Q2 2022 Graphic Packaging Holding Co Earnings Call
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Hello, and welcome to the graphic packaging second quarter 2022 earnings call.
My name is Katie and I'll be coordinating your call today, if you would like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad.
I'll now hand, the visual host Miniski, Jess Vice President of Investor Relations to begin Melanie please.
Please go ahead.
Good morning, and welcome to graphic packaging holding company's second quarter 2022 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 .
To help you follow along with today's call, we will be referencing our second quarter earnings presentation, which can be accessed through the webcast and also on the investors section of our website at www Dot graphic Phe Dot com before I turn the call over to Mike. Let me remind you that today's press release and the presentations made by.
Our executive include forward looking statements as defined in the private Securities Litigation Reform Act 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 include but are not limited to the factors identified in the release.
And in our filings with the Securities and Exchange Commission with that let me turn the call over to Mike.
Thank you Melanie.
Good morning to everyone joining us on the call and this webcast. This morning, the second quarter of 2022 was a very strong quarter overall.
Demonstrated clear progress on our vision 2025 goals during the quarter, we advanced our strategic objectives building upon our three year track record of sustained net organic sales growth and delivered margin expansion.
Financial results benefited significantly from a positive price to commodity input cost relationship strong contributions from recent acquisitions.
Earnings on our organic growth and positive net productivity.
Given the strong overall performance and execution, we are upwardly revising our full year 2022, adjusted EBITDA guidance range today.
Beginning on slide three of the earnings presentation, we provide key highlights for the second quarter and a few comments related to the full year 2022 guidance, we achieved another quarter of 3% organic sales growth matching our year over year growth achieved in the first quarter and.
In addition in line with our guidance to increase integration rates in 2022 year to date integration was up 300 basis points to 74% for the same period in 2021.
Adjusted EBITDA moved higher to $396 million, an increase of 60% or $148 million from the prior year period adjusted earnings per share excluding amortization of purchased intangibles more than doubled from the same quarter last year to 60 cents.
We operated well in the quarter servicing our global base of customers. We continue to successfully ramp up our new K two coated recycled board machine in Kalamazoo, Michigan. The startup has gone extremely well and full production capacity is expected by mid 2023. Accordingly, we closed the Battle Creek mill and have success.
We sold the paperboard inventory returns on our transformational investment in Kalamazoo are on track and I'm excited about new opportunities, we're seeing in packaging applications that will increasingly utilized coated recycled paperboard.
Successful execution of our pricing initiatives and modification of certain business terms with customers have positioned us to fully offset the unprecedented commodity input cost inflation experienced over the last two years, we expect to execute $300 million to $400 million of positive price cost in 2020 to fully offset.
The $180 million dislocation, we experienced in 2021, and the resulting higher 2022, adjusted EBITDA guidance midpoint of $155 billion will drive significant cash flow. This will allow us to delever quickly.
We expect year end leverage will be in the range of three to three five times well on our way to a targeted range of two five to three times.
Turning to slide four during the quarter, we continued to execute the pricing necessary to offset commodity input costs $278 million of positive price flow through the business more than offsetting commodity input cost inflation of $185 million.
For the first half we realized the favorable price cost relationship with nearly $140 million.
On this slide you see full year expectations for commodity input costs and price realization.
We refined our expected range for commodity input costs of $550 million to $650 million pricing.
Pricing expectations for the full year were increased roughly $100 million.
As a result of favorable price cost relationship for the full year has increased $50 million at the midpoint from our previous guidance.
Finally, as we committed last quarter you will also see we are providing an initial look at current rollover estimates into 2023.
Based on known pricing initiatives, we expect 300 million to $400 million in 2023 pricing rollover at current commodity input cost rollover input cost inflation would it be in a range of $100 million to a $150 million. Please note. These figures are directional in nature and our point in <unk>.
<unk> estimates this figure should not be viewed as official guidance for 2023, turning to slide five let me walk through some examples of innovation and new products being developed for our customers by our expanded team in Europe .
We have shared with you our excitement regarding the growth potential we see with existing and new customers markets and geographies seeing is believing and this slide showcases a small sample of fiber based consumer packaging solutions recently launched by our European team.
Health care, the Tamperproof testing kit for athletes from lock on one to 2022 Swift Packaging Award our design team in Europe had to meet fraud security and ease of handling demands the resulting packaging solution is made entirely from paperboard sourced from responsibly managed forests and replaces the previous plastic packaging.
<unk>.
When beer stores health care launched its first climate neutral advantages to the market as part of our sustainability agenda. The company wanted new packaging that mirrors, the sustainable nature of the new green and protect branded products through wound care.
Packaging solution features years made from unbleached fibers comes from 93% recycled paperboard and has the lowest weight possible as desired by beer store the graphics reflect the product inside and features multi level <unk> and bossing special varnishes to recreate the look and feel of a bandage.
The packaging serves to capture consumer attention from the store shelf.
You will also see on this slide the new sustainable packaging developed for Procter <unk> Gamble's Gillette lineup raises for male and female grooming.
The new packaging showcase tier is made from recycled paperboard and is 100% plastic free.
<unk> supports the brands initiatives to increase the use of recycled materials and the composition of its product packaging and meet its commitments to have 100% with packaging recyclable by 23rd Let me conclude my prepared remarks on slide six the investments we've completed and the initiatives we are undertaking to advance our capabilities.
Engage our employees and optimize our operating infrastructure have and will continue to differentiate the company. We are leaders in sustainable fiber based consumer packaging. Our integrated packaging solutions are made primarily from renewable wood fibre from sustainably managed forests in the United States.
Paperboard, we source for operations in Europe , and other geographies outside the U S is also made from sustainably managed forests.
Greater than 95% of our fiber based packaging solutions can be recycled today, while there is always room to improve actual recycling rates. We expect the percentage of fiber based packaging that is recycled in the communities to continue to increase as collection processes are improved and municipalities accept more fiber into the recycling stream.
We will.
Continue to invest behind recycling initiatives consumer education, and new product development through specific company initiatives and through paper and packaging industry associations. The strong performance in cash flow generation expected in our business will result in rapid deleveraging of our balance sheet. This will allow us to continue to execute.
Our long term balanced approach to capital allocation, including investments back into the business execution of high return strategic M&A and opportunistic return of capital to stockholders.
We are meeting or exceeding important 2022 milestones on our path to our vision 2025.
We are delivering on new product development opportunities for customers and today, we have exceeded our sustainably supported organic sales growth goals. We expect net organic sales growth in 2022 to be at or above the high end of our targeted range, our ability to help customers reduce their environmental impact and elevate their brands through.
And improvements in packaging is driving profitable growth for us well into the future.
With that I'll hand, the call over to Steve for a review of the financials, Steve over to you.
Thanks, Mike and good morning.
Before diving into the quarterly results, let me provide an update on the converting operations, we acquired in Russia as part of the <unk> packaging acquisition.
Production at the converting facilities, primarily serves multinational foodservice and tobacco customers.
This is relatively small.
Roughly $100 million in sales and approximately $10 million and adjusted EBITDA.
As we disclosed last quarter, we have been exploring multiple options for the two plants in Russia.
The business is now classified as held for sale for accounting purposes.
We took a charge of $92 million during the second quarter to write down the plant to an estimated value pending unexpected sale.
We are targeting year end 2022 to complete the sale process.
Moving to slide eight focused on key financial highlights.
Net sales increased 36% or $621 million to $2 4 billion.
The year over year increase in sales was driven by a second consecutive quarter, a 3% net organic sales growth higher.
Higher pricing flowing through the business and contributions from acquisitions.
Adjusted EBITDA margins expanded to 16, 8%, reflecting an increase of 250 basis points from the same quarter of last year.
The significant step up in adjusted EBITDA to $396 million in the second quarter resulted from a combination of positive factors.
We experienced an acceleration in the positive price cost relationship as pricing actions taken over the last several quarters were fully realized.
Volume mix from net organic sales growth materialized.
Earnings from acquisitions delivered as planned and strong operating performance continuing adjusted earnings per share excluding amortization of purchased intangibles more than doubled from last year to 60 cents a share.
As stated last quarter, we are including an adjustment for purchased intangibles in the adjusted EPS calculation.
Is it appropriately reflects the operating earnings and cash flow capabilities of the company.
Our integration rate year to date was 74%.
Well 300 basis points from 2021.
Driving increased integration and our business is a strategic priority and you can expect this business metrics to move higher in the years ahead, as we strengthen long term relationships with integrated customers and innovate.
On slides nine and 10, you will find our revenue and EBITDA waterfall.
The drivers of the 36% year over year increase in sales were $278 million or pricing and $379 million of higher volume mix from organic sales growth and acquisitions.
Slightly offset by $36 million of unfavorable foreign exchange.
Growth in adjusted EBITDA accelerated in the second quarter incur.
Increasing 60% to $396 million.
This was despite commodity input cost inflation, hitting a new high in the quarter of $185 million $25 million of labor benefits and other inflation.
Unfavorable foreign exchange of $17 million.
More than offsetting these expenses were $278 million of positive price flowing through the business.
$81 million of volume mix and $16 million of net performance.
On Slide 11, let me expand on quarterly financial operating performance and touch on the industry environment.
Our food beverage and consumer businesses exhibited strong sales.
Growth of 14% before acquisitions.
It was driven by positive price and organic sales growth.
Sales from our foodservice business increased 28% year over year.
Turning to paperboard market data.
The <unk> will report industry operating rates for the second quarter. Later this week on July 29.
Included on this slide is data from Q1.
Industry operating rates across substrates, where we participate we're 95% and above.
The current environment continues to be characterized by strong demand.
Backlog remained above 10 weeks at the end of the second quarter.
Our net leverage ratio was $4 three six times at the end of the second quarter.
While pro forma net leverage was 417 times.
We expect to end the year with net leverage between three and three five times.
Liquidity in the business remains over $1 billion.
Turning now to an update on full year 2022 guidance on slide 12.
We are increasing the low end of our adjusted EBITDA guidance from $1 4 billion to $1 5 billion.
Raising the midpoint of our guidance range by $50 million to $1 five 5 billion.
Expectations for consolidated sales in 2022 are also moving higher by $300 million to $9 3 billion.
Strength in the underlying business and significant pricing actions are driving the higher outlook.
On Slide 13, you will see a guidance update for adjusted EPS.
As we continue to execute on our growth and margin expansion initiatives, our expectations for adjusted EPS in 2022 that increased to a range of $2 to $2 25.
Well from our initial guide of $1 75 to $2 and 25.
Let me wrap up on slide 14.
Slide we first presented at our Investor Day in New York in February .
We are making great strides meeting or exceeding the milestones we set for 2022 on our path to enhance and strengthen vision 2025.
We are focused on delivering superior returns for stockholders, while continuing to advance our leadership and innovative solutions for global customers.
That will conclude our comments. This morning, let me now turn the call over to the operator for questions.
Operator.
Thank you if you would like to ask a question. Please press star followed by one on a kind of thank you Paolo.
These limit your questions to a maximum of one one.
Jim.
Ladies and show your phone is on mute locally.
Can you ask your question.
Yeah.
Yeah.
Yes.
We take our first question from Mike Willoughby from Bank of Montreal. Please go ahead Marc.
Thank you good morning, Melanie Mike Steve.
Hey, Mark Hey, Mark.
Marc or Stephen I'm, just curious you're deleveraging faster than expected and I wondered if you could just help us with the.
The implications of that for capital allocation over the next couple of years in terms of return of capital acquisitions, maybe more organic investments.
Yeah. Thanks for that Mark Yeah, our focus as we headed into 2022, and we were pretty clear on that at our Investor Day in February was to Delever, the balance sheet and get ourselves there.
In a really good spot back down towards our historical goal of operating between two and a half and three times lever.
And you know I'm happy to say that you were on that track as you know we generate a disproportionate amount of our cash in the second half of this year.
This year will be no exception, but as we model that out.
The puts and takes as we've given in the.
The materials, we provided to you we see ourselves.
Getting in that three to three five times range that Steve outlined in his prepared remarks.
Once we get there that does give us optionality to do a number of things and I think our track record is quite good at finding good investments back into the business.
Some of those are larger a lot of those are kind of steady state productivity automation type projects that continue to.
I hope to take cost out over time, which as you know one of our core operating principles as you well know.
Also it gives us the optionality to.
To look at you know high return M&A.
And then it also funds cash for us to look at Oh, you know ongoing dividends and repurchasing of shares all of those things. We've done historically, if you look back over the last five years at various tranches based on trying to create the greatest amount of value for our shareholders. So what we really want to do this.
Here is get our balance sheet back to that point and I think that's even underscored by the uncertain macro out there.
That we're dealing with with interest rates started to rise.
And are you really set this up you know to be.
Opportunistic as we are around you know what the turn into 2023.
And beyond so we like that and I think Steve maybe you could just put a little color on kind of our our debt stack and what that looks like here as we finish this year into next year for Mark to that'd be helpful. Yeah, No. Thanks, Mike and Mark Good morning, just talking about that a little bit on the balance sheet as Mike was saying I mean, we'll be down in the.
Three to three five times range as we exit out of the year and by year end I know, our our our debt will be 70% fixed probably 30, only 30% variable which is in a good place and so our ability to continue to have an.
And interest rate portfolio, that's down in that 3% range as we exited out of 'twenty two into 'twenty three we have no maturities coming of any substance over the next couple of years. We've got one that's worth $250 million bond that we're retiring this year, that's just under 5% so actually a net positive for us.
Interest rate basis. So we feel good about that the debt stack is that a good place and to mikes point really the window opens back up quite nicely for us to apply all of the critical components of our allocation strategy that we've been deploying to put those back to work as we kind of exit out of 'twenty two into 'twenty three.
And of course relative to me.
I'm sorry, Mark just finally, you know as we've talked in the past been a material cash taxpayer that isn't going to be in front of us until we get out into 'twenty four 'twenty five.
Okay very good I'll turn it over guys.
Thanks Mark.
Yeah.
Thank you. Our next question comes from George Staphos from Bank of America. Please go ahead George.
Hi, everyone. Good morning, Thanks for the details.
Steve Mike recognizing this as an official guidance and you know it's the the old saying no. Good deed goes unpunished right. If we look at the guidance this year.
At 1.55 or $1 billion at the midpoint and we consider some of the things that you said in the past about Q2 and what it could add next year you have some remaining synergies from <unk> and some of the other acquisitions and you gave US a point in time view on the roll forward.
EBITDA for 'twenty three.
It is.
Couple of hundred million whatever.
Somewhat higher than where you're targeting for this year.
Recognize you are not going to give us a point in time or forecast now what are the some of the things that we should be cognizant of as we're refining our forecast that could be headwind relative to you know.
What would be a quick sort of buildup of EBITDA and for that matter was there anything that I missed in going through that sort of quick.
Quick and Dirty algorithm. My second question on Slide 12, we go to it we noticed that volume has been doing a bit better than prior guidance, what's been driving that and productivity performance a premise a little bit below where you had been previously what's driving that thanks and good luck in the quarter.
I'll take the first part George.
Mike.
And I'll, let Steve kind of comment on the second part.
Look I think you've summarized what we put out there very well I mean, we've got as we committed to because of the lag that we have on pricing. We historically have given a look at a point in time into both pricing and kind of a mark to market. If you will of what the carryover inflation would look like.
Having said that things that could impact us would be the fact that if I look at this year.
Every month, so I'm six for six on this coming into you know kind of the monthly review, we've seen our inflation go up.
Yeah, well, that's sequentially slowed down it hasn't abated and so while there are some things that are you know you guys see like OCC that you point to that it's gone down.
If you look at the second quarter, we saw chemicals and resins continued to accelerate and that was additional $50 million just in the quarter from where we thought it would be so I caution everybody that.
Steve and I look at this we're not saying that inflation is in a rearview mirror as a matter of fact, we're planning for more inflation.
We don't know any different right now and we think that's a prudent way to do it and that's really why we've been so aggressive on the pricing side to make sure we're staying out in front of it.
So when you think about 'twenty three you know the things that you can count on are the ones you outlined.
You talked about the second half of Kalamazoo that $50 million that startup continues to go incredibly well, we're very pleased with the results we talk Battle Creek down.
In may sold the inventory so those fixed costs are gone.
And that'll that'll generate the $50 million incremental here that we expect in 'twenty, two and that'll carry over into 'twenty. Three we will have some additional synergies primarily from our AAR packaging acquisition.
With a with them aircraft largely timing out now having only did a little over a year. It's been a great acquisition for us we like the verticals from a sales standpoint, all of the things that that board. So I think the big caution that I would point out and we just don't know is what happens with inflation you saw.
Actual gas this morning, it's the equivalent of $55 an M M. Btu on European exchanges that ultimately is going to put additional pressure on Nat gas in the U S.
They need more LNG into the European continent for heating, particularly eating this fall and into the winter. So we're trying to think through those types of things I think those would be the things that.
It could be rocks that are you know it could be things that we have to navigate but I like how we positioned ourselves.
<unk> been aggressive on the pricing front. So hopefully that gives you a little context and I'll I'll turn it over to Steve now for the second part of your question Yes.
Thanks, George I think just kind of ticking through the EBITDA guidance, just some of the movement in the ranges as we typically do in the middle of the year here, we kind of refine things narrow ranges, where we can which we've done with the overall range now the one five to one six.
Mix is up a bit we feel really good about two things one we're earning on the organic sales growth of 3%. So it gives us confidence that we're earning on organic sales and the acquisitions are performing very very well embedded in our year to date results our packaging EBITDA of the acquired business 80 million.
So which is really at or above our expectations. At this point. So the acquisition is performing exceptionally well even in the face of some FX headwinds and so that gives us confidence on the volume mix net performance very modestly down that's just us mark to marketing some of our variable compensation.
And then kind of where we are relative to.
On the variable side of our compensation, which we put into productivity and that performance. So we've just refined that labor and benefits up a little bit in our other inflation a little bit of inflation on the labor and benefits side, obviously, attracting retaining talent.
And continuing to build out our workforce effectively in a in an inflationary environment, but also the other inflation insurance premiums. For example, just continued to be up so we've refined those numbers up modestly we've refined FX more of a headwind at.
At current rates and so we've put the range more balanced around what were actually experiencing and then price costs you've seen so we've kind of refined all the numbers. The net of it all is that performance on price organic sales growth.
Execution, Kalamazoo gives us confidence that we were able to actually overcome some of the headwinds we've seen in things like FX and some of the reality some of the other inflation.
Thank you very much guys. Good luck in the quarter.
Yes, Thank you George.
The next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead Marc.
Thank you.
So I appreciate all the color and as you know there's this uncertainty about where inflation goes.
Which has been the case for a while and you've been getting out in front with with pricing.
Theres, a little pause now on pricing.
Can you sort of explain perhaps a little bit why there would be a pause now and are you at a point, where the it gets harder just because the prices have gone up as much as they have gone up or.
If you.
Can you give any kind of color on what.
What's the desire to keep getting out in front in case inflation keeps going.
Yeah, Thanks, Mark so.
I don't want to speculate about what we would or wouldn't do in terms of pricing on a go forward basis, but I will tell you. This we looked at a wide variety of factors when we look at.
Our pricing decisions and what we decide to do on the various substrates and one of the biggest ones is around operating rates and when you look at the operating rates that we've seen on these substrates and how.
They've been very firm actually at the high end of the range from a historical standpoint over the past few years, you know that's informed a lot of our decision making process along with the backdrop of inflation. That's been really unprecedented in terms of what we've seen so we want to stay out in front of that we're assessing.
That we look at it on a on a routine and regular basis as you can imagine.
Beyond the paperboard, we're looking at our existing contracts, we have with customers you heard Steve talk about modification of certain business terms and conditions. We continue to look for opportunities to refine that particularly in a market like the one that we're in now.
Because it makes sense for us to do that our contractual renewals. So hopefully that gives you a little bit of color of what we're looking to do and.
And how we do it.
That does it very very helpful. Thank you and just one quick follow up you talked about there continue to be inflation you saw in the second quarter. If you look sequentially third quarter versus second quarter are you anticipating that there will be much additional inflation, so I'm not talking year over year, but.
If we just think about it sequentially or have things because you did say there was more but at the same time you suggested it was abating, maybe a little bit more specificity on when we think about <unk>.
Yeah.
Yes, Mark its Steve I think from a.
<unk> Q2 to Q3.
We will see probably a little bit of abatement, there or is it $185 million of inflation.
The guide that we provided is more in the $1 41, 50, probably heavily driven by the reality of inflation starting to materialize last year in Q3.
But yes sequential Q2 to Q3 should be down.
Modestly certainly at the midpoint of the guide that we provided at around $600 million for the full year.
Okay. So just to clarify so it'll it'll abate year over year, but still if we were just to think about sequentially you were expecting.
Essentially costs to be higher in the third quarter of this year than the second quarter of this year is that correct.
Yeah.
Not year over year, just if we're to take prices of things for the third quarter.
Versus price of things yes.
The actual price of things in the third quarter of this year will be higher than the price of things in the second quarter of this year and then on a year over year basis. It will be modestly lower on a year over year basis, which is why you get sequentially.
Increase from Q2 to Q3 on a relative to last year is modestly lower but actual prices Q2 to Q3 in 2022 are up on a quarter to quarter basis, which is what Mike was talking about we haven't seen a quarter, yet where our full year expectations of the inflation for the year or it hasn't moved.
Modestly.
Understood and is it and I know you look at it seasonally so it's usually a year over year comparisons you you focus on could you quantify is there a way to quantify the cost.
<unk>.
Yeah.
Say that again, Mark I'm not sure I'm following your bouncing ball.
Yes. So if we were to look at the business sequentially not year over year, and we look at the types of buckets price.
Cost et cetera.
If you were to try and quantify the the input cost bucket, how much might that be up I realize that's not how you normally are presenting at so it may not be a fair question, but if you have that handy.
Well I think the way to think about it mark is that sequentially price cost, which is really the critical relationship we were $93 million favorable in Q2 will be a little over $100 million favorable in Q3, and so the relationship is in a similar place Q Q Q2 to Q3 as we execute.
Our pricing initiatives that you would expect similar in Q4 and so we're now in a place where we are in that $100 million plus or minus range on a price cost basis per quarter for Q2 Q3 Q4.
Thank you as a reminder, please limit your questions to a maximum of one and one follow up question.
I'll now move on to Ghansham Panjabi from Baird. Please go ahead.
Hey, guys. Good morning, Thanks for fitting me in.
I guess, Mike just going back to the to the inflation question.
Commodities have pulled back just given the weaker macro economic backdrop in there.
There's a good chance that some of this might.
<unk> lead to some level of deflation just given the very high levels were coming off of if investors as they sort of evaluate paperboard as a commodity as well.
How should we think about a deflation cycle, if one were to manifest.
In terms of maybe the industry structure, having changed in the U S over the last three years since the previous deflation segment.
Yeah, Thanks, Ghansham and again, we're being cautious here around making sure that we're not trying to predict what's going to happen from an inflation standpoint, because as you well know things change real time.
You know as recently as yesterday relative to what that gas was doing.
The big Guy, you'll spend for us and it shot up pretty good with the news coming out of Europe . So that's why we do what we do but having said all of that I mean, if that was to occur and we started to see input cost deflation what we'd have to look at as you know to take a look at the operating rates on paperboard and how well that's holding up and I think as you look at what.
We've been able to do we've grown our topline here organic volumes now for the past three years at a 3% level.
So that's that's chewing up a lot of paperboard.
That we're making and also that we're buying on a geographic basis, and so that really informs the overall pricing.
Ox Board globally, as you know how well our operating rates are and what what's going on with inventory. So that's what I would.
It needs to be monitored launch and you know coming out of the second quarter as Ive said, our backlogs in all of our substrates are unmoved at 10 weeks. So we were actually above historically, where we have seen them to service customers. You know week, where you used to think about a very balanced and strong market being six to eight weeks that allowed us to service.
Our customers real well.
But this growth has consumed a lot of that has put pressure on it and to be fair. We actually have some customers that were not able to surface quite as well as we'd like to right now because of the fact, we don't have enough.
We are available to us to process. So that's that.
That is all part of the calculus in how we look at it.
Because it's very clear and then for my second question on elasticity I mean, three months ago. Many of your customers downstream from you, including the retailers.
We're talking about record low consumer elasticity and that has clearly changed very quickly, putting Walmart yesterday, and it's gonna grow last week and so on.
How do you see that impact.
From an end market perspective across I know youre exposed to consumer staples, but the consumer is pulling back. So just your thoughts in terms of product development is that have you seen any changes there have you seen any.
Inventory reduction efforts that your customers anything you can share.
Well start with the inventory reduction question of course, we've got limited visibility into that but we've been hand to mouth with most of our customers. So I don't expect that theres been a big inventory build or any appreciable nature and the supply chain of the things we provide our customers having said that elasticity rates have adjusted.
We have had a couple of customers that have reported here recently.
I think what you're referencing is their core volumes were down 1% to 2% and yet when you look at us we prefer.
Formed at 3%. So the question is what well what we've been trying to do is provide.
Detailed examples like I said in my prepared remarks, seeing is believing we have been showing the types of single use plastic replacement options that we've got new product development activities that are under underway and commercial and that's really on the margin whats driving our demand gotcha and it's real.
This kind of ground zero for that that's why we took on our slide number five that you see there all the examples we listed there the vast majority of those things were in plastic and now they're in.
Based on your paperboard.
We talked about our penetration continuing to penetrate the retail outlets, we've profiled paper steel, replacing polystyrene trays, we've talked about foam to paper conversions that are ongoing and of course, our keel cliff and some of the things we're doing on the beverage business our machine sales for beverage in Europe are.
At a record pace.
Pace this year really substituting not just kill cliff, but fully enclosed baskets and wraps and so when you put that all together you know that the end result of that is we're bullish on our goal of 100 to 200 basis points of true organic growth year on year as part of our vision 2025, and a key component of that is single.
Plastic replacement and we're winning.
Thanks, Mike.
Yeah.
The next question comes from Scott from UBS. Please go ahead.
Great. Thanks, very much for taking my questions. Good morning, everybody.
Just have two.
<unk> organic growth.
Just wanted to dig into is very strong organic growth that we've been talking about and I'm just curious.
If you can give us a sense of whether that's coming from all the new product launches that we've been discussing over the last couple of quarters, you sort of laid them out in the slide deck every quarter or if it's.
Sort of like accelerating adoption of products that you've already brought to the marketplace.
Yeah Clay with Steve I think one of the things. We're very pleased with is that a lot of the organic sales growth has come from new to the market products things like Mike was just referencing on his comments and in his prepared remarks. These are new products, whether it's on a trade whether it's.
Paper <unk> clip real trays bowls other plastic conversions and it's clearly for US consistently been 100 to 200 basis points of our organic sales growth and as we've talked in the past we track that on a new product basis every month every quarter and it's an important part of why we.
Ben fundamentally outperforming the broad based markets because of the conversions to fiber Bay.
So it's a heavily around the new side in terms of new conversions.
If you kind of go underneath at the market level. The good part of the portfolio a function. He knows it has been is that our traditional.
Beverage consumer foods business has consistently been growing 2% to 3%.
And our foodservice business, particularly this year has rebounded quite materially on the volume front growing closer to 10% and so the portfolio of products that we've kind of built over the last several years both regionally.
As well as from our market participation strategy has held up very well in terms of where the growth is actually coming from.
Got it that's very clear.
But then you know just sort of building on the SaaS of the new product launches that you have.
How should we think about market penetration adoption and then maybe whether there's like an economies of scale margin.
<unk>.
Heightened the recent success I mean is that.
Sort of like the next.
The next phase of this 2000 Twenty's now journey that we've been talking about for a couple of years now.
Yeah, I'll start and Mike can add on I think one of the positives of our vision 2025 is that our addressable market is in fact quite large and so when the addressable market is.
Sure.
Mid teens billions.
And we're and we're putting up 100 $200 million of.
Organic sales growth on an annualized basis I think it does show the runway that's available, particularly in plastic replacement, which is the largest of the components of our of the addressable markets that we've talked about so I think that's why as Mike just said our confidence in the 100 to 200 basis points on a sustained basis over a.
Our multi year journey.
It gives us confidence that it's there because of just purely at the question that you're asking I don't know Mike if the glass no I think Steve look the other part of that is we're running I mean, when you look at the margin profile of the new products that we've launched here you see that Cleveland.
Waterfall that we presented there are here for the second quarter is not only growing the top line, we're growing the bottom line state stuff's in our wheelhouse as part of our integrated packaging platform that we have and so it's kind of a virtuous cycle. We continue to work on where we find these opportunities you know I didn't really fit what we do.
Yeah.
Got it that's very clear thank you.
Thanks Kelly.
Next question from Kyle White from Deutsche Bank. Please go ahead Carl.
Hey, good morning, Thanks for taking the question I wanted to just quickly go back to Jordan's question and ask it again and there's a little bit different way I appreciate the price cost outlook for 2023.
But the caution on commodity costs as well, but when you think about the other bucket is it fair to assume that performance should mostly offset labor and currency. So really on the other wildcard that we have for next year is what happens on volume.
Trial from.
From an intellectual standpoint, you're right. When you look at it that way at all I'll say is that six months between now and the end of the year is a long time, so things can come up but they're directionally, our track record about being able to offset our labor and benefits inflation with our productivity is solid our confidence you're hearing from us relative to Kalamazoo.
Is very high you know based on what you've seen us do.
Date, and as Steve mentioned, our packaging acquisition is performing quite well, but look.
Look, let's not forget you know Europe's.
Got a war going on in the Ukraine, That's got other implications that could happen here relative to your big geographies, where we participate like Germany. As an example, with Nat gas prices going up. So there there are variables here that could hit us and.
We're watching those.
And are you trying to make sure that we countermeasure those as an example, we're putting LNG capability into a number of our factories.
Europe .
To allow us to kind of mitigate that and continue to operate under that was kind of scenarios. If you can't get natural gas, but they're out there and so that's the caution that we're providing here.
Yeah, and just added onto that Kyle I mean, obviously, we're not providing guidance on 'twenty three today in the middle of 'twenty, two but we'll also dial in things like our traditional maintenance downtime, we do have years, where it's plus 10 or $20 million on a year over year basis, and so you know, we'll dial that in obviously as we move out into early next year, but fun.
The mentally the model for the business really hasn't changed based upon the key components and the confidence we have in that.
The items, if you will that offset inflationary inflationary, but the volatility in Europe that banks referencing as.
It's important.
No that makes perfect sense, and then just as a follow on I think a lot of investors in the paperboard space are concerned about potentially being at peak pricing.
For pricing cuts later on maybe can you just talk about some of the levers that you have to keep your market's imbalance if demand were to soften no you have to.
Some auctions on the CRB side following the Kalamazoo project, and then kind of what's the latest with Texarkana investing for flexibility to switch between the U K SBS there.
Yes, thanks for that so we continue to look at all of those projects. We look at Texarkana as a swing machine to see U K right. Now you know as Ive indicated here, we're very busy on our Sps.
Meets our requirements, both our internal and external customers that we have to service and.
And we continue to look at SPD option for Augusta, We told you. Some trials that we're running there we continue to work on those kind of things. So those are options for us, but the biggest thing we need to do is to continue to drive our organic growth profile here.
Here and you know what we've been doing that now for over the last three years now if that was to change are.
Our confidence is high that we'd be able to outperform in a market.
But we've also shown a proclivity you know in the past to make sure that we're matching our supply with our demand and does this would be no different if we got into that kind of a situation because we want to make sure that we've got.
Cereal, we need to service the demand that we have and that's that's how we operate the company and I'll just add to Mike's comments I think one of the things you've seen us do a lot of over the last couple of years, particularly as the particularly as Covid played out was to move products between and among all three substrates, where we needed to do and it's really given us.
Our visibility into really a 4 million ton.
Production capacity that we can move between and among where necessary and to your question in a economic slowdown to match supply and demand we have the levers to pull between and among our facilities.
Flexibility today.
Probably argue was as high as it's been our ability to take those kind of decisive actions on supply demand. If we see that as something that's required to uphold.
Have a good appropriately balanced supply and demand environment absolutely correct.
Yeah.
Sounds good congrats on the strong quarter.
Thank you Tycho.
Yeah.
The next question comes from Gabe <unk> from Wells Fargo. Please go ahead.
Like Steve Good morning.
Okay.
I was curious.
There's been a lot of ground covered here, but if you were to force rank kind of variables.
That would cause you to be at the low end of your guidance for 2022 <unk> at the high end.
I'm picking a few out here, one being price cost relationship to kind of volumes in Europe maybe.
Maybe foreign exchange as it related item there.
And in the Kalamazoo ramp up and well productivity are there other factors.
We should be mindful of number one and then number two just like I said, the order of priority or where do you see the biggest risks to those.
That gave us Steve I'll I'll start I mean, I think based upon the last 18 months, the most volatility and variability has been in inflation.
And so that's the one that can move.
Materially here in the quarter were probably not seen much movement, but we've got another quarter beyond that and so.
Over the last 18 months inflation has clearly been the most volatile which would be both high end and low end.
To your question of FX that has more variability in the short term, which means that it has the ability to move we've certainly seen a strengthening dollar which increased our range and that tends to be measured in.
Low tens of millions, but that is something that's not in our control obviously our line of sight to our volumes in light at this point labor and benefits inflation and generally volumes is pretty accurate. So I'd say, probably those two are the least controllable for us and as such would probably have the highest degrees of potential.
<unk> variability and maybe just to add on that Gabe I think you know price cost obviously very important on some of the swings that Steve just talked about and I think he's bounded those properly for you, but what I really am excited about for US is we've got a fair amount of self help.
Going into an uncertain macro with the things that we've done in the past I mean, when you look at Kalamazoo that'll deliver the better part of a $130 million over the next two and a half year period of time, which is huge right.
Kind of bring that on and fully integrated into our supply chain the way that we planned to do it.
And then we've got telling you they are packaging acquisition, which I referenced a couple of times here, it's going well, but our.
Our confidence in that 40 million in synergies that we outlines incredibly high so.
In addition to kind of pricing and kind of managing the inflation side of this best degree. We can we've got these self help opportunities and you know that gives our team something to grind on something to really focus on you know and you want that as a CEO going into this kind of environment. So that everybody can stay heads.
Down and really really you'll focus on execution, which is what banks are doing.
Well, thanks, Mike I appreciate that the second one and real quick on on the Kalamazoo project.
When that kicked off it was he was meant to be capacity neutral.
You mentioned in your prepared remarks that Battle Creek had come offline. So I guess the question is youre still running Middleton.
And the other mill up there in the northeast.
And despite that you're still at 10 weeks of backlogs and CRB as it sits right now.
Yeah.
That's correct Yeah. That's correct. That's our that's the supply side of it is you've accounted for it. So you are our mill in Quebec and.
These dangerous and then.
The Middletown Mill, and then obviously Kalamazoo with new machine on line. So the net of that on a net basis is.
An incremental call it 180000 tonnes and that's factored into the 10 weeks of back to backlog and the growth that we're seeing here over indexed really do youll CRB in 'twenty, two and heading into 'twenty three.
Alright, thank you.
Yeah.
Hi, Beth.
Next we have a question from Adam Samuelson from Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Yep.
A lot of ground has been covered and I wanted to maybe go back to Europe , a little bit and you alluded to industry operating rates in North America, we will get the official data for the second quarter.
Later this week.
What's your sense about industry operating rates in Europe and.
You talked about looking at gas supply kind of mitigation.
<unk> for some of your plants over the next few months getting gas prices in Europe , and what what's your sense on.
What your paper suppliers and board supplier airports players in Europe , what they're able to do from a contingency perspective to deal with that really dramatic energy price moves there.
It's a great question Adam I appreciate you asking it.
You take a step back and think about North America here. This morning.
Gas exchanges around $9 and I'm a btu.
On the European exchanges that number at $55 and I'm a btu.
Overnight into this morning, just to put that in perspective, a little bit for you what that means that $9 an M. N V to you at our most efficient CRB mill in Kalamazoo, Michigan that would equate to roughly $50, a tonne and Nat gas wood cost in terms of our overall cost around $50 a tonne.
So if you do the math on that you know you've got a you're in.
Assuming that a G D board or CRB manufacturer in Europe was as efficient as Kalamazoo, which you know most are not.
That would be $275 a ton on an equivalency basis. So just put that into perspective. So when you think about cost structures and trade flows on like SBB in Virgin Paperboard, and where it goes and what people would have to do over the short and medium term that's.
That's a challenge for the CRB manufacturers and you're sure no. We don't make any board over there on CRB or any other substrate. As you know so we were insulated from that we obviously and higher prices.
The paperboard that we buy from them.
But it creates some interesting trade flow opportunities. If you look at kind of the SPP board and what that could.
Potentially replace in terms of the higher cost producers of G. D. A C D Board TRP Board in Europe , and so that's on our minds I can't speak to what they could do from a contingency standpoint, if they could run at LNG that would be an awful lot of LNG you'd have to procure at a converting plants obviously much smaller.
Those are the types of things that'll play out over the next six to nine months and we're watching that and making sure that we've got clear line of sight to that so hopefully that gives you a little color, yes, Adam it's a great question.
As we look at it.
Michael just outlined I think the broader implications or yes relative to our buying a paperboard, but also the trade flows from an import export perspective, just given the realities of right now it costs moving up in Europe pretty significantly. We're obviously, taking the price actions necessary to offset that with our customers, but I think the trade.
Trade flow components are actually probably is equally important.
Okay, and maybe just as a follow up to that and just how do you think about kind of your own contingencies on the surety of supply with some of your suppliers in Europe have to make some tough tough choices on an operating given energy can shrink.
Yes, so the primary market, we want to supply our low cost high quality CRB out of Kalamazoo is North America Heart stop having said that we have had several customers that from a contingency standpoint really want us to qualify some of our material.
In Europe , and we will do that that isn't a market, we're looking to necessarily penetrated but for security of supply.
For some of our largest accounts and we will look to you'll find a way to to make sure that that is done.
Alright, great Thats really really helpful color I'll pass it on thank you.
You bet.
Next question comes from Mike Rollins from Citi. Please go ahead.
Thanks, guys. Good luck.
Mike Steve Melanie I appreciate you take Colombia takes questions here.
Just real quick.
Good morning.
Just on the Middletown.
Obviously, you had one point you were expecting the mill to be close he decided to keep it running given the demand of your experience. What's the key to is that nameplate capacities. Middletown is something that you would again consider closing and can you also give us a sense of maybe the profitability differential between Q2 and Middletown, just roughly speaking.
<unk>.
Yeah. So.
We factored the nameplate capacity yet when we made the decision to say we're going to continue to operate in Middletown, we have that demand Michael and again as I just kind of outlined there's uncertainty on a geo geo geography basis here that we want to keep our options open as possible we can.
In terms of.
French on cost, obviously, the new equipment, you'll consume significantly less electricity uses less gas all of those things that we've talked to you about but the biggest differences, we make a million tons of material and Kalamazoo, we'd make a 180000 in Middletown and so it's really from a fixed cost standpoint, you know quite different so I think I caught.
Two if you look at the cash cost curves, we estimate that we've got you know the better part of 100 dollar a ton you advantage Kalamazoo versus the balance of the industry in Middletown would be in that balance of the industry.
The damage.
Got it.
And then just one quick follow up just on the you mentioned.
The SBB and.
I'm just wondering if you have any update on the thermo mechanical pulp production that you would contemplate your Augusta mill I think as you as you mentioned, Mike you were doing good to get the trials in March and April how how did they progress and do you have any increased confidence that at some point you might actually proceed with SBB production.
Like I said, you know at the Investor Day, Michael we're going to run trials, we're going to look at a bunch of different things. So that's what we do.
To make sure that we've got Optionality, but we don't have a project that we're ready to talk about with FTP right now and we like kind of the.
The Optionality that we've got with our existing bill a footprint that we have and as Steve alluded to.
We've got a lot of levers that we can pull.
Here, you know depending on how things develop over the next year or two so you know.
You can count on us continuing to look at those types of things if we ever do.
Include that it makes sense to do so will obviously roll it out but right now we're just doing internal work on studies.
Got it good luck in the balance of the year.
Thank you Michael.
The last question comes from Irene <unk> from RBC capital markets. Please go ahead.
Yeah.
Great. Thanks for taking my questions squeezing me in here.
So two quick ones. So first off I guess just on the operating rates side do you expect operating rates to kind of maintain and this is kind of mid 90% level.
For all three substrates as you go into 'twenty three and.
Given that the demand has actually been a little bit better than expected would you expect any kind of debottlenecking projects or increase our increased capacity as we look out a couple of years and then secondly, that's somewhat related.
Specced Capex to remain kind of in the $4 $50 million to $500 million range or maybe even just a comment on those two items snacks.
So arun good to hear from you and thanks for the question I'll take the operating rate I guess look we're not going to speculate on what's going to happen on operating rates in 23, right now, but you know with our 10 week backlogs you know, we'll get the full book on that for me at the eight year on Friday after markets close that'd be another data point, that's out there I expect it to be solid given what we.
Were seeing and were a large component of that as you well know.
And are you what are you in regards to the Debottlenecking projects I think look everybody works on creep.
Every year and you know that number tends to be somewhere between a half of 1% maybe 1% you know that Oh people, you'll look to do but the only major new capacity that was coming online in the near term with our mill in Kalamazoo, but its up and operational and we're ramping it up rather quickly as I alluded to the next major tranche.
If anything.
Domestically.
If they end up doing it is what bill of Rouge announced and that won't come online until probably 26 based on their most recent comments. So that's that's what we know and Arun on Capex.
We've talked as we've talked to you know capex in the 5% of sales so corner $50 million to $500 million is clearly good baseline capex that allows us to maintain our assets appropriately as well as invest for kind of core productivity any projects that would be beyond that we would call out very specific.
Typically with identifiable returns as part of our overall approach to capital allocation. So the fundamentals of the kind of 5% doing what it's doing and anything above that if we chose to be called out separately is how we continue to operate.
Thanks.
I will now hand, the call back over to you.
Mike Doss for any closing remarks.
Thank you operator, and thanks for joining us on the call. This morning, we look forward to updating you next quarter on progress towards achieving our vision 2025 goals have a great day.
Thank you for joining this now concludes today's call. Please disconnect your lines.
Okay.
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