Q4 2022 Graphic Packaging Holding Co Earnings Call
Hello, and welcome the graphic packaging in Q4, and full year 'twenty to 'twenty two earnings call and webcast.
My name is and I'll be coordinating your cold state.
To register your questions. During the presentation may do so by pressing star one on your telephone keypad.
I like to hand over to Melanie can you just vice president of Investor Relations. The floor is yours. Please go ahead.
Good morning, and welcome to graphic packaging holding company fourth quarter and full year 2022 earnings.
Joining us on our call today.
Sure Mike.
Company's president and CEO , and Steve Scherger, Executive Vice President and CFO .
How do you call on today's call, we will be referencing our fourth quarter earnings presentation, which can be accessed through the webcast and also on the investors section of our website.
W. W <unk> rapid changing.
Before I turn the call.
Over to Mike, Let me remind you that today actually on the presentation.
Sure.
Forward looking statements as defined.
Private Securities Litigation Reform Act 1998.
These statements are subject to risks and uncertainties.
Cause actual results to differ materially.
Yeah.
These risks and uncertainties include but are not limited to the factors identified and they believe in and the islands the Securities and Exchange Commission.
Thank you.
Good morning, Thank you for joining us on the call today 2022 was an outstanding year.
We significantly grew our business and continue to execute on strategic initiatives focused on extending our leadership in quite a bit.
8% consumer packaging is driving profitable growth and delivering returns for shareholders in line with our vision 2025 schools.
Cool.
Turning to slide four let me walk you through the years accomplishments and a brief look into 2023 before sharing the details the exciting strategic capital we are announcing this morning.
Actual results, both the quarter and all your wood.
Characterized by strong growth in March.
Sales for the all your increased 32% to nine 4 billion driven.
Driven by $1 $1 billion deposit price.
3% organic sales growth and acquisitions.
Adjusted EBITDA was $1 $6 billion grew at a faster pace.
[noise] up 52% as margins expanded by 210 basis points to 16, 9%.
Got it recycled paperboard or CRB.
And in investment the largest capital investment we have made.
In light early 2022.
First we ramped production up.
Michigan on our original timeline.
Good afternoon.
Long term commitment to high quality low cost production fiber based consumer packaging utilizing recycled content.
The investment return for the first $47 million EBITDA.
Two and remains on track to achieve the total annual run rate of $130 million of incremental EBITDA in 2024.
Our success. This investment has provided us with the expertise confidence to continue to strategically invest as we will detail further.
Yes.
Dr Packaging acquisition in Europe and eastern.
There's.
Gross opportunities provided by new consumer markets geographic expansion and proprietary solutions protected by intellectual property have further accelerated our excellent well Matt.
Alright bye.
Success will be integrating the business and the initial targeted $40 million synergy goal remains on track with the first $15 million realized in 2022.
As committed our net leverage ratio declined 3.2 times at year end pro forma four six times at year end 2021.
Through new product innovation and expanded geographies.
We increased the addressable market organic growth $12 $5 billion $5 billion, just a few years ago.
We remain confident in our Bellevue achieved 100 gig 200 basis points annual net organic sales growth in 2023, India, given strong demand global customers.
Pipeline innovative paper based consumer package.
Looking briefly at the 2023 and as Steve will describe in his remarks, we expect sales adjusted EBITDA and adjusted EPS to a jet growth Europe year generating strong cash flow you will invest for long term value creation will have a balance sheet prudent for today's uncertain economic environment.
Before I walk through details of the significant investment we are announcing today, let me take a moment on slide five to reflect on our performance over the past three year periods since announcing vision 2025 temper 2019.
Our global team has successfully executed the pivots and sustainability supporting organic growth with net sales.
Sales up approximately 10% since 2019.
Pursuant to achieve critical milestone on our journey to vision 2025, including growing net sales expand margins and build a much larger scale business focused almost entirely based on some of our package.
Over the past three years sales have grown by over $3 billion $94 billion representing 15%.
Annual growth rate adjusted EBITDA and adjusted earnings per share I understand again faster pace in sales driven by margin expansion.
Our financial results and achievements over the last few years have resulted in a total shareholder return of 41% outperforming the S&P 500 returned by 1600 base points.
We are creating value through our leadership of vision 2020 by the investments we have made to advance our capabilities at the fiber base consumer packaging company differentiate us as you've heard me say before we are running different rates.
Let me now turn to slide six provides details regarding our announcement this morning, and the role that we're playing a long term commitment to meeting sumer demand available package.
Graphic packaging is the only north American producer investment meaningfully upgrade and expand ERP capabilities.
We are confident.
Right strategy to deliver value to our customers and to our investors we recognize the distinct opportunities substrates can provide.
Consumer packaging will include more CRP and workplaces, and we're taking steps position, our paperboard network to meet this growing demand.
We have a strong leadership position in CRB from a cost and capability perspective, and this investment further these advantages we will be leveraging our unique expertise in CRB production, our muscle memory and the recent pay to investment and our leading North American mill system Bill.
ERP email and Waco, Texas.
Importantly, this investment not only enhances our CRB.
But supports optimization of our paperboard network and improves our environmental footprint further distinguish in graphic packaging as a low cost high quality paperboard producer in North America.
As a result, we expected right.
And sustainable EBITDA improvement.
Future.
Referring to slide seven the growing demand for packaging made with recycled materials driven by the consumer.
Today's consumer is more environmentally aware then.
According to a recent survey consumers right packaging made from recycled materials.
The appeal in sustainability.
Total package made with CRB consumers see the benefit their recycling efforts each time they place the fiber based packaging towards cycling that.
As you can imagine our customers are responding to what consumers are telling them.
Use more recycled materials in their package now.
Not only is doing so in line with consumer trends and preferences is also a key driver for advancing their recyclability goals and supports the overall publicly committed and are building programs.
This growing demand.
Food quality ERP produced by graphic packaging modern bells utilizing the latest in VR technology is expanding.
Our opportunities.
Package.
Slide eight demonstrates how we believe this new investment will meet the increased demand for CRB and unmatched cost compared to our competitors.
As you can see the addition of Waco allows us to further optimize our network by closing higher cost mills over time, while still expanding capacity to meet growing global demand.
We expect the new machine in Waco, near the capacity cost per ton at the recently completed two machine talent.
It's clear to see that the modern technology inherent in these new machines provide meaningful cost produce step change improvement heritage decades old machines used elsewhere.
Notably this expansive competitive cost differentiation.
CRB substrate as compared to other type of data.
Substrates.
We are building for the future and Amanda this is far more efficient than what was built in the past.
Turning to slide nine in addition to the efficiency of the mill itself. We are very excited to have secured.
In a location that is ideally positioned within a growing economic pattern.
The city Waco is situated in the tank to try our new mill will be strategically located at 200 miles approximately 80% of the population taxes, providing easy access to a strong existing recycled fiber best.
<unk> also has existing infrastructures, Oregon, Bill as well as the advantage logistics from our rail roadway prospectuses are averaging facilities and our customers.
We're looking forward to joining two vehicles.
Working with Great talent base in the area. We appreciate the strong support and engagement. We have received from the steady Eddy County, as we conducted our site selection process.
A timing perspective, we expect to start construction this quarter and begin commissioning the machine by the end of 2025 with production ramping up in early 2026.
Our decision to build this milk shortly after the K two allows us to leverage key learnings from that process, both internally and with our external partners, which gives us confidence in our ability to meet the project timeline and quickly ramp up production on new recycled paperboard.
Slide 10 shows an updated map for future Mill network.
Once this new investment and targeted mill closures, we are looking at a simplified and optimized no network that will lower cost and strategically increased basket.
Our Virgin Paperboard Mills are located throughout the South East, which is the best Virgin fiber basket in the country.
Our two industry, leading CRM females in the future will geographically located to provide broad coverage across the United States as well.
In Mexico.
We estimate you optimize mill network will have 5% more capacity than yesterday with flexibility to adjust capacity in line with demand.
Importantly, while the capacity expansion is driven by the addition of the new wave of mill the benefits run across other substrates improve CRB quality made possible by our gaming machines will enable substrate optimization across our mill system as some packages that sport that required Virgin fiber and now the name of the CRB.
This will free up incremental Virgin capacity in our other mills meet our growing global demand.
The combination of our global packaging growth plans and our mill network optimization plans will support integration rate.
90% once the new builds operation overall, this investments will extend our position as the lowest cost highest quality paperboard producer in North America.
Beyond cost quality and B. There are also significant inability advanced new investment.
On slide 11.
First we will be increasing circularity of our system through an enhanced offer invest.
This investment increases our ability to clean and separate broad array secondary fiber.
Today, a large percentage of our paperboard waste that we did not.
Recycled as they supported our Waco mill's designed to enable them to recycling, 100% of our own internally generated paperboard sidewall waves.
We plan to capture the value of that fiber as well as reduce the environmental impact shipping for fiber offshore process.
We are estimating around 200000 tons sidewall waste will be processed at the Waco mill versus purchasing external secondary fiber as we do today. This will also significantly enhanced security as a secondary fibers why.
This machine also increases our paper Cup recycling ability.
Ultra has the capacity across up to 15 million paper Cups per day to take advantage of this increased recycling capacity we have launched.
Engage with our customers and recycling partners to increase the collection rate paper costs further support recovery and a more circular economy. As you would expect initial interest from customers is very hot.
Additionally, the CRM email network optimization is expected to improve our environmental footprint.
Our absolute greenhouse gas emissions are expected to decrease in our optimized North American CRB mill network by 12%.
And investments in technology, such as the gas turbine to generate all the electricity needed by the mill as well as produce stand for paperboard dry will improve overall efficiency and reliability.
Well, let me cover the financial highlights of the project on Slide 12.
This approximately $1 billion investment will be entirely funded with operating cash flow over the course of three years and is consistent with our balanced approach to capital allocation.
We have flexibility to invest in our business and have a strong balance sheet with manageable debt levels.
He will detail further.
Focus on continuing to reduce our net leverage in 2023.
We expect the state of the art nail will generate $160 million incremental annual EBITDA at full run rate driven by approximately $100 million.
Cost reduction and $60 million benefit through optimized mill.
We expect to realize approximately $80 million return on the inverse.
2026 machines first year of operation.
In summary, the strategic investments showcased how we are extending our leadership fiber based consumer packaging to meet growing demand for more sustainable packaging solutions.
With that I'll turn the call over to Steve to provide more detail on the quarter and full year financials, along with 2020 guidance.
Steve.
Yeah.
Thanks, Mike Good morning.
Turning to slide 13, and the key financial highlights for the fourth quarter and full year.
Net sales increased 20% in the fourth quarter to $2 $4 billion.
32% for the full year to $9 $4 billion.
Fourth quarter net organic sales growth of 1%.
That was in line with our expectations as our customers manage year end inventory position.
Resulting in full year net sales growth of 3%.
This represents our third consecutive year of delivering organic sales growth at or above.
High end of our targeted range.
Q4 adjusted EBITDA.
$413 million increased $128 million or 45% year over year.
Meeting our expectation despite the $20 million unfavorable impact from the late December winter storms.
Which impacted paperboard production.
Roughly 40000 tons during the month.
Adjusted EBITDA margin of 17, 3% improved 300 basis points from the prior year period.
Full year, adjusted EBITDA of $1 $6 billion increased $544 million.
Or 52% from 'twenty to 'twenty one.
Adjusted EBITDA margin of 16, 9% was up 210 basis points year over year.
Adjusted EPS excluding.
Excluding amortization of purchased intangibles.
Continued to expand growing 78%.
For the full year $2 33.
On Slide 14, let me walk through additional details of financial performance market.
Operations.
G H.
Our food beverage and consumer sales grew 37% in 2022.
Driven by positive price organic sales growth and acquisition.
Oh your sales were up 16% before acquisition.
Foodservice sale also strong growth.
25% 2021.
Significant growth in both sales and adjusted EBITDA.
Were driven by positive pricing organic sales growth and acquisition.
Partially offset by unfavorable foreign exchange.
Full year adjusted EBITDA was also positively impacted by $47 million from K to see our investments and $15 million in synergies realized from the <unk> packaging acquisition.
These positive benefits were partially offset by supply chain challenges and cost that our teams successfully manage throughout 2022 in order to meet customer demand.
For your reference our sales and EBITDA waterfall are available in the appendix of today's presentation.
Turning to paperboard market Theyre.
Industry operating rates reported by the U S remains solid cross sell strengths in the fourth quarter.
Sps was 91%.
CRB was 95%.
Our U K operating rate remains over 95%.
Company backlog for seven to eight weeks remained healthy at all reflective of a balanced supply demand environment.
During the year, our strong cash flow engine really was on post split.
In addition to investing capital to grow our business, we return capital to shareholders, while significantly delevering our balance.
Net debt declined by $526 million to $5 $1 billion and as committed we were.
Reduced leverage to three two times at year end 2022.
Pro forma four six times at the end of 2021.
Kind of cheap.
Liquidity remains very strong at over $1 5 billion.
As a reminder, our board of directors announced a quarterly dividend increase to 10 cents per share.
In January 2023.
Given the strength of our cash flows and the progress we've made toward achieving our vision 2025 goal.
On slide 15.
Let me provide our guidance for 2023.
Many of you positive drivers.
Growth.
In 2022 will continue in 2023.
We believe that organic sales growth driven by innovative packaging solutions positive pricing.
Returns from the K two investment.
Synergy capture and core productivity.
Right.
Improvements year over year.
2023 sale.
<unk> did grow over $500 million.
Ultimately $10 billion.
Adjusted EBITDA is expected to be in a range of 1.7 to $1 9 billion.
Reflecting an increase of 13% or $200 million at the midpoint.
Adjusted EPS, excluding amortization of purchased intangible.
It is expected to increase to a range of $2 52.
The $2 90 per share.
We expect generate robust cash flow of $600 million to $800 million.
Which includes an additional 250 to 300 million dollar investment to support the new CRB mill in Waco, Texas.
We are targeting a further reduction in our net leverage ratio.
Proximately two five times by year end.
Slide 16 presents strong progress we have made toward achieving our vision 2025 goal over the last three years.
Our 2023 guidance reflects momentum in the business towards achieving the enhanced financial goals, we established last February .
We expect further expand our margin.
Gross returns on invested capital in.
Increase our paperboard integrate great.
And deploy capital to support growth and reduce costs.
Finally.
As noted on slide 16.
We believe graphic packaging is well position to consider pursuing an investment grade credit rating.
Our leadership position and progress to date, achieving vision 2025, gross and required milestone.
Coupled with our copper and sustain future cashflows business provide us a flexibility required.
Changyou to invest for growth, while pursuing an enhanced credit rate.
We will be engaging with the rating agencies in 2023 to assess options and the associated benefits of a potential upgrade.
Thank you for your time this morning, I will turn the call back to Mike for closing remarks.
Steve. Thank you building on Steve's comments cash flow generation and our business is significant and provides the means and financial flexibility to make investments such as the new CRB mill Waco, we announced today, while simultaneously further reducing debt and exploring an investment grade credit rating.
Let me now wrap up my prepared remarks on slide 17.
Through our established track record of delivering that organic sales growth and productivity gains along with our long history of deploying capital strategically to strengthen and grow the business, we are creating value for all stakeholders.
We are executing strategic initiatives that answered the call from consumers for more sustainable packaging options and expanding the breadth of consumer packaging solutions, we offer.
As a pure play global fiber based consumer packaging leader.
We're running a different race.
Thank you for your time this morning, let's turn the call back to the operator now begin the question and answer session.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now.
If you change your mind, Please press star followed by two.
Ask your question. Please ensure your device is on mute locally.
Our first question today comes from Ghansham Panjabi from Baird.
Your line is open.
Yeah, Hey, guys good morning.
I guess first off you know I got my kind of stepping back good morning, a lot of the CPG as that had been reporting.
Calendar year for Q numbers, a lot of their volumes almost without exception are down mid single digits, and then I look at your volumes and they seem to have substantially be correlated from them. So can you just give us some perspective on that and also maybe you can parse out volumes between Europe and the U S as well for you.
Yeah sure happy to do that first our growth last year was broad based and geography really in all geographies. So I'll start with that comment.
You know obviously in Q4, we saw some deceleration as we talk to you about when we got on a call at the end of Q3 and that played out through the quarter.
Cheaper in November were quite strong in December was weaker as we expect it to be quite frankly, given some of the destocking that or customers talk to us about but look we were able to finish the quarter with positive growth and really it's all about as I said in my prepared remarks look where we're attacking this market differently with our new product innovation in the product.
So we have focused on plastic substitution around the margin and we've been profiling a number of those different examples on our calls over the last couple of years and I think it's really evidence see it over a three year period of time, if you look at a three year stack as you've talked about in his prepared comments over 10% volume growth and so it is.
Real and even though some of those elasticities to your point or down a bit.
We like defense nature of our portfolio. If you think about what we've done over the last.
Five years in terms of volume differentiating end use market participation, our core food and beverage as we talked about in our February investor.
Investor Day is 56%, which is down dramatically from where it was five years ago. We've got our foodservice business that really is in the heart of this mobility movement convenience movement, when you see things like.
Last friday's job announcement about 500000 jobs I mean people are on the go.
They're busy and so they like to appreciate those kind of projects products and so you add that to a consumer business is now almost 20% diversified defensive end products like Oh.
Cat litters in dog, food and glue and filter frames, I mean kind of his nose.
Multiple fronts and then the last piece of that would be or are all your health and beauty business that we acquired they are packaging kind of buildup of 100% profile I think part of it the mid point you've got you can you know this as you know the defensive nature of that portfolio. We've got yeah, almost 20% of that is right in the heart of.
The store brand private label type offerings. So if the consumer trade down we kind of catch it there too and so where we where we're participating on the branded side and if they see some weakness get grab it on the retail side doing private label sectors and then ultimately this foodservice business has been a real winner for us.
As customers continue to be mobile.
Got you and then for my second question, you know back to be the announcement in Waco, just the thought process of building a brand new mill versus perhaps pursuing an expansion of an existing mill system sort of like you did with Kalamazoo is it just the world has changed with geographic standpoint, as it relates to your customers and the cost is.
The overwhelming in terms of optimization by doing this or just give us more perspective on that.
Yeah.
Yeah. Thanks for the question. It's a good one I think looked if you we looked at expanding every existing CRP facility. We had to do a similar type projects. What we did in calendar <unk>, but if you really take a step back from from it for a minute what do you need to do if you're making high quality low cost <unk> as being a fiber basket, that's growing and very resilient.
And so when we looked at kind of our profile you can see there on the slide the reduction down to six mills, which I'll come back to in terms of why that's important dog from simplification standpoint.
We really needed to be kind of in that southwest area. It gives us great Optionality to go down into our growing Mexico business. We can hit the West Coast. We can go back to the east and you've got a basket of 20 million people in that Texas triangle area, there, but very little pressure on that fiber basket as a matter of fact, a lot of that fiber goes down into Mexico right now so we'll grab that.
Our process and turn it back into a high quality materials and they're not but that as you heard in my prepared remarks were really excited about is we're making some other pretty big investments with this mill in terms of you know kind of owning our own our own energy production relative to electricity you know with the gas turbine generator there we'll put in it.
Co Gen type setup.
Set up so we'll take the same from that and turn it into electricity and will drive the paperboard and then a lot of money going into a specialized hydro pumping system. There that's going to give us maximum optionality to internalize.
<unk> trim roles that right now our goal are sold out more exports.
Open market and then trim things like some of our Aqua Coke trends that we haven't been able to process effectively at our existing European mills would be able to take all of that trend from our carton plants bring it back to our mill and wake on process. It. So that really allows us to have the reliability. We're looking for it allows us to have the security of supply and of course that fibers.
But we already own so you know from a cash standpoint, it's a real winner for us. So what we really liked how that's kind of coming together and then you have the tangential knock on benefits of the muscle memory that was just bill you don't kill them suite with our engineers and our contractors that have done. This once this machine will be identical machine to the one delta.
Kalamazoo, it'll be a single machine operation.
We've got the cost associated with the infrastructure that we didn't have there, but geographically locating one mill in Michigan between Chicago.
And Detroit and then this new Bill in the Texas Triangle, you couldn't you know geographically positioned to coated recycled paperboard mills and better spots. So that really are you over the next three decades.
What drives the highest cost in or.
Excuse me, the highest quality and lowest cost.
You know platform that we can have and gossip and Steve just one thing that we mentioned in the prepared remarks. It's also with the Trump halting the ability to also recycle up to 15 million Cups, a day and so it's really an incredible investment and circular economy the ability to capture more.
Fiber and better ways and we're looking forward to advancing that over the next couple of years as well so just kind of round. It out some of the net positive benefits up the investment and maybe one final thing that I would share a gunshot. Since you you went there I mean, if you really take a step back and think about what we're doing here over the next three years, we're really building a moat around there.
Business we're.
We're simplifying our mill structure, we're going to be the lowest cost by far as you saw in our prepared comments and again our track record would support this we're gonna be over 90% integrated we get a lot of questions around other paperboard that's being added.
Globally, primarily and a little bit here in North America on the Virgin grades. We're the only one investing on the recycled side and we see the end use consumer really appreciating that much more they liked the materials that are recycled they they get the benefit of seeing their work when they put a general recycling ban or Oh, yes.
Some other container or it's going to go back and recovery rates for paper and paper packaging in the U S last year were almost 68% much higher than almost any other substrate with the exception of maybe you'll Google. So if you. If you look at that it's right at the center of it and Youre going to see CRB in more applications.
Low caliper grades that we can run now.
Have the capability on these modern machines to be able to do it freezes, great boards and beverage boards and so as both Steve and I said in our prepared comments. It allows us to really optimize our whole system and you have to remember we buy a million tons on the external market and so now we will not be able to have to buy them immediately.
Optimizing our system because between what we've got the new investment Waco, and our Virgin Mills will be optimized space. So our our confidence in the $160 million is very high and largely within our control.
Okay. Thanks, so much.
Excellent.
Got it.
Yeah.
Our next question comes from Mark Weintraub from Seaport. Your line is open.
Thank you a few keep them really quick the run rate for price cost spread as we look at it today recognizing of course your guidance is going to be factoring possibilities for changes in cost et cetera, but if I think like last quarter. The midpoint had been about two two.
25, if we were to just look at the midpoint today, what would it be.
Yeah, Mark it's Steve glad to take that on the range. We provided the 100 to 400, we think is a good prudent range just given the volatility that we've seen over the last couple of years. So it feels like a very appropriate range for us obviously, we've got some commodities moving up and down right now.
Now paperboard that we buy and chemicals that we buy down you know fiber, obviously energy and get some logistics on a mark to market basis sitting here today it would be at the low end of the range. So closer to the low end of the 100 to 400, but it's also in February and so obviously, we will continue to ramp.
Find as the year plays out there certainly dialogue around some acceleration of costs in the second half of the year that could occur.
So we're trying to keep a range that makes good sense, but the mark to market currently would be closer to the low end of the range 400.
Okay. Appreciate that and then just just a follow up on the organic sales growth.
The 1% to 2% for twenty-three understood I think curiosity.
As you're looking at the first quarter are you expecting to be in that type of.
Or are you thinking that it's you know, perhaps a little weaker at the start of the year and you make up ground later in the year against easier comps.
Yeah, Mark I'll start and Mike can add any color I think one of the positive sitting here on the call. Today is we've got a good view into it.
Into January we're off to the start we expect it to be in line with that under the 200 basis points. So as we talked we saw almost across the board all packagers slowdown in December for Us things cycled back.
Order patterns to where we expected them to be so we would expect Q1 to be in line with those kind of expectations as we move into the into the year. Obviously a lot of that supported by the new product development activities that have been commercialized maybe they only add to that Mark is that you have it.
Confidence in January it was broad based with nearly all geographies. So we're seeing that really across our business.
Okay, I'll get back in queue, though because I realized others have questions.
Thanks.
Our next question comes from George Staphos from Bank of America. Your line is open.
Hi, everyone. Good morning.
Thanks for all the details and congratulations on.
Good end to the year I wanted to turned back to Waco.
And you know you mentioned the comment.
Hi, Bill.
<unk> a moat around your business and certainly that's been one of the things you've talked about a lot of what we've talked about is one way to think about this as well.
You, obviously have had very strong results for last year.
And it looks like given your guidance youre expecting that in 'twenty three.
And so the prudent thing to do ahead of potentially additional.
Supply and competition is build the return build the ability to grow your earnings.
Ahead of when.
When that capacity hits, and 25 and 26, you'll have potentially fall plays out as you expect a lot of tools at your disposal in 'twenty five and 26, you used cash for buybacks you'll have growth off this new machine in terms of EBITDA is that one way to look at this or would you totally disagree with that and why or why not.
It's the absolute right way to look at it George and again just building on some of the comments you made earlier with <unk> question I mean, a part of that discovery, we really like is simplified field structure, six well capitalized low cost high quality mills, and the substrates that we need driving towards 90% vertical.
Between our organic growth.
Just kind of some additional growth that we anticipate that we'll see here over that time. If you just do the math on the one to one basis point, so it positions us very well.
Core of 'twenty, five 'twenty six regardless of kind of what those outcomes look like and what I'd also say George and you've seen that you've done. This a long time, we'll have to kind of watch and see what others are doing there because our experience in this industry is quite a bit for Stephen I is that over time low cost wins high cost loses and I'd expect it to be similar this go around.
But the great thing about how we're positioned in graphic packaging is not only are we low cost on the mill side, but are converting.
System is largely tied into that and of course, you know what you spent over the years to create.
Capability, there too, which is really supporting our growth so you're thinking about it absolutely right.
Alright, Thanks, and Mike I don't want to turn this into kind of an algebra class, but when I do some rough math on east Angus Middleton and in Panama and look at the slide deck can also make a conversion from metric to short ton. It seems like Waco adds about 550000 Shaw.
Tons, if I did the math right would you agree with that and if so.
It seems like the profit per ton is a bit more 2030 bucks versus K too could you talk.
Talk to that and if it's if it is higher why would that be the case.
Yeah, George it's Steve I'll start and Mike.
Mike can add on as well, but you got it correct.
Co investment at 550000 short tons at dish and the assumption that you see in the slides the cumulative capacity of the other three facilities that are on the higher cost facilities SAR 350000 tonnes, so across south east Angus and Tim and so that's the net.
Incremental 200, obviously that can move over the year is dependent upon the growth profile and the supply demand environment from what we're doing but that's the math that you're seeing there and yes, we're seeing a slightly higher net improvement because of the singularity of this of this investment.
Well in terms of its ability to kind of stand on its own and with some of the.
Incremental investments that Mike was talking about on recovery in energy production and the like I said, yeah. No. That's right. So again fiber cost will be a little lower in aggregate here because of the capabilities, we have George and internalizing some of that material. We're just not getting much money for right now in the export markets I guess, that's a pickup for us there.
From a cost standpoint also from a sustainability standpoint, which we're quite excited about and.
The other part of that is making our own electricity without our own steam, but that's going to lower the overall cost of that mill, so you're thinking about the right way.
Yeah.
Okay, guys I will turn it over thanks very much.
Thanks George.
I'll turn to Kyle White from Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the questions you know a lot of investors are concerned that the pricing for your paperboard grades will begin to rollover as has happened in other markets. It looks like backlogs came down just a touch but remained pretty healthy I guess, what do you say when asked about this standpoint, an environment do you see any increased competition.
Any of your markets, if any kind of discounting taking place.
So Kyle as you know overall capacity based on what's been publicly announced is going to be relatively flat over the next couple of years for sure and then Theres. Some adds that will happen into 'twenty five 'twenty six but if you just take a step back and look at what we're talking about a graphic packaging, which is what I'll talk about and speak to we expect our volumes to go.
Grow in 2023, meaning we're going to need more paperwork.
And so we would expect those markets to remain Yelp stock our backlogs are solid as we reported here and that's our expectation going forward.
Okay.
Yeah.
And then on the cost increases range by quite a bit on the commodity cost bucket relative to the preliminary outlook last quarter.
What was the reasoning behind this you talked about a little bit, but what was where do you see the most uncertainty in costs I could see the most inflation throughout the year that caused you to increase this range.
Yeah, Colin Steve I mean, I think we're just being prudent to if you look back over the last two years we've seen.
Hundreds of millions of dollars of inflation come at the business in short order at times.
And you've seen very high volatility.
In cost categories like Nat gas like recycled fiber and so we're just looking at this saying listen we don't know where it will land. We think the the 100 to 400 is a good.
Assumption I just provided the mark to market a little bit earlier, which is on the lower end.
But could you see some re inflation in the back half of the year is that plausible. It's certainly we don't have a point of view on it but we're recognizing that it is in fact plausible and if it occurs then we will take appropriate price action to recover.
But we're just trying to be mindful of the fact that we've been for now over two years operating in a pretty volatile commodity input cost environment.
If you think about it counts build on that I mean, if somebody would have told us in August that we would have $2 50.
M M Btu that gas I don't I don't know if you would have believed it either so I mean things can move around in a hurry based on geopolitical things and other events a couple of deals on the call was actually wrote about re inflation in the second half of this year. So I think it's prudent to be.
Bit conservative here in terms of how we're looking at it because as Steve said, we just don't know for sure.
And that's good I'll turn it over to al.
Yeah.
Thanks Kyle.
<unk>.
Yeah.
We now turn to Adam Samuelson from Goldman Sachs. Your line is open.
Hi, yes. Thank you good morning, everyone.
Yeah, So I guess so.
I wanted to come back to the way co investment and just talk about a 12% kind of return on a cash return of 11% ROIC C and I'm just trying to get a sense of how you have risk adjusted that.
Versus your cost of capital for the size of the project and alternative uses of capital in terms of buying whether.
Whether it's buying stock or M&A, which obviously delivers earnings.
On a much shorter order.
Just it would seem like the spread versus the cost of capital for for <unk>.
Sizeable project as it does not have a big project risk premium and then I just want to make sure.
I guess is how youre viewing that.
Yeah. Thanks for the question Adam So first off you know part of how would you Bruce the project has the experience and the.
And knowledge, we have coming out of Q2, so I'll start with that I mean as I mentioned in my prepared remarks. This is an identical machine. The one we just got done building. So all of the engineering is done if you think about the operating system on this machine it'll be all day, but by the time, we lifted and shifted down to Waco. So.
You know all of those things you don't really give us confidence in our ability to have a vertical ramp and I think you'd actually have to agree a ramp in Kalamazoo and 11 month fashion getting up to full run rate.
I've seen it most people's expectations, including mine, which were high and so I think if you think about it in those terms that's a that gives us confidence in the project, having said that I think the other thing you've got to factor into an investment like a bill like this is this is a three decade plus type investment one other benefit about CRP versus.
Some of the Virgin stuff is the ongoing capital requirements to run CRB mill or are much lower than that of a Virgin mill. Because you don't have all the pulping and back end things that you've got to deal with so the drop through on that 160. Once we're at full run rate is pretty large.
Our our stakeholders and investors will be the beneficiaries of that kind of cash dropping through each and every year just like they were if you recall when we talked about when we did take to what we saw in Q1. It had been running for three decades thrown out $100 million of cash for $120 million investment. So that's how.
We think about it at a high level capital allocation, you're right Theres things like acquisitions that you could do they could have a little bit more immediate but they come with risk to as we know of the situation and the macro like we're dealing with right now, but we've done all of those I mean, if you think about P. A R deal. We did it was winter for us the synergies are.
On track, how we're growing our top line there.
Have done buybacks in the past if you go back to 2015, almost a $1 billion of buybacks that we've done.
Over that period of time, so we look at it is truly a balanced capital allocation process and we think this one is a real winner for our shareholders. Yeah, just to add onto that Steve I think you know.
There's a couple of things that narrowly Michaels articulating what is the returns are actually in many ways mechanically. It is fixed cost reduction variable cost reduction we can see it it's in our control we know how to execute.
Against it and Echo the point, a 30 year or return profile for best in class cost structure at 11% to 12% return is quite value, creating but we're also with what we're sharing today theres a boat that we're investing for the long term growth, but we're going to reduce.
That again in 2023, probably about another half a billion dollars Leverages got a drop from three two times to two and a half times and so we are returning very significant cash flows in a balanced way back to all stakeholders in this case by investing for the long term to build.
Both surround the moat around the business, while returning value to shareholders in a significant way.
Driving leverage down to the low end of our targeted range.
Okay. That's all very helpful and I'm going to ask a follow up you talked about kind of re optimizing the mill.
E mailed the mill network and some of the different kind of products that can come out of the Virgin grade Mills how.
How do you think this positions your footprints that compete against some of the F. B B kind of SBS type capacity, that's being that's being put out by others and what kind.
Kind of how it how your cost position in those markets are impacted by putting waco and directing that capacity to CRB.
I think create a very tough environment for them in many ways and when you think about it we're going to have an optimized six mill system coming out of this most cost domiciled here in the U S and the best fiber baskets, both on the Virginia on the CRB side and over time, we're going to take our tons, 5% growth that we're talking about it.
Grow organically driving integration rates up about 90%. So we always have said Adam that we wanted to have the ability to have levers to pull in different optionality in growing our global spend to the point now where we're buying a million tons of paperboard.
It creates a situation where we can hold a lot of different levers that allow us to optimize our core and continue to have to buy on the outside as we grow our converting business, both organically and with strategic M&A. So that's our strategy.
And I think it positions us well from a boat standpoint.
Those tons come online in 'twenty five 'twenty six.
Okay, Alright, that's all that's all very helpful. I'll pass it on thank you.
Yeah.
Thank you.
As a reminder, if you would like to ask any questions. Please press star one on your telephone to comps somebody else you limit yourself to one question on one follow up.
Our next question comes from Gabe <unk> from Wells Fargo Securities. Your line is open.
Thanks, Steve Good morning.
Too okay.
0.2 points of clarification. Thank you. This this tam a mill with a I guess a footnote one on there.
Like it was worth.
Acquired at the end of January maybe just a little bit of color. There. So what was driving that decision.
Because it seems like it's it's not on the math when I look at the right side of Slide 10, and then on the cash flow discussion or guide that you're giving us.
I don't know if you can talk about it much Steve that the $3 to $400 million, that's working capital interest taxes pension.
What do you what are you trying to tell us there.
So I'll take the first part of that gave them a steep hill.
Second part of the question, but the first part of it is if you take a step back and remember we have a supply agreement with great. When we bought they're converting business back in.
Of your 2020.
It was a pretty large almost 20000 tonnes. This mill play centrally into that where over half the volume with that mill. So relative to what we're doing here, we need those tons to make sure that we can run our business over the next few years and ultimately.
Great that into our overall business, we're very committed to CRB as evidenced by the investments that we're making so it made sense for us to kind of derisk that part of our business here going forward.
Yeah, I'd, just add that a couple of context points there in terms of expectations inside that the guide where our expectation for the mill for the team of mill. This year of about $15 million of EBITDA, it'll get offset a little bit by the exit from Russia that we've articulated earlier that we're continuing.
To work through.
Relative to the other cash items all we're really doing there is just provided you with the range of what we expect are there really the other uses of cash for the business this year, and that's where interest taxes working capital and pension.
We'll fall our interest costs are kind of be in the low to mid twos, our cash taxes will be <unk>.
Plus or minus and then working capital and pension you know in a range of probably zero to 75 million. So all we're doing there is just you know.
Putting it into the appropriate category, three and $400 million, that's really what it cost to operate the business.
Beyond the capital that we're putting to work and hence it's your walk from from the midpoint of our EBITDA less capex less the $3 million to $400 million gets you to the cash flow of $6 million to $800 million take the dividend off of that any other small things that we do and that's where the debt reduction.
The benefits to get you down to leverage in two and a half range. So we're just providing you with the with the work.
I understand there was it was just the aggregate of those numbers and I think maybe previously you guys have kind of broken those off course I appreciate it.
And maybe what Youre hearing and the next question is kind of two parts.
I guess, what youre hearing from from our side of the table is maybe a little bit of a surprise on behalf of investors in terms of the magnitude and timing of all this investment so oh I'll start by saying you know what I think you guys have proven a lot of success with with Kase do so congrats.
Congrats there.
So the two part question is one as you look across the existing system one of the things from a timing perspective that that may have accelerated this or brought it to the forefront could be.
I guess, some existing capital requirements of some of the existing footprint. So.
Can you talk about whether or not that was part of the decision, making and then the second point C from a financial standpoint.
I think the Middletown mill enabled you to maybe capture some of this incremental 200000 tons of growth. So in other words is it part of your original KSU project, you guys were going to close that and kept it open because as you've talked about you've seen the growth.
If I were to ascribe to that kind of $400 million EBITDA per ton figure to that it would say well they were already on track to get some $70 million of incremental EBITDA that they werent expecting before.
So looking at the projects from that perspective, maybe the return potential is really 90 million from the cost saves that you'd be getting because you could have already gotten that growth with with Middleton I know, it's not that simple, but just.
Maybe flaws in that logic, if you will.
Yeah, Let me take the second one first and then Mike can attack the first nope for real clarity.
We got the first 50 million from K two we'll get the next 50 million. This year, we'll get the final $30 million and 24 and the $1 60 is incremental to that.
And so you've got an accumulation here of 131 60, I mean, that's a very substantial.
Multi nearly decade level improvement.
Of EBIT from this investment.
That was very unique and world class low cost high quality CRB platform. So there is not if you're asking that question. There is not a plus or minus 50, plus 50, plus 30, plus 80, plus 80, that's what's common.
Yeah. So again, the other part of that and I think it's important Saturdays dream builds that we will look to shut down once waco's operational I mean, these are small end of life type assets to be fair the folks that run those mills and work in those bills have done an excellent job with what they have for a really long time and these kind of <unk>.
<unk> are always hard, but our ability to attract new talent to work in places like that.
It's diminishing quite frankly, we need to have modern facilities that are well capitalized.
Control rooms that are digital in nature, no pizza people work in those kind of environments, we see it in Kalamazoo in terms of our hiring process and then the other thing I'll point out and this is important our customers are under increasing pressure because of the public proclamations, they're making commitments that we're making around sustainability that really we have to.
We have the ability to service them and help them accomplish those objectives that they have over the next five to 10 years and when you look at investments like we did in Kalamazoo. It now in Waco, Waco alone is going to reduce our absolute greenhouse gas emissions across our CRB platform by 12% and if you're serious.
About sustainability and circularity.
Got it make those kind of investments because you can't get their re lamping, our converting facility with early do you like so.
These are major moves that we're making to support our customers and position. This company over a multi decade period of time too.
Really generate ongoing cash flows that they are just that.
Consistent with our vision 2025 goals and aspirations that we've outlined.
I appreciate it gentlemen, thank you.
Yeah.
Becky.
Our next question comes from Kieran de Brun from Mizuho. Your line is open.
Hey, good morning.
Yeah, a lot of the questions that have been answered, but just to touch again on kind of the capital deployment priorities I guess as we look out towards 2025, if I if.
If I just kind of look at that adjusted EBITDA and sales range. It implies to me not so much on the sales front, but on the EBITDA front implies that there might be some room there.
The midpoint or even towards the higher end for M&A, So where do you think about adding capabilities in the future. If if there is kind of that focus on bolt on acquisitions or even larger M&A thinking.
Thanks for the questions here. So what are the things that Steve and I are both happy about as we head into 'twenty three a bit of an uncertain macro to say at least if.
If you if you have self help things that you can work on you know.
What a great thing for a CEO a CFO to have.
And to be able to align the organization around and we've got that we've got the continued ramp up in Kalamazoo, that's going to deliver another 50 million Bucks. This year about ongoing savings as Steve has outlined we've got synergies and growth that we can drive with our packaging acquisition and ultimately of course, our teams will be getting busy now youre down in Waco.
Things that week role and we can execute on and our track record of on execution is really really high as you can go so we like that and so as we've said before and will continue to say I mean, our our bar for any M&A is extremely high.
Given some of the things that don't we're working on internally, having said that we don't always get to control when something would come to market. So there are certain things. Obviously, we would take a look at but it's going to have a really really high bar you have given.
The other priorities that we've got in front of us and the ability to really improve our EBITDA through our own actions over the next two to three years. So that's.
That's kind of how we think about that as Steve said, we're going to pay down another $500 million worth of debt roughly here. This year. If you take a look at what that looks like our debt ratio goes to two and a half times, we like how we're positioning this company not just into the future but in 2023.
So the Optionality will have will continue to grow and it'll expand as we go into 'twenty four 'twenty five.
Again, we like our internal self help story, and that's where we're going to spend our focus here unless.
Something very compelling would come along and as we've said they are at an incredibly high bar.
And to Mike's point Big part of that high bar is integration and that says we look out over the next several years you know, that's where we can really drive value movie that integration up towards 90%. So that's a big part of the bar. If you will that we sat around return expectations for anything we would assess.
Great. Thank you.
Yeah.
You bet.
Yeah.
We now turn to microcrystalline from Truest Securities. Your line is open.
Thanks, Mike Steve Melanie appreciate taking the questions.
Yeah.
Nowhere.
Over the hour here, but just one quick one on the Waco acquisition. If you just look at some of your initial estimates on cost and EBITDA. It seems like there's that Waco was really lower return in Kalamazoo based on those initial EBITDA generation and the culture and the spin can you help us with freedom, what's driving that low return at the outset.
Is that primarily due to the fact, you're dealing with a greenfield versus brownfield.
Well I'll start with the Yang absolute answer in terms of the increase some of the increased cost is a function we have to build the infrastructures wastewater treatment power island those kinds of things, we've got a construct and as we said Michael we're actually going to help you enhanced capabilities here too both in term.
Our pulping capabilities and give our ability to generate our own electricity within the mill, but the overall returns as the ratio. If you think about what we spent in Kalamazoo public talked about spending in Kalamazoo.
It's substantially similar.
Okay.
And just quickly on the Cana.
Can you remind us what the what the metrics are you looking at to determine whether to proceed with the total conversion of that mill, particularly given all the capacity that has been announced at the start here domestically.
I remember you mentioned the slowing of.
Conversion because it would take about 90 days of downtime.
Obviously, not particularly favorable in light of current supply types of play the men, but just wondering if that's something that's on your radar as well given the capacity additions that are targeted for the U S.
Yeah. So as we've talked publicly about Michael we've got we looked at projects to do I E are we looked at projects to expand our C. U K capacity, we looked at this project to expand our CRB capacity, obviously today in the near term, we're talking about CRB gift for all the reasons I've already outlined and I won't I won't recover at this point.
But having said that we've got good projects on both those different substrates over time, if we see a need for those right now our focus is going to be on the CRP I'll tell you that our Texas or Canada was quite busy because that machine that took downtime that you're referencing correctly. So that was during the pandemic when your foodservice volumes were down substantially.
And of course since so you know the reopening here in the U S.
All through last year at the end of January our foodservice business is accelerating in terms of volumes and growth and so we need those tons coming out of that mill now and ultimately that's how we're thinking about that.
Thank you.
Yeah.
You bet.
Next question comes from Cleve Rueckert from you.
Your line is open.
Hey, good morning, everybody. Thanks for sneaking me in here at NCR and I appreciate it.
Mike I wanted to just follow up something you said right I thought I heard you said in your prepared remarks like you said I think.
CRB cost advantage exceeds other substrates or where the potential cost advantage in CRB.
Did I hear that right and maybe could you expand on that a little bit.
Yeah.
Yes, Cleveland, Steve I'll I'll start I think what we were articulating there is that.
There's a unique opportunity that we began with K too in that exists with Waco.
Very distinct had been substantial cost to produce differences.
With CRB when you compare these investments to the other capabilities in the industry, our one remaining and and others, whereas in Virgin substrates that level of difference tends to be smaller whether you're making a current investment or maintaining your ASP.
So there's a unique.
Competitive differentiation.
Since with CRB that is larger than you would see a be capable to be captured with Virgin paperboard investments I think it was what we were articulating there right and so if you looked at that cash cost curve. It seemed the slide what Steve was referencing is that advantage is much larger on CRB than if you saw the.
Same cash cost curve for SBS, which if you can go get the Fisher curve. The low if you look at North America between the lowest cost and highest cost on an Sps, it's within a $50 bill and so our advantage is going to be when this is going $135 a tonne. So that's the substantial nature of it that we're talking about.
Yeah, No I just wanted to make sure that point was clear and then Mike I really like your point earlier about the lower capital intensity recycled grades versus version so.
Well said.
When we see them.
Long history on them.
Yeah, Yeah, it's a great point and then just one one quick follow up.
We're talking more about integration now and vertical integration and I'm. Just wondering if you guys could quantify a little bit for us what it what it means to go from 73% to 90% integration.
What that does for you in other areas of your business just as a reminder, and then maybe just remind us what the restricting factor is on integration you know in other markets, we kind of think of the downstream has been.
The restriction, but you know I.
I think Mike you were talking about you buy a million tons of paper every year. So maybe it's just really just this upstream investments in that.
Enables that integration and that's it for me. Thank you.
Yeah, I think look if you think about that and I. Appreciate the question, we really take a look at that million tons, we bias make versus buy in that calculus change over time based on freight and other things that go into that you know around some of the places we purchase a paperboard around the globe.
Particularly if we want to optimize our mill network, which will be able to do once we're done here with this waco investment. So I think the biggest thing for driving integration rates up is already any growth. You know every time, we grow each year, we grow like we've done over the last three yeah, we need more tons next year and we have to have low cost high quality.
Material paperboard to be able to convert it for our customers our customers really appreciate the vertical integration and they we're reminded how important that was during the pandemic could ultimately through some of the dislocations associated with the supply chain difficulties, so being an integrated supplier to these large brands. These large retailers really helps you.
Risked their overall supply chain profile.
So it's an important part of that calculus, having said that you got to invest in your converting to and we've done a good job on that over the years to make sure that you've got you know good converting plants that are geographically located to where your customers are we'd like to say that all packaging is local.
And conversion has to be done in a way that helps service, our customers' facilities and plants and again our selection of Waco.
Great because we've got 100 converting facilities here in the U S and it's a great location for us to be able to service them geographically you guys had mentioned down into Mexico, the West coast back East and even up into the upper Midwest. So that's how we think about it Cleveland White vertical integration is such a key part of our strategy and has been really for well over.
For a decade now.
I appreciate it thank you very much.
Okay.
You bet.
This concludes the call today I will now turn the call back to Mike Doss, President and CEO for closing remarks.
Thank you Elliot and I do want to thank everybody for joining us for our call today, we look forward to talking to you again towards the end of April with our updated though first quarter results have a great day.
Today's call is now concluded as we like to thank you for your participation you may now disconnect your lines.
Sure.
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