Q3 2022 Graphic Packaging Holding Co Earnings Call
Good morning. Thank you for attending the graphic packaging third quarter 2022 earnings call. My name is Matt and I will be your moderator for today's call all lines will be needed 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 co op risk over to oracles Melanie aegis.
Good morning, and welcome to graphic packaging holding.
Third quarter 'twenty to greet you Ernie.
Joining us on our call today are Mike Doss, the company's president and CEO .
Sure enough executive Vice President and CFO .
To help you along with today's call, we will be referenced in our third quarter earnings presentation, which can be accessed through the web.
And on the investors section of our website.
Www dot graphic.
Dot com.
Before I turn the call over to Mike, Let me remind you that today's press release and a presentation made by our.
Forward looking statements.
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.
My remarks on slide four.
Yes.
We delivered exceptional financial results in the third quarter. Our continued strong performance in net organic sales growth can be attributed to goodwill.
Mobile business portfolio, we have built diversified by both end markets and brands strategic investments, we have made and the robust innovation pipeline we are cultivating.
In the third quarter net organic sales growth picked up sequentially accelerating 5% year over year. This represents another quarter of outperformance versus our long term net organic sales growth goals I remain very encouraged by our significant new product development pipeline and consumer demand for highly functional and increasingly worse.
Packaging.
Interest and engagement from existing and new customers remains robust.
As demand for fiber based packaging to replace other packaging alternatives increases we are capturing new business across our low cost well capitalized highly integrated platform.
Such our integration rate continues to grow with 74% of our paperboard production integrating into our packaging today compared to 72% at this time a year ago.
Vertical integration is a competitive differentiator in today's challenging global supply chain environment, we benefit from the flexibility we have established by producing all three paperboard substrates and the assurance of supply we can offer customers.
Accordingly, our vertically integrated business model provides runway further enhance operating efficiencies and supports our vision 2025 margin expansion goals.
Adjusted EBITDA increased by 55% year over year to $441 million, resulting in an 18% EBITDA margin.
Adjusted earnings per share, excluding amortization grew 76% 67 per share.
Strong performance year to date is resulting in an increase to our previous one five to $1 6 billion adjusted EBITDA guidance. We now expect adjusted EBITDA for the full year of $1 6 billion.
Midpoint, reflecting a 52% increase over 2021.
Our financial results are underpinned by a secular demand tailwind for more sustainable consumer packaging solutions globally, importantly, and specific to graphic packaging, our ongoing execution of our strategic initiatives and platform investments has strengthened and extended our global fiber based packaging offering.
This positioned us to capture growth and demand.
Price increases required to offset unprecedented commodity input cost inflation continued to be executed globally. As a result, we now expect $425 million to $475 million in positive price cost relationship in 2022.
The significant step up in adjusted EBITDA, resulting from the business drivers I've walked through on slide four we will drive strong cash flow generation. This year has committed we are focused on driving down our leverage ratio and expect to exit the year and the three one to three three times range.
Slide five provides additional detail on the inflationary environment and pricing outlook in the quarter, we continue to realize the pricing necessary to offset higher commodity input costs and recover the dislocation from 2021.
$334 million of positive price flow through the business during the quarter more than offsetting commodity input cost inflation of $162 million.
Roughly two months left in the fourth quarter, our full year 2022 expectations for commodity input costs have tightened to a range of 575% to $625 million pricing expectations for the full year or approximately $1.05 billion.
$100 million guidance provided last quarter additional.
Additional SBS pricing along with other pricing initiatives were realized and implemented during the third quarter.
Our 2023 rollover price and commodity input costs rages, mark to market as of today, our $375 million to $475 million and $150 million to $250 million respectively. As we have stated we believe we will see inflation again next year, particularly in Europe .
Similar to last quarter I want to reiterate the rollover figures on slide five are directional in nature and are point in time estimates, we will provide guidance for our expected price to cost relationship for 2023, when we report fourth quarter and full year 2022 results in late January .
Turning to slide six let me provide a progress update of our K two coated recycled board machine production ramp.
Were pleased to host many of you in September we're looking at 100 years paper, making technology, culminating with our largest capital investment in history. The <unk>.
<unk> CRB machine.
As analysts and investors were able to clearly see during the tour the machine truly does transform kalamazoo into the most advanced manufacturing operations.
Technology automation and advanced energy efficiencies. It is the largest and lowest cost producer of coated recycled board in North America.
And I am pleased to as grant and steadily and is ahead of plan. We have hit our targeted output of 500 tonnes per day on multiple days, averaging over 400 tons per day in September with the new production in Q2, we realized $17 million in EBITDA in the third quarter and expect to meet our $50 million target for 2000.
'twenty two.
Slide seven is an example of how our global innovation engine and customer partnerships continue to drive new business and organic sales growth.
Established as part of vision 2025, our partners pillar is focused on growing with the best customers in the best markets. We are excited to be doing just that by working with Unilever on the new product as part of the Companys 1 billion euro clean future initiatives.
<unk> announced its clean future strategy in 2020.
And its intent to change the way some of the world's best known cleaning and laundry products are created manufactured and packaged when you'll acres largest detergent brand transformers laundry capsule with new technology to be its most sustainable yet they wanted the new package solution that was both recyclable and plastic free.
Our packaging developed for Unilever delivered those enhancements and will reduce over 6000 metric tons of plastic from entering the wage and each year. We are thrilled to have partnered with such a purposeful brand and company on this product launch.
Laundry capsules, along with the products new packaging relaunched in July and can be found in various outlets throughout France reception has been enthusiastic and we expect to see new growth opportunities with different brands and in additional countries.
Current design product protection and credibility of our high quality fiber based packaging enhances marketing appeal for customers. The renewable aspect of the paperboard solution and the high collection and Recyclability rates of paper provide proof points to our customers and our customers' customers that the sustainability efforts.
We're making a positive impact turning to slide eight reflecting our new opportunities, we see across our markets for plastic substitution. We have raised the expectation of our total addressable market to $12 5 billion.
You can see here in many different products and packaging configurations under plastic substitution. This speaks to our diversified portfolio and the variety of packaging solutions, we produce for a wide array of global customers and consumers.
I will wrap up my prepared remarks by noting that our overall business remains resilient and we continue to grow with our innovative solutions. We are meeting a need in the marketplace as local communities to become increasingly more focused on sustainability. We are very pleased with our results in the quarter strong outlook for the full year and continued progress.
It's achieving our enhanced vision 2025 aspirations.
We are creating value through leadership with vision 2025.
<unk>, we have made to advance our capabilities and optimize our mill and converting infrastructure differentiate us.
24000 employees are highly engaged and are truly running at different rates with that I will now turn the call over to Steve.
Thanks, Mike and good morning.
Turning to slide nine and key financial highlights in the third quarter net.
Net sales decreased 38% or $659 million to $2 5 billion.
Notably net organic sales growth accelerated from 3% in the first half of 2022, 5% during the third quarter.
A positive price cost relationship and our European acquisition also drove performance.
Adjusted EBITDA margin expanded by 210 basis points year over year to 18% of sales.
Adjusted EBITDA was higher by $157 million to $441 million.
An increase of 55% over the prior year period.
Adjusted earnings per share.
Excluding amortization of purchased intangibles increased 76% from last year to 67 a share.
Our paperboard integration rate year to date improved to 74%.
Up 200 basis points from 2021.
On slides 10, and 11, please find our sales and adjusted EBITDA waterfall.
Sales increased $669 million year over year or 38%.
Driven by $334 million in pricing.
$380 million and volume mix from organic sales and acquisitions.
Foreign exchange was a $45 million sales headwind in the quarter.
Adjusted EBITDA increased $157 million or 55% to $441 million in Q3.
Drivers of EBITDA growth during the quarter.
$334 million comprised $61 million in <unk>.
In mix.
We are earning on our organic sales and acquisitions are meeting expectations.
Partially offsetting pricing improvements in volume mix in the quarter.
$162 million of commodity input cost inflation.
$28 million of labor benefits and other inflation too.
$27 million of unfavorable net performance.
And $21 million of foreign exchange.
Within the net performance category.
We recorded $38 million of increased year over year incentive accruals in the quarter.
And incurred some higher costs to meet accelerated organic sales growth.
EBITDA from our CRP optimization and K two machine ramp contributed positively during the quarter.
Adding $17 million to performance.
As Mike discussed we are on track to deliver $50 million of EBITDA from this transformational investment during 2022.
Momentum in our production ramp will continue as we exit the year.
Delivering unexpected additional $50 million of EBITDA in 2023.
On slide 12.
Let me expand on quarterly financials operating performance and capital allocation.
Our food beverage and consumer businesses grew 20% for acquisition during the quarter.
Driven by positive price and organic sales growth.
Our foodservice business also achieved strong growth up 29% from the same quarter one year ago.
Turning to paperboard market data.
<unk> will report industry operating rates for the third quarter on Friday.
Q2 industry operating rates remained very strong across substrates.
Sps at 94% and CRP, 102%.
Or is the U K operating rate remains over 95%.
Our teams worked tirelessly and were successful in capturing and servicing higher organic sales growth during the quarter.
Backlogs remained strong at eight plus weeks across all substrates.
During the quarter, we returned $23 million to stockholders in dividends and repurchased $50 million in common stock.
Practically eliminating shareholder delusion from long term incentive grants.
In September our board of directors approved a quarterly dividend increase of 33%.
With the dividend payable in January 2023.
The increase to our dividend payout is reflective of our balanced approach to capital allocation.
The strength of our cash flows and the significant progress we've made toward our vision 2025 growth goals.
Our net leverage ratio of three seven times at the end of the third quarter.
We have rapidly reduced our net leverage ratio over the past 11 months following European acquisition.
We expect to be roughly $3 two times levered as we exit 2022.
Finally liquidity remains healthy at over $1 4 billion.
On Slide 13, let me provide an update on expectations for the full year.
As you saw in the third quarter.
Strength in organic sales improved pricing strong volume mix and the Kate to ramp are driving substantial results.
We are increasing our adjusted EBITDA guidance.
Midpoint by $50 million to $1 6 billion.
This reflects growth of 52% over 2021.
Expectations for sales for the year are now closer to $9 5 billion.
Turning briefly to cash flow.
We expect capital expenditures of $500 million to $525 million.
As we make investments to capture current and future organic sales growth.
Cash interest has moved slightly higher to reflect the current interest rate environment.
While our range for cash taxes has declined.
Adjusted cash flow is expected to be in the $600 million to $800 million range.
Our guidance update on adjusted EPS, excluding amortization can be seen on slide 14.
Continued execution of our growth and margin expansion initiatives. This year has increased our expectations for adjusted EPS.
We now see a range of $2 20.
To $2 40 per share.
From the guidance, we provided last quarter.
That will conclude our comments. This morning, let me now turn the call over to the operator for questions operator.
Okay.
Right.
Okay.
Before I provide instructions on the Q&A. Please.
Please note that due to global connection issues being experienced this morning, if you experience any difficulties on this call. Please contact <unk> investor relations via email.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
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We ask that you limit yourself to one question and one follow we will pause briefly as questions registered.
The first question is from the line of Ghansham Panjabi with Baird.
Your line is now open.
Thank you and good morning, everybody.
Good morning, guys I guess.
Good morning, just making sure you can hear me.
I guess first off Mike on obviously very strong momentum on the volume side during the third quarter as well.
But we are starting to see.
Some sort of concern on the consumer staples side, especially in the beverage side can you just give us a sense as to how volumes progressed throughout the quarter, what youre seeing in terms of new product activity.
Maybe across both Europe .
In the U S as well.
Yes sounds good.
Starting to inch TV can add some color to that I think we saw.
The broad based strength across.
Our overall business in the third quarter.
Change much materially.
From month to month. It was strong some of that <unk> was a function of the fact that.
We had kalamazoo up and running we are creating more paperboard, we had middletown running so it created.
Opportunity for us to really service our business incredibly well.
With fact.
Paperboard to meet customer demand.
As you kind of look through the different verticals, we saw food and beverage growth. We saw in mobility continues to be strong on the foodservice side of the business here in North America.
Europe grew in certain categories in a couple of them they were down slightly but overall Europe had a positive growth trajectory, which we were pleased with and as we've kind of rounded.
Out of third quarter and into early fourth quarter to date here, we're seeing our growth at the top end of our long term target so 2% call. It 200 basis points and if we finished the year at that kind of level that will be fantastic because what that will be then as for the third year in a row, we will be above 3%.
<unk> organic growth to do a three year stack on that it's over 10% in terms of organic growth and as you know thats a real pivot.
No tender or trajectory, we had before that time period. So that's that's kind of how we're thinking about it and what we're seeing Steve I don't know if you have anything else to.
To add Mike described.
Described it well I think the broad based nature of it was positive for us both foodservice and kind of core food and beverage.
Willing to add as we can continue to identify a couple of hundred basis points of real new to the market innovation products, primarily plastic replacements that are that are supporting the net organic sales growth.
Okay fantastic. Thanks for that and then just for my second question in terms of how we should sort of think about capital allocation in 2023. Following obviously your focus on debt pay down this year and then just related to that.
In our packaging can you just touch on.
Some of the opportunities you see to cross leverage some of the innovation that they have some of it was highlighted at pack Expo This week.
Just anything you could share there as it relates to the U S.
I'll start with that I mean, I think that's been really one of the positives we've seen on the <unk> acquisition, we anticipated that we would learn and be able to kind of move trends that we're seeing across the globe.
Much faster that was part of our investment thesis and as we talked about when we made the investment Europe is really ground zero for sustainability.
See a lot of those trends commodity Europe , and Thats part of what you see on the slide in the deck that shows the expansion of our.
Tam.
We've got the ability to.
Be able to increase that because we got line of sight into <unk>.
Additional plastic replacement opportunities and expanded debt.
$12 5 billion.
So we're very pleased with what we see there you saw an example of one of those products when we put in the deck that had.
<unk> and what we did there with paperboard for Unilever, we're really pleased with that one.
Dissipate, we'll see continued acceleration of those kinds of trends via leverage that really on a global platform. So we're excited there too and.
In regards to capital allocation.
This was a year, where we told everybody we're going to focus on debt reduction and that's in fact, what we've done as you've heard Steve seems prepared remarks, we will finish the midpoint of our guide around three two times, we want to get down in the two five to three times long term target, which will be sometime.
Next year.
The early next year and then as we kind of look at what's due with a strong healthy cash flow generation, what I love is the Optionality, we've gotten the business. We've got the ability to look at game changing M&A, where it makes sense and it comes with high returns.
Synergies that make sense to us.
Can pursue capital project large capital projects due to to change our cost structure and our mills are converting business and obviously, we've got the ability to return cash to shareholders too and you saw our board here in September increased our dividend by 33% as an example, we continue to buy back our dilution. So we've got all of those.
As things available to us and we'll look at the types of returns we can see for shareholders along those lines, but ultimately in going into an uncertain macro what I love is that we're going to throw awful lot of cash and if we actually drive our debt down a little bit for us.
Period of time here, where we will kind of above watching the market develop.
So that's not a bad option for us either so I love the Optionality that we've got multiple levers to pull.
The team has done fantastic job this year positioning the business with this acquisition of Anr and the start up of talent zoo to really position us heading into 2023 with a lot of momentum.
Alright, perfect. Thanks, so much Mike.
You bet.
Thank you for your question.
The next question is from the line of Mark Wilde with Bank of Montreal. Your line is now open.
Thanks, Good morning, Mike Steve Melanie.
Hey, good morning, Mark.
I wondered just to start off Mike can you just give us a little more color.
On what Youre seeing over in Europe , right now it does seem like the economic pressure there is even greater than we're seeing in North America and I Wonder when you talk about Europe . If you can also talk about what youre seeing from your customers in front of the winter season and prospects of energy cuts.
Hey, Mark Good morning, Steve I'll start and Mike can add on to it as Mike mentioned, we saw modest organic sales growth in Europe in the quarter, which was given the macros and the challenging environments. There was.
Net favorable to us in terms of.
The consumer based food and beverage consumption holding up we saw a slight.
Weakening on the core beverage business in the quarter as folks actually returned to being out and about a little bit.
As we move around towards the winter, we actually expect that to come.
To come back to the positive given the amount of investment that's been made in fiber based packaging for at home consumption.
Beverage as Mike mentioned, just adding on to it.
Packaging, specifically those economics are actually are all in our expectations of $118 million of EBITDA year to date, we expect to be at the $150 $60 million level for the year, even in the face of foreign exchange and the.
<unk> that we're in so really outperformance at the operating level, there and as Mike mentioned the innovation component now certainly we are turning towards what could be some challenging winter months ahead. We can talk Mike could talk briefly about the energy and ability to run basis, but to date, because we're not <unk>.
<unk> dependent as some other manufacturing.
Type businesses in the region, we have been operating successfully in meeting customer demand.
To add to that Mike No I think maybe just to add mark So we by $25 million <unk> using natural gas as a company a little less than one of those is in Europe , because it's converting only as you know.
And so our exposure there on the Nat gas side isn't real high we buy a fair amount of paperboard 1 billion tonnes on a global basis, so were watching that.
And obviously you've seen the ability for those producers to push those prices along and we've got that reflected in our contracts and really in the mark to market that we gave to you here as part of our prepared remarks. So look I think all our customers are watching whats going on right now the weather is good in Europe . It's.
It's been very good the last couple of weeks in their injection levels are high net gas prices have come down over the last couple of weeks from their all time highs in June and July as you well know, but that can change quickly and so we are monitoring closely.
We've got really good communication between that business and Steve and myself.
Some cases is changing on a daily and weekly basis, and that's part of why you saw in the Mark to market, we have a range there of $100 million.
Largely due to the fact that that inflation in Europe is just a little hard to call right now.
And so we'll continue to watch it will be aggressive around our pricing actions and to make sure we cover that as we've been.
And.
That's kind of how I think we're thinking about that operating environment.
Okay. That's helpful. And then just for my follow on I wondered if you could just give us some update on that.
Couple of conversion projects that you've talked about one is.
Using that mechanical pulp mill that you bought down in Augusta potentially make FCB.
Then the other I think is the.
No talk we've had about converting from SBS to see UK over at.
Over at Texarkana, and I guess I'm asking those questions just in the context of all of this particular illness.
Fox Sports capacity, we're seeing the Scandinavians talk about adding sure.
Sure, yes, thanks for that.
It is.
Very good question I mean in terms of what we're doing we continue to run trials on SBB pulp type that we've gotten Augusta as you mentioned, we acquired thermal mechanical pulping operation right adjacent to our property. So we've got some optionality there.
We're continuing to look at that over.
What the costs would be what the benefits would be those kind of things.
Same thing with the swing machine and Texarkana that we've talked about a couple of years ago.
We've still got that Optionality to convert one of those machines over.
But to be fair with backlogs in the strong growth we've seen we haven't seen the need to really take any action on those.
We're also looking at our CRB platform to be there.
The startup of gallon was Houston very good well.
Like what we see so far with the new machine and so I think as you think about graphic we've got a number of levers that we can pull and we're trying to really make sure we're being smart about what we do how we allocate capital and having a medium long term perspective in mind relative to what we make and integrate into our own operations as well as what.
We would buy externally, which is roughly 1 million tons.
So.
Yeah.
That as we kind of look at that we looked at study that as a leadership team and talked about it with our board and that'll be something we continue to do here as we drive forward.
Okay very good I'll turn it over thank you.
Thank you for your question.
The next question is from the line of Mark Weintraub.
Seaport Research partners.
Your line is now open.
Thank you first kind of a smaller question, but incentive accruals 80 million.
This year, what would be more typical in so.
Do we then therefore get some sort of assuming it's a lower number next year do we get.
Almost like a double catch up next year can we get a bump next year.
On the Brazil market Steve.
As you know last year, we had significant underperformance on incentives.
Then by the inflation that will do the business. This year. It characterize this as a return to more.
Normalized incentives, both short and long term as we kind of put the bridge together, obviously, we look to continue to perform at that level I wouldn't assume a significant snapback in 'twenty three consider this a little bit more.
At the more normalized level, there might be a modest one will be able to articulate that with guidance.
January but it's really a return to more normalized compensation.
Got it thank you.
Also when youre doing them Mark to market. When was the date that was as of is that as a kind of very recent does that capture what's been some pretty big declines in recovered paper pricing.
Recent past.
Yes, Mark its Steve.
Mark to market as of the moment, we're talking.
We kind of pull things together as we head into this conversation.
Recurrent so it takes into consideration latest.
Pricing on the pricing front it takes into consideration what we know as Mike just mentioned, though one of the reasons, we've got a bit of a range on it.
On the cost side into 'twenty three is just because of the variability in Europe . We're obviously in a day to day mode in Europe in terms of knowing even what the mark to market is.
For certain costs that were managing through and so we think that overall.
The mid point of the price and cost is very representative of if you truly did.
Mark to market that would be those would be the numbers, both price and cost but.
Our ability is a bit wide right now primarily repeating it just driven by Europe .
Okay I appreciate the added color. Thank you.
You bet. Thanks Mark.
Thank you for your question.
The next question is from the line of George Staphos with Bank of America. Your line is.
Okay.
Hi, Thank you hi, guys. Good morning, Capri doing well thanks for the detail.
The first question is on sort of top line and volume growth expectations, and Mike could you give us a bit of color in terms of how the addressable market grew from nine to $12 5 billion.
The.
I know, it's going to be a lot of things, but if there was one or two or three markets had in particular drove that and relatedly.
How are you seeing the new products that you are bringing into the market, allowing you to generate growth.
I wanted to pay for in an environment, where we have lots of stress related inflation and how do you prevent against.
The demand that youre seeing being just your customers.
Mobile ordering double booking because backlogs are at eight weeks and we've seen signs of this elsewhere.
There is ordering in anticipation as a precaution and then that ultimately dissipate and I had a question on capital allocation.
I'll take that latter part first George and as you re measure our growth and kind of in that 3% range. Since last quarter was exceptionally strong quite frankly, we've been outperforming our medium and long term goal of 100 to 200 basis points, which we believe over the medium to long term is the right target for our company. So we.
Outperform that in the last three years and that's how we look at it.
And if you look at kind of what we did we didn't see growth of 10% or double digit increases like some other packaging firms and segment saw during the last couple of years ours is pretty steady there.
For a fact, we were actually as we disclosed in the first quarter in the second quarter. This year, a little behind where we wanted to be in terms of our ability to service customers.
Our backlogs were up at 10 weeks, plus which is just too long for us to give the customer what they need to run their business. So actually we're quite pleased with our backlogs now being strong at eight weeks, that's historically, where strong backlogs would be for our industry and that allows us to service our customers quite well so look we've gotten.
Limited visibility into our actual customer.
Inventory building process, but in this kind of macro it's a little hard to see that anybody really wants to build a bunch of working cap. So if it has happened we don't think it's broad based.
And obviously, we're going to continue to work with our customers to make sure they have what they need.
And we're seeing our service levels actually correct themselves are on time and in full are actually moving back into the 90% range, which is where we'd expect them to be.
It's been probably six to nine months since I can actually say that so.
We're pleased about that as well and in terms of the addressable market growing George that's really just our innovation and design personnel.
Hopefully with the enhanced capabilities, we acquired with our packaging and really sitting down and looking at different segments in different markets and where we can find opportunities for paperboard packaging consumer based fiber packaging to win.
And that's why every earnings call, we tried to profile something different to give you a snapshot on the margin around the types of things that we're seeing I thought. This one was particularly good would you leave a bid and getting out of plastic Thompson really going 100% into paperboard and they get it in a way that was childproof.
It's.
It's a great lift in packages that excellent graphics, and it's got a huge sustainability story and so we're seeing customers continue to do that so.
And that's part of their mantra when you look at their their ESG requirements for reporting Theyre doing publicly.
Our large customers are all focused on driving that type of improvement and we fit right in the center of that and we provide some really unique options and innovation that will allow them to accomplish those objectives. So.
The team in Europe . The additional resources, we have the work that we've done now let's take a look at different segments that we can penetrate.
And finding real meaningful growth and value creation for customers.
And it's working and that's that's what gives us confidence Stephen I that are 100 to 200 basis points and the commitments that we've made as part of our vision 2025 enhanced goals that we laid out in February are the right ones for our company and George just to add to Mike's point.
Specifically on the $12 5 billion.
It's plastic replacement, it's a category so the actual broad based category and of course, its consumer base and so I think it speaks right to the heart of.
Of our food beverage foodservice consumer packaging consumer and plastic replacement are really the kind of what's been homed in on to allow us to increase that addressable market.
Okay, just a quickie I know, it's not a huge number but the increase in Capex can you talk about what drove that any key end markets.
If you could share on the online my call. Thanks, guys and good luck in the quarter.
Thanks George.
We're pleased to actually take it up a little bit because it's all about organic sales growth both known projects that we're investing behind.
At the $3 million to $5 million types of investment at a time. These are typically modest sized investments that are high return for us to have the capacity, mostly converting capacity in this case.
To capture the growth and so think of it as categories like we were just talking about a.
Fiber bowl replacement aura.
Kind of a of a replacement or a cup replacement into fiber. So these are primarily organic sales growth capture investments.
That will give us confidence in the 100 to 200 basis points on a multiyear basis.
Okay. Thanks, I'll turn it over.
You bet. Thanks George.
Yes.
Thank you for your question.
The next question is from the line of Kyle White with Deutsche Bank. Your line is now open.
Hey, good morning, Thanks for taking the question I wanted to go back to I believe because on the earlier question.
We had a beverage can peer reports in lead volumes, especially in September I'm curious if you guys saw a noticeable drop off in September .
Okay great.
Or was this being offset elsewhere or is it something that maybe you expect to occur in October .
Kyle It's Mike we had a little problem there could you repeat the question. Please.
Yes, I apologize can you hear me better now.
Yes, yes, we got some good.
Got it I wanted to go back to <unk> question on on we.
We had a beverage can peer report some weakness here, especially in September and I was curious if you guys saw a noticeable drop off in demand on your UK grid in September or if it's something that you expect to occur in October .
Or anything you can give us in terms of details that you are seeing on that Gregg specifically.
Yes, no we have not seen a meaningful drop off on our <unk> UK as a matter of fact, our demand remains strong but remember it's much more broad based than just beverage beverage is a big market for us, but we're now in the frozen food market. That's really strong there theres a lot of strength applications for C. U K and we buy a fair amount of it as you know Kyle.
<unk> and so.
Every time that we're making out of Macon and West Monroe, We've got a plan for both in 2022 and 2023.
Got it and then a lot of volatility on OTC here recently, just curious what your near term outlook is for that and then what you think it will average out for next year and then more importantly, how should we think about the relationship between OCC costs versus kind of a coated recycled board pricing over the long term.
Yes, so why don't I take that Steve you can jump in with anything to add but look paperboard pricing.
All commodities is based on supply and demand and we just got done talking about the fact that we've got a weak backlog on all our materials, we grew 5% in the quarter and we're growing here at least.
Month to date here in October with 2% range. So we continue to grow the net requires paperboard because.
Every package needs paperboard, that's what we do and so if you look at what that means I saw the we've got a few.
And the early write ups around CRB and how does that square with some of the comments made in one of the trade organization magazines from our standpoint, I can see why someone who's buying paperboard may want to poke around on that.
Given OCC has gone down a little bit.
They're probably not on the call with the same responsibilities that Steve and IR.
Here to be able to kind of talk about whats actually happening and if you look at our backlog here.
Plus and Thats with Kalamazoo, accelerating and we're still running our Middletown mill and we plan to continue to do that we need those tons to run our business. So look as Steve mentioned in his prepared comments.
The data will come out here on Friday, So we'll get another look on it but.
We're actually about half of that market as you know.
So we feel like we've got a pretty good beat on it and relative to OCC pricing to the actual pricing of paperboard again, it all comes down to supply and demand.
And right now demand is strong.
The only thing I'd add just specifically for you is that the OCC on a year over year basis will turn into a deflationary environment in Q4, but it's been more than offset by the ongoing inflation, we're seeing for external paperboard chemicals, net energy et cetera, so hence the continuation.
Net inflation that we're managing even here.
In Q4, and then for our Mark to market, we're just assuming as is.
Got it that's helpful I'll turn it over.
Thank you Kyle.
Thank you for your question.
Next question is from the line of Cleve Rueckert with UBS. Your line is now open.
Hey, good morning, guys. Thanks for taking our questions.
I just wanted to go back to organic growth and I guess, specifically just sort of looking at slide eight.
In the past we've said the most of this growth is mainly driven by new products and not necessarily accelerating growth within the existing portfolio.
Steve you touched on it a minute ago and sort of response to George but I'm just I'm just wondering what do you have to do now to to access. This addressable market. I mean is it is it mainly that sort of incremental investment in the downstream converting capacity.
As you as you sort of explore opportunities in R&D with your customers is that what we should expect you to focus on for the next couple of years.
Yes, no clue I think thats right I mean, the reality is as you know innovation in our segments take time and so the team as we continue to look at that ongoing 100 200 basis points, it's multiyear and its orientation, it's what's our line of sight.
In 2003 to give us confidence that there is at least a couple of hundred million dollars. There do we have line of sight to even convergence in 'twenty four 'twenty five because some of these conversions for our customers are multi year in their orientation like you've seen with key local if it takes years sports totally play out so that's why that <unk>.
Backlog of opportunities is significant.
Looking out even today, probably out to 'twenty five for certain projects that we already some of the investments we're talking about making are to support multi year initiatives.
It is about today, but also its multi year Mike.
Steve I think the other part of the Cleveland and Steve.
As Steve mentioned this earlier on the call regarding the increased Capex as we're investing behind this.
We've got to have the capabilities to drive that level of growth and those kind of innovations and that requires investment on our behalf, but it also makes us quite sticky with that end use customer.
And those are categories, we really want to win in because we believe that.
Our fiber based solution has a unique competitive positioning to be able to do it in many cases, replacing plastic as we've talked about here. So it's a combination of really strong innovation and design capabilities that we've invested in heavily over the last three or four years in terms of human capital and.
Process capabilities as well as the Capex and.
The investments that we've made in our converting operations to support that and you really got to do both.
I think that we're really kind of hitting our stride along those lines and making a pivot away from what historically had been.
Company that had great operating processing focused on cost reduction in a flat market and get a really good job with that to one where now we truly are driving meaningful top line growth that's been sustained over a number of years and that's the DNA, we're really trying to build in the pivot that we've made as a corporation and hopefully thats coming through and you are seeing there.
Yes, I mean, low cost highest quality well capitalized tends to win the day over time and our customers recognize that too because they want to invest behind the company that's willing to put the put the dollars to work.
Yes.
Great point, thanks, thanks for making that clear.
And just one sort of I guess another follow up on an earlier question, but we get the question all the time, so I'm going to pose it to you.
It relates to paperboard capacity.
Especially from competitors I know, we've talked extensively about the north American market on on these calls before but I guess just thinking about it.
Capacity expansions in Europe .
And also in China.
How does that affect your business I mean, how should how should we think about it and how are you thinking about and planning for some of these changes and then more so outside the U S.
Syed.
No I appreciate the question, it's important one I guess I'm going to parse it apart a little bit.
Yes.
Talk about both China and Europe as they are different in terms of what's going on there but first.
What I'm going to say is we share a common view that the market is going to continue to grow I think we've demonstrated that over the last three years and what we've been able to do so theres going to be a need for more paperboard here in the future.
The question of course on investors' minds as it should be is what are those operating rates look like.
The tons covered where do they go and kind of what are the implications as we think about China and those of you on the call who kind of followed that market for a long time I mean, Ivory Board has been overbuilt in China for the last two decades.
Plus and a very modest amount of that actually makes its way to North America I think last year it was less than 25000 tons.
And the primary reason for that is the vast majority of the mills in China are non integrated in both pulp and energy, which makes them high cost and so they tend to service that local market quite well.
But that stuff, just really doesn't export well to different geographies because of the costs associated with it. So it's not to say that it can never show up here, but the cost structure and the cost curve over the medium term.
Disadvantages no other way to say it against North American and European consumers. So that's how we think about China in terms of Europe and some of the announcements that have been made and to be fair. Some of these have been just.
Hypothetical look I'm looking at potentially doing this I'll, let you know in 2024, what I'm thinking type thing.
Versus a very well capitalized company last week.
<unk> announced that Theyre going to spend 1 billion euros, which has a lot of money and buy their own estimation create the Europe's lowest cost SBB mill.
And look that makes sense to me given what they're spending given that you have an existing.
Mill location to put that money into it.
And what I believe will happen over the next few years is that machine comes online in 2025, Thats, what they said at least.
That.
Put a fair amount of pressure on a lot of non integrated small SBB and recycled board manufacturers in Europe , particularly given the energy situation. That's playing out there now, but I don't anticipate will be materially different over the next two to three years. So time will tell we'll have to tend to see how that all plays out.
Ultimately the question for investors as it relates to graphic packaging is what the implications are for the imports here into the U S. As they stated that some of that material could come to the U S.
I think thats a hard question to answer for me to answer right now for anybody who really know for sure because it comes down to what's FX doing what our cost doing in 2000 2025.
There's a long ways away from now.
So.
What we know for sure is that graphic packaging has gone through awful lot of operating cash flow over the next few years.
Done a very good job of reinvesting intelligently back into our business to create value for shareholders and we're going to be a very very strong company in 2025, and so we'll be ready to respond based on what happens there and how it kind of all plays out.
Very thoughtful in terms of the decisions, we make around investments back into the mills, how we manage our supply and demand to grow our business, but we will continue to do is drive our integration rates up you saw we had 200 basis points improvement. This year, we will make progress again next year.
By 2025 that will continue to grow.
So that's how we kind of think about it and as I mentioned earlier when Mark asked a question around kind of what are you thinking in terms of potential investments back into C. U K FTB or CRB is through that lens that we study. This we spent a lot of time thinking about those trade flows where we buy tons, what we make how we integrated into our own business and <unk>.
How to create the most value for.
Shareholders over time, so it's a very thoughtful process that we spend a lot of time on as a leadership team and as a board.
You can rest assured that that would continue to be the case here going forward. So hopefully that gives you a little bit of color on the topic.
I appreciate you asking the question and the only thing that I appreciate it.
To round it out to Mike's point, just in North America, probably as of this morning any additional investments here in North America are probably out in the 2026 timeframe at the earliest based upon at least most recent facts from other competitors.
I appreciate it thank you very much guys.
You bet.
Thank you for your question.
Next question is from the line of Mike <unk> with <unk> Securities. Your line is now open.
Thanks, Thanks, Mike Steve Melanie Congrats on another good quarter.
Thank you Michael.
Wanted to follow up quickly with you on some of that you mentioned CRB and the eight plus weeks you have in backlog I'm wondering obviously some of there's some noise around some of the trade rags mentioned, a moderating CRE beta minutes. So I'm wondering if you can elaborate on really what youre seeing real time in new businesses with respect to CRB and what is the backlog moderation really has to do with.
Moderating demand or is it more of a function maybe easing supply chain constraints that have allowed you to really create the backlog that had been extended.
Yes.
Yes, it's hard to know for sure what other people are seeing so I'll speak to graphic Michael but we have an eight week backlog in our CRB business today, and that's with a ramping in Kalamazoo, that's gone better than planned and the Middletown Mill continues to operate as we said it would.
The future here so those combination of two factors.
Really what we're seeing and so I don't know.
As I kind of indicated earlier with someone else's seen when they say they've got a 4% to five week backlog.
Again, we don't have clear visibility into all of that all I can say as a producer of about roughly half of that material. We haven't seen that our demand has remained strong in the center of the store is actually pretty good I think you've seen some of our customers they've taken a lot of price, but the volumes are holding in there maybe down 1%.
And I think the other thing to remember Michael for US is that over 20% of our actual portfolio of business here in North America.
Fits into the store brand private label sector. So if a customers trading down for whatever reason, we tend to participate at an equal level, there if not a little bit more which is purposeful on our behalf and we built the company over the last really decade to be able to do that as that portion of the business continues to grow so we might be better.
<unk> more than others. It's hard for me to now look will look on Friday, and see what the data sets, but I think overall the robustness of our backlogs on all three substrates remains.
Very very good to.
Repeat something Mike said earlier actually moving from 10 weeks, Dave was actually a benefit for us in terms of our ability to meet customers' expectations still significant demand.
But it's actually a healthier customer relationship experience as well for them.
In terms of our ability to get them product on time in full.
Got it I appreciate the color there and just one quick follow up on Kalamazoo.
You mentioned this in your commentary that it's ahead of schedule and I think you mentioned the same thing on the field trip as well.
The mill is running better than you anticipated I guess can you provide some color on why you're reiterating your EBITDA guidance and don't see upside to those to those numbers that you've laid out there is if it's actually running a lot better than we anticipated.
Well I think.
On a day to day operating basis as we mentioned in the prepared remarks, I mean, we're very pleased with the ramp up into the 4500 plus tons, a day and line of sight to the <unk>.
A big strong ramp up was $17 million in Q3.
30, plus in Q4, so I guess, we reiterate that we have a lot of confidence in the $50 million in the next 50 million and so at this point just consider that high confidence.
In the context of our overall guidance, yes. The returns are there I think thats well said, Steve I mean, when you look at 'twenty three Michael We said there was $50 million there, we feel really confident in that.
Got you good luck in the balance of the year.
Thank you so much.
Sure.
Thank you for your question.
The final question will be from the line of Gabe.
Wells Fargo. Your line is now open.
Mike, Steve Melanie and good morning.
And I apologize I joined a little bit late so, but I'm a little surprised.
Until the last question to try to win.
Take a peek around the corner into 2023, and like I said I apologize if I missed it but.
If I take the midpoint of the mark to market on price cost.
Seem to apply $2 25, even if I assume kind of flat volumes.
We assume the $50 million from Kalamazoo, plus maybe a little bit more.
Normal graphic productivity.
It seems to me like inflation non material related input costs related.
Might be running maybe 80 to 100 would seem to imply I don't know Directionally <unk> EBITDA number and then I guess on the bottom and if I were to annualize and I. Appreciate this isn't.
The best way to do it but maybe the midpoint of Q4 call at $405 or 10 would kind of get me to $106 20 number.
Are there pieces parts in there that we're missing in that and I appreciate that we're trying to forecast in the future and we don't know.
Biggest component, which is price cost or swing factor I should say.
Yes, Dave its Steve I mean, obviously I think we provide more transparency into 'twenty. Three then certainly anyone in our respective space and I know you appreciate that we're not in guidance mode. Yet, we'll do that at the end of January and we will provide it something we have talked about public a few things.
You are correct on all of your basic assumptions. The company is going to look like a lot of like it looks like in the past in terms of how we will execute but next year, obviously FX headwinds.
The potential for not only in the Russian business and we are likely to have a little more maintenance downtime and we've talked in other public environment, but that's probably a 50 million dollar type year over year headwind. So we will provide full detailed guidance when we round the corner here get out of the quarter and move into <unk>.
<unk> to 'twenty three.
I appreciate that alright, thanks, guys. Good luck.
You bet. Thanks Kate.
Thank you for your question there are no additional questions waiting at this time, so I will pass the conference back to Mike Doss for any closing remarks.
I want to thank everybody for participating in the call today I apologize to anybody we were not able to get to in terms of the Q and for any issues with sound quality that may have been out there given some of the.
Web problems, we're experiencing today I hope, you're all able to join US in January for our fourth quarter and full year 2022 results and an update on our continued progress towards achieving the goals established with our enhanced vision 2025, and with that I Hope you have a great day. Thank you.
That concludes the conference call. Thank you for your participation you may now disconnect your line.