their operations back in.
Fully staff that we have.
Had a real opportunity.
That particular.
Two of any materiality, but overall our volumes are very busy demand solid it's broad.
Broad based we're seeing first of all Scott.
Single use plastics and paperboard is clearly evidenced five year organic volume.
We've talked about here and the products that we're showing you in terms of our.
Display so all in all very strong operating backdrop for us right now.
Thank you Mike.
Thanks George.
Thank you.
The next question today comes from <unk> <unk> with bank of Montreal Mark. Please go ahead. Your line is now open.
Good morning, Mike Good morning, Stephen Melanie.
Hey, Mark.
I'm wondering Mike if you can just give us any color on potential impact from the Russian sanctions.
<unk> board flows over in Europe .
Yeah. So.
From that standpoint, we profiled our Russia business for you Mark.
It's very small in.
Both the sales and EBITDA standpoint, not overly significant.
As a matter of fact, they call it de Minimis.
What we have seen though is some ships on.
On a net basis, we'd exit.
Net positive for us in terms of volume of material that is on in some of our other plants.
As a result of some of the dislocation in the Ukraine in particular so.
We've seen a lot written about a lot talked about around kind of what it all means in terms of overall demand profile as we head into fall and early next year, but again right now as we sit here today, our backlogs are quite solid and all of our current plants in Europe as you well know.
A buyer of paperboard in that market, we do import some of our own paperboard into Europe , specifically for the beverage application, but our teams did a really good job in the fall securing tonnage from producers to make sure that we were in a position to respond to customers' needs. This year, albeit at higher prices, we locked down and.
Higher prices and we've been able to pass that along with price currency paperboard and demand has remained strong in that market. So.
That would be the color I had tried to paint for you there net net maybe a slight positive for us we're watching closely because its a fluid and dynamic market as you can well appreciate.
But the early reads for us relative to what it means with both the large AAR packaging acquisition, we did are performing at expectations or maybe slightly.
Hey, Mark it's Dave just to put a little color on that as Mike was saying I mean, we saw positive.
Organic sales growth from our packaging.
Business in the quarter.
Operating EBITDA was right at a little better than our expectation of about $40 million. So we were really pleased with.
I'll start the team they are established as Mike.
So lasers as well as relative to the team coming together exceptionally well.
Okay, and then for my follow on Mike I wondered if you could just give us some general thoughts on sort of.
Sure.
Progress on plastics.
In Europe versus North America.
It does seem like maybe North America is probably picking up a little scream relative to Europe I notice some of the like.
Josh.
Warehouse club seem to be moving kind of produce out of.
On a clam shells and into paperboard alternatives.
Joe So I won't say markets pointing out is our thesis when we originally announced in May last year that Europe was ground zero for sustainability that hasnt changed.
One of the initiatives we see.
Going out in that market to replace single use.
Dixon shrink wrap film and a variety of different products is very strong as a matter of fact imports into the U S from European producers were actually down for the first couple of months of this year. Because you go forward is needed in that market and of course, we would rather sell it in that market.
With the shipping costs are bringing it here and I think that's another another.
Interesting points.
He made relative to kind of the trade flows paperboard, but.
I would also agree with you that with your statement that we're seeing an acceleration here in the North American market relative similar trends I mean, our paper steel.
A variety of different <unk>.
Applications that we've talked about profile for your strong around the perimeter of the store is strong replacement Richard application.
With paper or our scanner fruits and vegetables and provisioning for take home.
Thank you for that evening for lunch.
So that's a lot of singles and basis.
But they're pretty broad based and again Mark I'd point. So that's really when you look at some of the volumes in some of the larger cpg's and some of the analysts have written about that being largely flat or growing that's where it's coming from it's comment from those types of substitution is really around the perimeter of the store.
It's just getting out of rigid applications kind of in general in Europe , certainly shrink wrap out because that was a big big market as you know for carbonated soft drink and beer.
Okay very good I'll turn it over thanks, Mike Thanks, Steve.
Okay. Thanks Mark.
Thank you.
Our next question today comes from Mark Weintraub from Seaport Research partners.
Please go ahead your line.
Line is now open.
Thank you.
So I realize youre going to give us more specifics at mid year on the.
Rollover into 'twenty three.
I think potentially.
In terms of the.
How to think about it I understand that part of it is driven by the pricing that we see in pulp and paper week and there's a lag.
In terms of how that flows through.
I assume also some of it is related to cost escalators and it looks to me and correct me if I'm wrong, but some of that increased to $8 50 for this year, even was probably an increase in cost escalators.
I would like to get confirmation on that.
Understanding it correctly and then.
Is it fair to say that given the very extensive amount of inflation, there probably would be something related to that in 'twenty three.
And of course, if we end up at the high end of the inflationary ranges that you've laid out that number for next year would presumably be bigger kind of big picture.
Right way to think about it.
Yes market, Steve you are Directionally, correct, and you know the business.
Well I mean, we have a combination of.
Market based model that cost based models and that six months.
Lag you're absolutely right, we will see flow through.
Initiatives that were just now executing on that will roll in.
<unk> three along with movement through our cost models, depending upon where in the range of inflation flows.
But if it is like you said, it's a mid to high and then that would have resulted in additional price actions that.
Would flow through I think that's all.
A little bit the apparent one we've executed on for years is ensuring.
Surety that we have momentum for price continuing to offset commodity input cost inflation effectively and we are very positive.
That direction in Q1, and we expect to see that positive.
Impact makes its way through Q2, and really cold the rest of the year.
Great. Thank you and then.
Second question.
So you're now talking about $130 million of incremental EBITDA related to <unk>.
Hey, too and I think you may have already made that adjustment from the original $100 million, but just a little clarity that is that the.
Print you now expect.
The line is different from what you originally had anticipated.
The actions to date haven't.
We haven't seen as much in the way is offsetting capacity reduction as was originally contemplated is that now revise and is that incorporated in the higher $130 million.
Incremental EBITDA from this project you expect.
Yes March so really what that reflects and there's actually a slide in the deck Slide 17, which is also one of them that we use.
At our Investor Day, where we said that we were going to.
Operate the Middletown facility notes on Paperboard mill, which in our original plan was to shut that down so that is what's driving the incremental $30 million of EBITDA.
Across that platform.
And we need those tons to run the business with that footprint. We've got right now as you heard Steve say.
10 week backlog in every one of our substrates. So there's an incremental 240000 tons that when <unk> is fully ramp.
He will take over the next 18 to 24 months that will be in the market and it will be largely going to ourselves because of the growth in demand that we're seeing in our own products.
Great. Thanks very much.
You bet.
Thank you.
Next question today comes from Cleveland <unk> from UBS. Please. Please go ahead. Your line is now open.
Great. Good morning, everybody. Thanks for taking my questions.
I wanted to dig into the organic growth a little bit and maybe if you could give us some color on how the European market is.
Progressing versus the North America market.
You've alluded to it a couple of times throughout the call, but it is frankly, we've heard probably investors and others mentioned the word recession more times in the last two months and then probably the last five years.
So I'd just.
If you could sort of spell out some specifics on.
Youre seeing demand and organic growth trending in Europe , and maybe the U S independently.
Yeah, Thanks, Steve I'll start and then Mike can add some.
Additional color, but we're very pleased that our organic sales growth is really across the business globally as well as markets and so.
Overall, Europe organic growth was modestly above the number that we're articulating so as we just talked about we've seen a little more early adoption of conversion and the consumer.
Moving to be resilient and continues of course, given its food and beverage consumption and consumer packaging in Europe , predominantly so Europe European platform <unk>.
Organic sales growth at or above where we're at in total.
The Americas or the North American platform positive as well and as Mike mentioned that the market level foodservice has rebounded nicely in terms of organic sales growth, but even there we have organic positive sales growth in our core.
Food beverage and consumer businesses in North America. So it.
Both market and geography.
Across the totality of the platform, which.
Earn into the three 3% in total.
Maybe.
A little bit about him for graphic.
Think about our end use markets as a corporation.
56% of what we do always is food and beverage and on the 20% we surface and then you've got some products that's why in health and beauty AIDS around core and in Europe . This year as Steve mentioned, we're actually over indexed in food and beverage so well, we're talking potentially about a recession or you hear about.
Okay.
Investors.
Still a physiological human need drank. So the question is where they are going to get that stuff and when you think about on premise versus that all inflationary pressures historically, our business has been pretty recession resistant as you know.
And we've got a slide in there, it's very back but the kind of shows what happened 2008 versus what the company. We are actually today in 2022, which is very different our depth a lot lower our cash interest costs are lot lower a lot bigger company, so relative positioning for our business to kind of handle a variety of.
Economic.
Developments, I think we're pretty well positioned to be able to weather, whether those things hopefully that gives you a little bit of color on how we're thinking about it yes.
Great that's really helpful.
Thank you for the detail.
And then just maybe just a follow up Steve I think you said in your prepared remarks earlier that.
The backlogs are at about 10 weeks.
I'd just be curious to know.
How that compares to sort of the average or target.
How do you want to run the company.
Like backlogs to be or were they just sort of sit naturally in the past.
Well certainly we like strong.
I would tell you that at 10 weeks, we're actually beyond a little bit where I would hope we would be just to be able to service customers effectively because we're having to basically be Barry.
Dancing around how we schedule our facilities, where the paperboard goes given some of the longer transit times, we have on the international business for sure.
I guess, if you went back historically, we've been more in the six to eight week range over the last three or four years.
So they are definitely up from where they were for graphic.
Got it that's very clear thanks very much.
Thanks Cliff.
Yes.
Thank you.
The next question today comes from Adam Samuelson from Goldman Sachs. Please.
Please go ahead. Your line is now open.
Yes. Thank you good morning, everyone.
So I guess.
First question is.
Following on same lineup.
<unk> as before but just thinking about your exposure to private label as one area within especially within retail that could see you could see that some of the higher end branded names.
Yes.
Struggled a little bit more on the raise price and see consumers trade down and just trying to get a sense of.
How youre retire business on the food and HBC side looks in private label and is there a mix implications of those.
If those brands see.
Volume growth at the expense of some of the brands that yourself too.
Yes, thanks for that Adam I guess I would answer it this way I mean, our customers.
Announced earnings in the last couple of weeks talked about greater price elasticity than they've seen in the past.
That's what they are currently experiencing.
Relative to how that plays out through a recession I guess, what we tried to do is build the company to be a bit.
Resilient in that regard and you remember we had a slide that we showed at the Investor day back in February that talked about 80% of what we do is brand and 20% is store brand or private label and that is a global comment. So we're kind of in all markets capable of handling that kind of a mix now it would be kind of right on top of.
What you would see the normal.
Distribution of branded versus private label, so we're well positioned to handle the growth.
Most.
Regardless of where it goes in terms of overall consumer demand.
On our behalf.
Made a number of acquisitions here over the last 10 years versus where we were even in all ways.
But we are more heavily indexed granted to make sure that we are.
We build our operating model.
Well in that kind of an environment.
What happens.
Okay. That's helpful. And then just a second question maybe.
On Europe .
Hey, I'm trying to just get a sense of how much is there is issues around supply paperboard.
In Europe , how much flexibility you have to sort of it sounds like you have much in the short term because of capacity constraints with flexibility to source more.
The board from the U S.
The corollary or driver then I'm thinking about is the energy costs for European paper Mills.
Then does that.
We provide a bit more of a pricing halo to it's not.
Distinct markets, but those relationships in terms of does that provide a pricing halo into the U S. Because of the energy costs in Europe .
Well, if youre looking at a relative competitive cash cost curve to get answered, Yes, North America is moving lower as a result of the impact.
Sure on a number of those credits.
In terms of your question around what that means across Europe as I mentioned our team.
You saw this coming and started in the fall of last year locking down tonnage to make sure that we add.
Your commitment to the paperboard mills that we buy.
For tonnage take care customers made an excellent job.
We're all proud of that as I mentioned that we are paying more for that material, but it's embedded in our pricing and inflation assumptions you see here the share.
So the customers actually pivoted more towards making sure that they have securities supply.
Get me wrong, they don't want to pay more but ever.
Understand that that's the environment that we're in right now and they're more interested in making sure. They have the materials to make products volume products on on the store shelves. So I would anticipate that that will continue to be the case for up to the balance of the year and to your point, we do import around 250000 tons of our own materials.
Average business.
But that's about the extent of what we're capable of doing right now just given the demand we've got here in the North American market.
I mentioned also though we are seeing based on the preliminary data first couple of months of this year.
Courts are actually down year over year into North America.
I would assume although I don't know factually.
That's tough to sustain in the European market given some of the challenges they have and growth opportunities that are available to them, they're going to make more money on it in the north American market than they are shipping or excuse me in the European market, then they will shipping into North America.
Just to add.
At one point.
Mike The Thai law.
As such given the inflation in Europe , whether it be nat gas or a core that we acquire pricing environment has become much more fluid. So what historically might have been more annual agreements that turned into quarterly or monthly.
And upon the relationship and the like and Thats just been a reality of having to effectively manage through what is an unprecedented overall inflationary environment.
Alright, that's all really helpful color I'll pass it on thank you.
Thank you though.
Thank you.
The next question today comes from Anthony Pettinari from Citigroup. Anthony. Please go ahead. Your line is now open.
Good morning.
Sure.
On on demand trends for foodservice versus food and Bev and consumer during the pandemic, we talked a lot about the teeter totter can you just remind us is that sort of.
Fully unwound now a normalized now or how might you expect those to.
End markets might perform over the course of the year, just given the year over year comps and kind of the demand trends that youre seeing.
Yes, thanks for the question Chris.
Appreciate it.
You referenced kind of how we talked about it over the last couple of years, but I'm also happy to tell you that as of this quarter as I mentioned, our foodservice business is actually slightly ahead of pre pandemic levels side say there were more equal.
Equilibrium of where we would expect ourselves to be.
With growth.
Some of the plastic replacement some of the other things regarding talked about on the call you will continue to buttress up our food and beverage business in foodservice returning back to kind of that strong.
Profile and would expect that over the next few years mobility and used to improve.
That we would see growth in that book.
Positioning we've got relative to our end use markets that we're servicing.
Okay, that's very helpful.
And then you ramped up Kalamazoo, which is obviously a massive project I think.
Before that you had a couple big projects at West Monroe.
Projected sneak just.
These for optimization and Albert.
Operational performance going forward or is optimizing K, two and sort of the CRB platform.
I'm really going to still take.
Most of your time and energy this year maybe into next year.
Well, it's certainly going to take as majority of our focus and effort.
The commitments that we've made on K two one that's critical.
Set of initiatives for us we're off to a decent start as we told you.
Yes.
If we were performing better we would shut down will creep down sooner, which in fact is what we're doing we're averaging somewhere month to date.
800 tons, a day mark targeted for that machine.
<unk> hundred tons. So we're we're two months had slightly ahead of our targets quality looks great. Our team has done a wonderful job I, just give a shout out to them.
A tremendous accomplishment for them to be able to pull off what they've done with COVID-19 in the background and.
Over the last couple of years they have done it.
Our hourly folks that are ramping up.
Forming very well too small I'll give them a shout out, but we continue to run trials.
On fiber as we told you at the Investor Day.
E D.
Project for US makes sense and we don't have a project right now, but we're running those trials trial actually.
Can you do show promise so.
As we go forward here, we'll look at potentially.
Potentially a double let you come up with something that actually is a project there and it's all in the context again Anthony of that 7% sales Capex, 20% EBITDA margins I want you to think about that because that's really how we want you to model the company going forward.
So could you increase our capital spending.
Also with us increasing our EBITDA margin.
<unk> targets, because we expect those projects to have returned to historical congrats on a really good job along those lines. So that's how I'd ask you to think about it focus maniacally on okay. That's very helpful. I'll turn it over.
Yeah.
Thank you.
The next question today comes from Arun Viswanathan from RBC capital markets. Please go ahead. Your line is now open.
Great. Thanks for taking my question.
Just curious about the price cost I.
I guess outlook.
Given the recent inflation.
And maybe some tightening in the market as well.
What should we expect as far as pricing actions that you get to realize in 'twenty two rest of 'twenty, two and I guess I should have been in fact, our 'twenty three outlook.
So you.
You know, we're not going to.
Prognosticate around future pricing actions that we would take I mean, all I would tell you is that Tom.
Every one of the announcements that we've made have now been recognized.
And we're implementing those through our roll through on our contracts and our backlogs are at.
We will continue to monitor the application make sure that we're making good decisions for the company, but I am not going to talk about future pricing actions on a call thickness.
Understood.
And then on the volume outlook as you said.
Are you seeing anything.
Whether it relates to maybe sounds great conversion some of those pay for steel and other new product initiatives you discussed.
That would.
Potentially help you increase your organic growth outlook or are we still kind of thinking about the 100 to 200 basis points is the right range.
Yes, thanks for the question look.
We've actually now is that correct.
Prepared comments.
Beat our goal eight out of the nine last quarters. If you look at it and so it's a logical question you raised 100 to 200 basis points and what we've decided to do is just keep outperforming.
I don't want to sound snarky here, but on the other side of things we exited wanted to get credit for the 100 to 200 basis points that we put out there and the fact, we've been able to consistently beat that out for the last eight quarters in a row, so rather than try to put a higher goal out there, we're just going to keep performing.
And we believe that for later in the market you will see that then we'll be rewarded for it.
Great. Thanks, I'll turn it over.
You bet. Thanks Bruce.
Thank you.
Next question today comes from Gabe <unk> from Wells Fargo. Please go ahead. Your line is now open.
Mike Steve and good morning.
I wanted to ask about the guidance or the outlook, if you will and thinking about kind of a pretty strong start to the year.
I know you don't give quarterly guidance, but if I look at the <unk>.
Maintenance impact.
And I think please.
So the sequential incremental there will.
It will be let's say pick the midpoint I don't know 50 or so million.
Okay.
And appreciating the fact that it looks like price realizations I think relative to when you last updated us.
We see recognize a couple of price increases that were not in your outlook.
It feels like things are tracking.
I appreciate it's early in the year and there is some uncertainty.
Any reason why.
Hey, guys arent adjusted net.
Pretty wide guidance range.
For us today.
Yes, Steve.
In terms of Q2 and you are correct, we don't provide guidance, but we provide the components and you just set them back appropriately relative to where Q2 is <unk>.
Likely heading relative to price cost is relative to planned maintenance downtime and relative to your question on the <unk>.
If you will of.
The range, we really felt like Q1, let's maintain this.
<unk> $200 million on.
On the inflation front, and we'll dial that in after Q2.
Given the incredible uncertainty that we've seen.
Our mark to market today at $475 million is clear to us, but the mark to market has moved up every month for the last year or so.
Hence the little bit of a wider range feels appropriate it's prudent.
And gives us the ability to navigate inside of that but certainly relative to a couple of questions today 2023 pricing.
A range if you will around inflation, we will absolutely be dialing that in as we work through Q2, and we'll talk about that pretty specifically in July .
Alright, Thank you Steve for that and then.
Yes.
Disclosures last point of clarification.
Last quarter, you had given us tons unless I missed it I didn't see that this quarter. So I know you.
Talk to us about not focusing too much on a tonnage number just curious I'm, assuming that's intentional and we won't be doing that going forward.
So that's kind of question number one and then number two I guess as I think about rolling forward into 2023, and again, we can make your own assumptions about volume and price cost, but the other moving items would be.
A few extra million dollars of synergy realization from Premier packaging acquisition as well as an incremental 50 I don't want to say from from Kalamazoo are the other big ticket items that we should be thinking about.
Sure Let me take both of those real quick for you.
We're a packaging company.
And so what we really did year end.
This set of reporting and we've added in the supplemental material to provide line of sight.
With our organic sales growth calculation, which was three 3% this quarter.
Calculation represents 90% of the company and so we felt like that was the appropriate tool to look to as we've talked about organic sales growth.
We never went away from ton that we thought.
At our Investor Day, we're now at acquiring a million tons of paperboard and so we produce 4 million tonnes in the quarter that grew given the investments that we've been facing particularly Kalamazoo.
But as a tool to report against we really are continuing to make that pivot towards.
Integrated packaging company that we are an.
Organic sales growth calculation relative to 2023.
Correct relative to the things that we've articulated we've got synergies on acquisitions, we've got the continuation of Kalamazoo. Those are both good examples of improvement initiatives that will be a part of our 2023 expectations. Then it goes to what Mike was just talking about a moment ago all of them.
<unk> fit inside of the context.
Our goals in March we have from today's EBITDA margins up towards 20% over the next several years.
Great. Thank you and good luck.
Thanks Kate.
Thank you. Our final question today comes from Karen <unk> from Mizuho. Please go ahead. Your line is now open.
Good morning, and thank you for taking my question.
I just had a really quick one in terms of the day. Our packaging acquisition is there any color you can give us in terms of how we should think about the cadence of those $40 million of synergies over the next three years and also now that you've had a few months since the integration has began and are there any kind of positive or negative surprises that you've that you've experienced.
And if you could just touch a little bit in terms of the opportunities you're seeing from like a cross selling or co product development perspective, I would appreciate it. Thank you.
Yes, you bet current Steve I'll kick it off and Mike can add some.
Some of the specifics, but the $40 million over a three year period of time with this 2022 being tier one pretty evenly over that period deals still about right.
That being said.
I think how it will come in and then Mike can add on to this but I think we are very optimistic about what's possible relative to growth and commercial opportunities there will be cost opportunities and we'll manage through those on optimizing facility, but I think our confidence is very high and how it's likely to come in maybe more.
Growth oriented.
In a positive way.
Additional to those natural things that we'll do on the cost side.
Yes that totally correct you might think look our cockpits tie in the <unk> 40, and I would actually say it will probably be a bit indexed to 2023 quite frankly, given some of the opportunities and things that we're seeing in terms of the teams executing there.
I don't want to overplay, it I talked about it in my prepared comments, but yes.
We expect that the.
The.
Chemistry to be solid given the cultural backgrounds, both companies were very similar to.
<unk> exceeded my expectations. They got how quickly working on real work and of course.
Has anything been easy right now so thats it.
Good Christ, sometimes helps the team.
L gel together.
That's what we're seeing.
And in terms of geographic expansion, we've got a big book of innovation that we're opening up those new customers that they are the same for us.
So we're leveraging that bershawn that again was part of our hypothesis.
And it's playing out the way that we expected it would so all in all Karen.
And we're off to a really strong start.
We expect to deliver on all the commitments that we've made.
The business acquisitions they are packaging.
Great. Thank you very much for the color and congratulations again on a good quarter.
Okay.
Thank you.
That concludes today's question and answer session. So I'd like to pass the conference over to Michael <unk> for closing remarks. Please go ahead.
Thank you everybody for joining the call today, and we look forward to talking to you again in July with our second quarter results have a great day.
Okay.
That concludes the graphic packaging first quarter 2022 earnings call. Thank you for your participation you may now disconnect your line.
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