Q2 2023 Graphic Packaging Holding Co Earnings Call
This strategy is the strength of our packaging network and our ongoing efforts to ensure graphic packaging at the lowest cost highest quality paperboard producer in North America focused on consumer packaging globally.
Second quarter demonstrate the advantages of our global network and our continued actions to build upon our leadership position.
Starting with highlights on slide three our confidence in the long term strength of the demand for renewable and recyclable fiber based packaging as hot as a result, we remain focused on strategically expanding capacity across our network to service this demand, while lowering costs, improving quality and enhancing our it.
The base capabilities.
We continue to optimize our network and we will maintain important flexibility to manage production to the demand environment.
This flexibility enables us to respond to short term changes in demand such as the customer and retailer inventory destocking that has taken place across the industry in recent months.
By actively managing supply to meet demand and our commitment to a disciplined commercial approach. We are meeting the needs of customers and delivering results for stockholders, while adopting to fluctuations in demand.
The short term destocking dynamic does not impact our confidence and the opportunity for long term sustained organic growth or our plans to invest strategically to best position graphic packaging to provide renewable and recyclable packaging consumers prefer.
I am pleased to report that our <unk> machine investment in Kalamazoo continues to meet our return expectations and the new recycled paperboard investment and Waco remains on track to become another cornerstone for our optimized mill system.
The acquisition of Bell incorporated which we were pleased to announce today is another example of a strategic investment we're making in our packaging network depending.
The pending acquisition with three new packaging facilities increase our integration rates and expand the customers and categories. We serve.
As we invest in growth through both strategic M&A and capital investments, we remain focused on returning capital to stockholders as an important part of our balanced approach to allocating capital.
We are pleased that the board of directors has approved a $500 million increase to our share repurchase authorization, making a total of $590 million available for potential future share repurchases.
Finally, we are reiterating our full year 2023 guidance and remain on track to meet or exceed our enhanced vision 2025 financial goals. Our innovation engine continues to increase and diversify opportunities for similar experiences with fiber based packaging as we work with customers to deliver some.
Stable packaging that consumers prefer.
Because of this long term trend towards more recyclable and renewable packaging.
<unk> confident in our ability to drive a 100 to 200 basis points of net organic sales growth annually for years to come.
Slide four captures our key financial metrics for the quarter second quarter sales increased 1% to $2 4 billion.
With adjusted EBITDA growing 14% to $453 million.
As margins improved 210 basis points.
These results led to adjusted earnings per share of <unk>, a 10% increase year over year, given the short term destocking dynamics, we faced in Q2.
It is important to look at the year to date results where sales increased 5%.
The EBITDA improved 26% and adjusted EPS was up 31% year over year.
It is helpful to view this quarter in the context of the supply chain disruptions that dominated the headlines a year ago.
Retailers have not historically held high levels of packaged goods inventory in part because the products we package have expiration dates.
In the middle of last year, however, many accumulated supplies to insulate themselves from potential shortages 12 months. Later, we are seeing the offsetting effects of that buildup and slower organic sales as retailers and customers worked through their inventory.
We are actively responding to ensure we are keeping our inventory backlogs in operating rates at appropriate levels. We have and will continue to utilize planned maintenance downtime scaled back production to meet demand and manage cost implications.
Importantly, we have continued to realize the value of our packaging solutions in the marketplace, providing confidence in our ability to deliver sustained EBITDA margins in the 18% to 20% range. Looking ahead, we believe retailer destocking will be relatively short term headwind with normal customer order patterns and organic grew.
<unk> is expected to return in the fourth quarter of this year.
On slide five you can see examples of two key initiatives, we expect will drive growth and category expansion.
An entirely new grade the highest quality recycled paperboard available, which we call pace at a rainier and our proprietary Cup innovation that launched with <unk> during the quarter.
Pay et cetera in years in innovation that will facilitate recycled paperboard and more consumer packaging experiences. Thanks to the surface brightness and smoothness enhancements that have historically only been possible with Virgin fiber substrates.
While rainier will be a great looking package option for many food applications. We are also excited about its potential for health pharmaceutical and beauty products that for example utilized packaging to hold a pill bottle or blister pack health.
Health and beauty customers prioritize packaging appearance and readability.
We will continue to look for opportunities to win in this large market with our lower cost packaging solution made from recycled materials.
Customer trials for <unk> et cetera are underway and we received excellent feedback on the quality of this new innovation.
We are focused on driving continued packaging trials with customers and plan to ramp up production in the second half of the year and into 2024.
Last quarter, we announced our long standing customer chip delay was going to market with our new highly insulated double wall cough as a potential long term solution for their beverage program.
Three months later, the rollout to 10% of their stores is on track and going well with excellent feedback from chip delay and their consumers.
Proprietary fiber based comp has a number of distinct advantages that allow it to operate similar to the phone call.
Utilizes a built in insulated sleeve that controls condensation increases rigidity and is made with sustainably sourced material.
Turning to slide six you can see our current paperboard mill network with the production and strategically located in Europe packaging facilities.
Our newer K two machine in Kalamazoo utilize leading edge technology and produces the highest quality coated recycled paperboard for consumer packaging in the world.
The new machine and mill campus is a crucial part of our network that gives us flexibility to optimize our CRB production to meet packaging demand.
The success in Kalamazoo is an important example of our long term strategy of driving organic growth and delivering strong returns on capital investments.
Do you believe this strategically located Waco recycled paperboard mill will also deliver tremendous cost and quality benefits when completed in late 2025.
Progress at the Waco site continues with a number of milestones achieved including key management roles until 85% of the equipment has been ordered foundations and floor pads completed for the finished goods warehouse and we're pouring concrete for the recycled fiber warehouse floors.
These investments support growth drive down costs and advance our position as the leading fiber based packaging company focused on consumer markets.
On slide seven you see details of the acquisition, we announced today that will incorporate it as a family on packaging company that has been in business for over 40 years. It operates three packaging facilities in South Dakota and Ohio.
The acquisition strategically expands our packaging network and customer base in North America, while also increasing integration rates.
Felt provides packaging to a host of household names and we are particularly excited the acquisition will expand graphic packaging into the fiber base consumer mail or category, where <unk> has a substantial presence.
In terms of financials Bell has annual sales of approximately $200 million in.
EBITDA $30 million the acquisition cost is approximately $260 million and we estimate annual synergies of approximately $10 million over 24 months, we expect the acquisition to close in the fourth quarter.
Turning now to slide eight consumers are showing a preference for plastic packaging alternatives made from fiber based materials and are using their purchasing dollars to support brands that are doing the right thing for our planet.
Increased consumer demand creates a tremendous opportunity to partner with our customers on innovative packaging and that resonates with end users.
On the slide you see examples of products that our development team is working on as we actively expand and deepen our presence in food foodservice beverage and other consumer markets.
Our integrated packaging platform and product development approach, which always keeps the consumer in mind, our key differentiators and how we are running a different race.
Were actively pursuing a $12 5 billion dollar addressable market.
Of which $11 billion is represented by plastic and foam packaging replacement opportunities.
In summary, our operational execution advancements in innovation and investments to strengthen and strategically grow the business. All gives us confidence that we will continue to drive 100 to 200 basis points of annual net organic sales growth in the years ahead.
With that I'll turn the call over to Steve to provide more detail on the financial results Steve.
Thanks, Mike and good morning.
Turning to slide nine and the results for the second quarter and first half of 2023.
Q2 was up.
Building on our first quarter results and a strong start to the year.
Net sales increased 1% year over year to $2 4 billion.
With positive pricing, partially offset by a decline in net organic sales and lower open market paperboard volume.
For the first half of the year net sales of $4 8 billion.
Increased 5% over the first half of 2022.
That organic sales in the first half were lower by 2% from the prior year period due to inventory destocking in the quarter as Mike discussed earlier.
We see these moves by customers and retailers to normalized inventory levels as relatively short term.
And expect to return to organic sales growth during the fourth quarter.
Consistent with our track record of organic sales growth over the last few years.
We remain confident in our ability to capture new packaging opportunities and deliver in that organic sales growth.
Our expected four year cumulative average organic sales growth rate of 2% from 2019 to 2023 is at the high end of our targeted 100 to 200 basis points annual range established with vision 2025.
As you can see on the slide.
Our second quarter consolidated sales benefited from our diverse portfolio of end markets and customers.
Foodservice market, which represents approximately 40% of our portfolio had a very strong quarter.
Growing 10% compared to the prior year period.
Our food beverage and consumer markets, which represent approximately 80% of our portfolio.
<unk> flat sales year over year.
Adjusted EBITDA was $453 million.
<unk> $57 million over last year.
A 14% year over year increase was driven by net sales growth and margin expansion.
We were pleased to see.
Adjusted EBITDA margins of roughly 19% for the quarter.
And approaching 20% for the first half of the year.
In line with our vision 2025 financial aspirations.
Adjusted EPS grew 10% year over year to 66%.
And the $1 42.
For the first half of the year.
As a reminder, our sales and EBITDA waterfall are available for reference in the appendix of today's presentation.
Liquidity remained strong at over one and a quarter billion.
Importantly, our paperboard integration rate increased to 79% during the quarter.
Up 500 basis points from the prior year period.
Since January of 2018, when we completed our combination with international paper's North American consumer packaging business.
We have increased integration rates from 67% to 79%.
The pending acquisition of Bell.
Is estimated to increase our integration rate by an incremental two to 300 basis points over the next 24 months.
Our backlog average four weeks across all substrates.
And second quarter operating rates across the business remains in the mid nineties.
We are running our business to service customers at a high level, while actively managing supply to meet their demand for packaging.
Slide 10 features our full year guidance, reflecting growth across key performance metrics and a reduction in leverage to the low end of our historical targeted range.
As Mike mentioned earlier, we are reiterating our financial guidance for 2023 include.
Including the increased expectations for adjusted EBITDA and adjusted EPS, We provided last quarter.
Guidance does not include the pending acquisition of Bell.
Turning to slide 11, and our balanced approach to capital allocation.
Expectations for continued growth and significant cash generation.
Support our prudent allocation of capital into initiatives that strengthened the business.
And drive future growth.
At the same time.
The path to return leverage to two five times or below by year end.
In closing we are investing in initiatives that support our vision 2025, including todays Bel incorporated acquisition announcement, our investment Waco, and ongoing collaborative innovation projects with customers.
We are resolute in our focus to drive profitable growth and extend our leadership position in consumer packaging.
While returning capital to stockholders through our dividend.
Potential future share repurchases.
Thank you for your time this morning with that I'll turn the call back to the operator to begin the question and answer session operator.
Okay.
Okay.
Okay operator, thank you.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press thoughtful pace.
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And today, we ask you limit yourself to one question and one follow up.
First question today comes from Ghansham Panjabi with Baird. Your line is open.
Hey, guys good morning.
I guess first off clearly the operating environment.
<unk> got a much more challenging on volumes and also productivity and <unk> been able to offset that with better price cost unusually guided towards but Mike we're starting to see some price leakage paperboard, including SBS into UK and Theres, a lot of investor concern over CRB pricing as well and the potential for total price cost to flip negative in 2024.
So with that I, just love to hear your updated thoughts as it relates to that risk for graphic packaging.
Look out ahead.
18 months or so.
Yes, thanks for that Ghansham and.
And as we've talked about here as we've been out.
Sitting with investors in various conferences, Steve and I, both talked about the fact that there could be some leakage around.
The margin.
Some of the pricing.
As you alluded to $20 a ton on SBS in 'twenty on C U K as well.
But I think you guys take a step back in the context of our overall pricing initiatives really over the last three years those.
Substrates have gone up for $350 to $500 a ton so they have gone up pretty substantially.
But having said that the other thing that we continue to do as part of our commercial excellence initiatives here that we really started at the beginning of.
The pandemic.
Contractual resets, we've got with many of our customers and so that's flowing through the P&L as we do those and again we don't.
We spent a lot of time breaking those out those are customer proprietary as you can appreciate but those resets are significant and that's why it's been very difficult.
For the analyst community to truly trap or pricing relative to.
Just recently at the only indicators certainly risky is it.
One factor that goes into that but it's not the only factor and we've been pulling multiple level levers.
As demonstrated by what we've been able to achieve there.
Okay, Great and then just for my second question Youre confidence on price or core sales turning positive in <unk> what is that based on.
Yes, so look I mean, our crystal ball on that isn't any better or any worse than anybody elses, but we do talk to our customers. As you can appreciate on a routine basis and the comps they actually start to get easier towards the end of the year. If you look at our Q3 comp year over year, it's 5% last year, we grew so thats tough comp.
Into Q4, it's 1%.
And as we alluded to in our prepared comments many of our customers actually almost almost all of the products. We make for our customers have expiration dates associated with their their products and so they need to deal with those in a relatively quick fashion and so what they are talking to us about as you will see this in the second and third quarter, which is what <unk>.
We are seeing.
And then.
We've been listening and watching as they have been starting to go through their earnings season as well.
Our promotional activity that we will need to occur as they work to drive their volumes up again as well I mean, it's a key part of how they operate their stocks to they've got to have volume growth Ghansham as you well know and so we're starting to see some green shoots in some of the planning processes on that.
That's really what informs us that Q4 could actually inflect positive and.
Good morning, Steve just to add to Mike's points there.
We've also said is kind of a low watermark in may.
This year, we've seen month to month.
Sequential modest improvement and so the combination of the comps that Mike was talking about Q2 Q3 last year and then Q4.
More modest and then month to month kind of sequential modest improvement gives us confidence that Q3 may look a little bit like Q2, probably down a bit but Q4 should inflect based upon what we're seeing so those are the fact patterns that were monitoring that give us confidence in the statement.
Okay perfect. Thanks, so much.
We now turn to Mark Weintraub with Seaport Research partners. Your line is open.
Thank you first just wanted to follow up you may mention of resets et cetera, and how that's been affecting you.
Your.
Seeing et cetera can you give us any color as to how much more of that might there to be common.
It might be to come and.
How that might impact 2024, recognizing that there could be other real time adjustments happening as well.
Yes, Mark so our contracts as you know tend to be anywhere between call. It in North America, two to five years in duration and so those things have a fairly long tail associated with them and we're not going to give you an absolute percentage there right now kind of what we've worked through but there is still meaningful contracts that are out there that will.
Would be addressed in the next 12 to 24 months.
Okay, and I assume it's fair to.
To speculate that given the comment you made about things being up $3 50 to 500 and only coming back.
To date in some of the substrates that there would be potentially significant upside bias on the ones that are resetting.
Well, we have to go back and get that get those resets, that's exactly right and Thats, what we have in fact been doing.
Okay and.
Just on.
On slide nine I think there as I mentioned of unplanned downtime in second quarter.
Could you kind of walk through a little bit what happened there how big an impact that had on.
Your business profitability as well and is that all resolved at this point.
Yeah, I'll hit that a little business, Steve can talk a little bit more around some of the financial implications associated but really if you take a step back and you look at the first half of this year Mark.
We have now dealt with 80% of our planned maintenance outages for the year. So those are behind us.
And as you know when you take these mills down you've got <unk>.
<unk> hundred 2000 contractors on your property they are quite expensive and then you've got the loss production that goes along with that as well.
In addition to that in the second quarter, we talked roughly 30000 tons of what we'll call market downtime just to manage our supply with our demand what we were seeing.
And really controlling our working capital and specifically our inventories in addition to that in the month of July here.
Through the month of July August .
First today.
We took an additional 80000 tons of market downtime really focused on our inventories and matching our supply and our demand.
Timing of that is actually quite low.
Good relative to.
Yes.
Fourth of July break in some of the other things that are going on there our employees actually appreciate that of course, we prefer to be busy we prefer to have those orders, but if we need to take downtime.
We wanted to be able to do that and that's all reflected in the guide that you see in the results that we posted here in the first half of the year.
Yes, Mark its Steve and how that plays out.
Our guide as we continue to have very high confidence in the returns on calendar <unk>.
80 million dollar a year type level, and we're offsetting that and our assumptions around our guide kind of the midpoint of performance now down at zero that will.
And that incorporates in how we're thinking about continuing to actively manage supply and demand with as Mike mentioned.
80000 tons of market downtime being taken in July and so thats, how that holds together relative to how it's incorporated into our full year guidance, our full year thinking.
Okay Super So just to clarify so the unplanned downtime that was.
Your decision to take market related downtime as opposed to some operational issues or something like that.
Then additionally.
Cost of the market related downtime is showing up in the in Europe .
Our perform at your.
Productivity and.
The way you are categorizing it.
Mark that's correct and so the estimated cost implications of actively.
Managing our supply to meet specific customer demand is incorporated into performance Thats, where it flows through.
On the P&L and of course Kalamazoo is also in there. So you can be a positive offset.
By the expected negative and then what we're speaking to specifically is exactly what you said this is market related.
Downtime relative to supply and demand overall.
Our facilities have been operating very well actual a while running operating rates have been very high mid ninety's.
So overall, we are executing and operating very effectively we are just doing so to match up with the demand of our customers.
Super Thank you.
Our next question comes from George Staphos with Bank of America. Your line is open.
Thanks, Hi, everyone. Good morning, thanks for the detail.
I wanted to take a step back and talk a little bit about the the pace at or near board and Mike and Steve How you see that and CRB relatively fitting into the substrate mix.
Relative in particular to bleach board over time.
And over time do you see clearly you do with Kalamazoo, and Waco, but do you see more and more share gain by CRB over time for bleach and what does it mean for your bleached presence.
Yes, thanks for the questions George I think from that standpoint, as we kind of take a step back.
Rainier.
Set of Rainier.
Smoothness in brightness in particular do rival what we see with bleach paperboard and that opens up a whole bunch of avenues for us as we've talked about in our prepared comments, so I won't repeat those but.
The initial trials and qualifications, we've been doing with customers, both open market customers and internal customers.
So a lot of promise and we've got a pretty heavy dose of those here in Q3.
And we would expect to actually be placed and some of that material into the marketplace towards the end of Q3 and into Q4. So we like the momentum were seeing there relative to how it squares up with our overall SBS business you have to remember a big portion of our Sps business as uncoated and goes into cost 400000 tons roughly.
Of our $1 2 million tons.
And as you saw as Steve talked about in his comments our volumes on food service were up 10%.
Youll hear from sales standpoint, we continue to grow that business, we continue to invest behind that valves <unk> acquisition of <unk> is another.
Element of that is they've got a large foodservice business that we're excited to put as part of our portfolio. So again part of our run into different race, we really know where we want those substrates to be for us SBS, both uncoated and coated is indexing more towards foodservice, our open market customers, we service with our Sps business tend to.
More plate oriented which is not something we manufacture so we're thinking about where we pick our spots and when it comes to general folding carton youre going to see us push and flex our advantage on CERP because of the quality advantage, we have and the cost advantage that we have in Kalamazoo and soon we will have in Waco.
Thanks, Mike I appreciate the color on that and then my next question.
Is around guidance and to some degree you've already covered this with the overarching orgs.
Organic.
Revenue trend commentary, but.
Looking at some of the industry data that we received recently.
It seem to be a fairly sharp drop off in foodservice and bleached late in <unk>. If I heard you correctly I think it was answering Mark's question you said.
The low watermark was in May so can you sort of help us square that circle if in fact.
Those trends what you saw in the market as a whole and then relatedly on guidance.
You took the price cost guidance.
Pricing doesn't seem like it's heading higher from an index standpoint, so is that more the resets or is that cost that's been trending more favorably for you relative to your last commentary thanks, and good luck in the quarter.
Thanks, George I'll take the first part of that so specifically in the month of June we had a very long outage at our Augusta mill, which really had a big impact on the numbers that you saw so that's a pretty simple explanation in terms of kind of the quarterly cadence of that and I'll, let Steve take the.
Second part of the question.
<unk> cost George the $200 million improvement there two things. So one is exactly what Mike talked about earlier, we continue to have very good outcomes from a commercial excellence perspective on overall net pricing now moving into the $5 to $600 million range for the year with.
A continuation of some positive pricing here in the second half of the year and then as we've talked before the mark to market on commodity input costs have been at the low end of our earlier estimated range, we've now move them down into that range.
Such that the relationship on price cost is up $200 million.
And consistent with our prior conversations and if you do the second half of the year in the second half still have positive price cost some continued positive price execution.
And then a very benign inflationary environment roughly zero at the mid point tenants so that.
Mike was talking earlier kind of then starts to transition into 2024.
With both of those categories being reasonably benign as you kind of March out of 'twenty, three and on between the 2024 on a.
On a mark to market type basis.
Thanks, very much Steve.
You bet George.
Our next question comes from micro Oxman with <unk> Securities. Your line is open.
Thank you Mike Steve Melanie.
Can you just talk about how you weigh economic downtime again.
Maybe pulling forward some of the closures that you plan for your mill system in terms of like Middletown, and I guess, how do you think excuse me.
Yes.
Yes, I'm happy to take that Michael I mean, as you can appreciate likely in Kalamazoo, What we would do is we would run K too when we run <unk>, one and we do a rolling outage on <unk> III is the highest cost machine you saw there and so that actually is how we actually look at that if we don't have the demand for what we're capable of producing.
<unk>, they're the other action we took as you know as we announced at the last earnings call and during the quarter. We took down the <unk> paper mill. So that was another 80000 tons that came out of the market. So we are pretty aggressive in terms of how we.
Moving to match, our supply and our demand.
No. Thank you for that Mike just but just in terms of.
Now in a more challenging environment, where the demand is not there for CRB for some of the other substrates why not.
Move to move to closed Middletown, or east Angus sooner rather than later.
Yes.
<unk> would suggest we're going to need those tons for growth, but you are right. If something was to change we always have those levers that we can pull.
Yes, Michael it's Steve I think to reiterate Mikes point of course, those are levers that are available, but as we see a return to organic sales growth and coming out of 'twenty three and into 24 consistent with our expectations. We would have an expectation that we would need those tons to meet demand, but we will obviously.
Only produce.
The demand that we have for our products.
Got it and then just one quick question on imports.
One of your global competitors, just finished any capacity, Sweden mill.
Now the most efficient and largest folding box board plants in Europe .
Thoughts around increasing exports to the U S and any initiatives that you can take to offset.
Increasing European box board capacity.
Okay. Thank Michael actually if you look at the data imports are down.
20% year on year, so of FCB into the North American market and as you probably have seen and was well chronicled by the European producers.
<unk> already announced their results here in the quarter their wood costs are up substantially year on year as the structural cost wood plus.
Plus higher.
Structurally higher it would seem relative to not having the imports of European pulp.
Russian pulp into the Nordic countries there so.
I actually don't believe that that supply chain is one that we can't compete with I believe that we can absolutely compete with imports of <unk> into the North American market with our embedded mills in the locations where they're at and so that's how that's how we look at that.
Got it thank you very much.
Yeah.
We now turn to Adam Samuelson with Goldman Sachs. Your line is open.
Yes, Thank you and good morning, everyone.
Maybe Steve just a clarifying question just how you frame the third quarter I think obviously, the organic volume organic sales volume mix down year on year, but I wasn't entirely clear when you said the <unk>.
Third quarter looks like the second quarter, if you were referring to sequential EBITDA dollars.
Year on year growth.
Can you just clarify kind of what you were trying to what the point on the third quarter was Adam.
<unk>.
Yes, Adam it's Steve the statement was just purely about organic say.
Sales growth were currently assuming very modestly down in Q3, and then up in Q4 and hence that.
Results in the full year guide of zero, and minus 2%, which implies that the second half of the year.
Is somewhere around plus or minus 2% right thats. The math that gets you to a full year either at minus two which would say that minus two in the second half of the year would be within that range, we're assuming better than that as we would have modestly down and then modestly up.
If you kind of look at it organically.
We're now providing as you know quarterly guidance on EBITDA generally we're nearly halfway to our midpoint of our EBITDA, but I think our planning expectation of that being pretty consistent Q3 Q4.
Is probably reasonable mostly because we have less.
Land maintenance downtime in Q4, this year, which has kind of gone up kind of play itself out over the coming two quarters, but we're pleased with where we're positioned to halfway through the year at $937 million the midpoint of 109.
In the $960 as you kind of work your way into the second half with a guide towards the midpoint.
Okay.
That color is really helpful. And then just as we think about the demand side.
Yeah.
Any any color you have on maybe if there's any difference in trends between your European business.
In North America, and especially as we think about the benefits of some of the price cost benefits that have kind of been stickier.
Is there any is that disproportionate in Europe as some of the European benchmark indices, where you are not integrated have have have fallen.
Yes, I'll take that one Adam so from that standpoint, as you correctly pointed out with exception of the C. U K that we ship over to Europe .
Running our own facilities there for our beverage customers, we do buy the paperboard for the rest of the sales that we have so if the price goes down it's a pass through so it doesn't help us one way or the other up or down.
And what I'm really pleased about is our overall volumes have held up quite well in the European market relative to some of the other comps that we've seen kind of come out.
But I think it's really all a function again of the focus that we've got an innovation new product development.
<unk> that we're making into our European platform. So our strategy there is actually working quite well.
Okay. That's all very helpful helpful color I'll pass it on thanks.
Yeah.
Our next question comes from <unk> with UBS. Your line is open.
Hey, good morning, everybody. Thanks for taking my questions I think most of the questions have been asked and answered at this point, but Mike I'm. Just curious I think you said to George you sized the SBS side.
Your production that goes into cups.
Just be curious if you could remind us of that $12 $5 billion total addressable market how much of that is cups, and maybe you could just.
Remind us what the what.
What the stats are behind comps when we talked about it a lot earlier this year, but.
I think it was an opportunity to get into into them.
Replacing more foam with paper. So you know how much of that Tam is really skewed towards Cubs release question.
Yes, I believe it's Steve I'll take a cut at that and then Mike can add some additional perspective, but of our $12 5 billion dollar addressable.
<unk> market roughly $11 billion of that falls into the category of <unk>.
Plastic or foam type replacement so it's the majority.
And then when you look at the categories underneath that.
Round figures I mean.
What you'd characterize as cups, and bowls and trays, those kind of categories, which would fall into a lot of your <unk> in a lot of those transitions coupled.
A couple of billion plus so it's a sizable part of of the addressable market as we look at that and.
As Mike had in his prepared remarks, I mean, we see real momentum on the Cup side, which is why our confidence in SBS as a platform remains high we're obviously, adding our capacity elsewhere on the CRB side, the highest quality lowest cost there.
But our ability to mix and enhance our SBS platform with cup and other growth that falls heavily on the foodservice markets as an example.
It's quite high in the testing, we're doing and conversions. We're doing are are successful to date. So really good follow on question. Please because if you look at kind of the momentum in assuming we're successful in chippeway adopts that on a more national level. That's over 100000 tons once it's converted.
In there for us what that really does then it's 400000 now becomes 500000 tons of uncoated, which is not in the lane that everybody else is trying to compete in and certainly not in the lane, where some of these conversions are taking place. So we're trying to pick our spots and really be thoughtful about where we compete where we invest where it can create competitive advantage.
And provide a differentiated experience for our customers.
Got it thanks for that it's pretty clear and just one quick follow up is that.
I think you said a couple of billion dollars plus of addressable market is that skewed towards the U S or is there opportunity in Europe as well.
Yes, there is some opportunity in Europe , but it's definitely more skewed towards the U S theres virtually no foam in Europe .
Yes.
Yeah got it okay. Thanks very much.
Our next question comes from Andrew Wilson with RBC capital markets. Your line is open.
Great. Thanks for taking my question.
I guess I wanted to ask about the guidance first of all it seems like.
The volume mix side, it's a little bit.
The unexpected, but then that is being offset by.
Maybe a greater tailwind from the price of the commodity cost spread.
Is that an accurate kind of summary.
How the year is kind of playing out versus your expectations.
Yes, Steve I mean, I think if you stand back and talk about the year, it's pretty straightforward in some ways made $1 $6 billion of EBITDA last year in 2022.
$500 million of positive price commodity input cost relationship this year offset by $200 million of labor and benefits inflation and the cost that we're incurring to actively managed supply and demand.
And so it's one six plus 500 minus 200 and Thats the company.
As we're executing on it.
This year and it's us taking decisive action to.
To manage through the temporary inventory destocking by running our business to the specific demands of our customers.
Yes.
Great Steve and then just looking ahead then.
It seems like the volume mix side again.
Maybe below your longer term organic growth targets of 1% to 2%.
What's the path to get back there I know that you guys have discussed.
Some destocking amongst your retail customer.
Customer base, bringing down weeks of inventory maybe from fixed before.
Do you see that process kind of coming to an end in Q3, and then maybe as you look out into next year.
Likely.
High probability of getting back into that 1% to 2% range or potentially even exceeding it with some of the actions like bell.
And.
Kalamazoo productivity in Waco, and continued substrate conversion.
Yes, it's a very important question and one of the things that we tried to do with todays remarks is if you take a four year view 2019 through 2023. So a very good cross section of four years of consumer behavior in our innovation engine when we when we execute on the second half of the year roughly.
As we're providing that's 2% organic sales growth over a four year period of time, the majority of which will be driven by new to the market innovative products that our fiber base that are recycled or renewable so our confidence that that.
As we look out to 'twenty four and beyond that we'll continue to operate in that 100 to 200 basis points with our recyclable renewable innovative packaging products as high and as such we should inflect back and continue to grow organically consistent with what we've seen on balance over the last four years.
<unk>.
Yes, we operated above for a while we have a correction app named inventory four year view of the business would indicate 2%.
And lastly, if I may just ask one more just on the end market.
We've seen some significant pullback in some volumes in beverage and some other areas.
What are you hearing I guess from your customers as far as.
Future promotional activity if there is any.
Are they looking for ways to potentially start pushing volume again or are they still focused mostly on an offsetting inflation.
Is there any are there any initiatives such as light weighting or anything else that.
What effect the U S.
You can move forward.
So room really if you look what they've been focused on over the last 18 months to 24 months has really been pushing price right and they've been willing to sacrifice some volume in the form of getting higher prices and they've been largely successful in doing that but coming through this earnings season. As you saw this starting to get.
More pressure to get back to volume growth I mean, it's.
I mean, you do this for living you know how the math works relative to the modeling you've got to have a company that grows its volumes that ultimately its sales and generates higher earnings year on year, and that's done by growing volumes and so we have been watching like you have been as these customers announced they've been talking about the fact that they need to do that.
As I said in my prepared remarks, and one of the questions earlier.
Start to see some early green shoots.
But it's still early days on that I would expect it to occur based on history is a guide.
But we're looking for some more tangible evidence of that as well.
As I mentioned, our comps get a lot easier in Q4 than they do in Q3 and so that's why we've talked about the business modeling the way that would be out but look I am confident that.
These multi national global customers that we have baked positions with will work to find a way to position their brands and drive growth.
The outlying years, and we're going to participate with them along that with our solutions.
Great. Thanks.
Our next question comes from Phil <unk> with Jefferies. Your line is open.
Hey, guys. Thanks for squeezing me in.
Steve you usually gave us early right.
Third year based on where pricing is kind of shaking out in costs did I hear you correctly you are expecting price constantly based on the current run rate for 2000 2040 pretty benign.
If that's the case do you have enough levers effectively on an organic basis to drive EBITDA go into 'twenty 'twenty four.
Yes, so Steve I'll start and then Mike can.
Can add I think just for clarity we are not providing any.
Snapshots on guidance into 2024, but what we were providing.
You with is that on a mark to market basis, both current pricing and commodity input cost inflation are reasonably benign currently on a mark to market basis.
And then obviously that sets us up.
For growth as we returned to organic sales growth and a return to productivity levels that are positive and earn on organic sales and so those are the things that certainly probably at the end of Q3.
We'll come back and provide you with a little more color as we look out into 2024, but hopefully that gives you a response consistent with what we're seeing on a mark to market basis, I don't know, Mike anything you'd add to that no I. Just think look you've got to watch our overall demand continues to develop obviously, we got a fair amount of negative.
Under absorption of fixed costs in the market downtime and what we've provided you today and that influx into Q4 and into next year, obviously that could be a pickup. We obviously don't have the bell acquisition closed, but we were successful in doing that and get that done in Q4 that would be another.
Yes.
Catalyst as we go into next year and there's some synergies associated with that too. So we continue to have good momentum.
Bill you've covered this story for a long time, that's just kind of how we do it we just grind it out.
And Steve just to clarify that.
That mark to market basis.
Pretty benign that's a commentary for 2024 as we sit or you talked about mark to market being neutral for calendar 2023, I just want to make sure I get that fire point correct.
While that specific mark to market statement was with regards to 2024 as you look at the pricing on that.
And we know so known pricing actions and a mark to market on commodity input cost those both of those are reasonably benign.
Our guide for the second half of the year on price cost is modestly positive as we execute on pricing that we are executing on and have a mid point of inflation that's closer to zero.
Okay. That's super helpful. And then on the <unk> acquisition. The margins are quite impressive for just a foreign car.
Player I guess first question is I assume these assets are pretty well capitalized any color on that front and then you called out.
On the paperboard being consumed from Bell <unk>.
Any color on the split between the grades.
Or are they buying from you in size and then as and do they have any ongoing agreements that.
Take a little time for.
That will flip over where they could buy it from you more fully going forward.
Yes, so we've known.
At the Graham family for a long time, they've built a wonderful business over the last 40 years, and we're thrilled to be able to have the opportunity to have them join our company here.
And relative to the overall tonnage Phil it's 95000 tonnes. This predominantly CRB. That's the vast majority of what they do so it really fits well into <unk>.
Our investments in Kalamazoo in Waco.
And relative to agreements, we're not going to comment on those right now that would be premature to do so just given we've got to go through the regulatory process, we will get to all of that in good time.
Okay. Thanks for the great color.
Now turning to Anthony Pettinari with Citi. Your line is open.
Good morning, Mr Das Mr. Sugar This is Greg on for Anthony.
I just have a quick <unk>.
RV products broadly.
Morning.
I have a question about your CRB products broadly and then one follow up on specifically the mailers and the new paper Cup.
So first I mean, you've talked about the quality premium appears the RMB versus the market and my question is what actions can you take internally to further translate that quality premium into earnings whether that Intel's decoupling from benchmark CRB prices, gaining share of wallet with existing customers or something else and then.
<unk> would you flag any mix shifts trade up or trade down you've seen in <unk> and then here in July .
Yeah, So like I mentioned earlier, the neat thing about how we positioned the business as we've got unique ability in Kalamazoo to make a sheet Thats got superior quality and specifically the smoothness Andy of the brightness. The apparent if you will of that Chi that's going to allow us to target different categories. Both our open market customers thing.
Like health and beauty pharmaceutical as Steve talked about in his prepared comments and ultimately some of our food applications as well. So yeah. We're using we talked about calendar <unk> being a cost reduction project. In fact, it was then.
Never to grow on that but in the back of our minds. All along we felt we'd have the ability to make a great. A paperboard that was unique out of 100% recycled fibers and that's playing out as we speak with the trials that we're running here in Q2 Q3, and we believe we'll actually have some sales yet this year and good momentum as we go into next year or so.
Our overall strategy there.
Thanks, that's very helpful.
And then I guess shifting gears to the specific CRB products.
First question, how does <unk> really liked the cup.
And I guess related we I can imagine other.
Other quick serve restaurants have noticed the products maybe have tried themselves have you seen a response from truthfully as competitors interested in the comp maybe.
Maybe trialing it from you guys, whether that whether they are an existing GPO customer or not.
And then one follow up on paper mill or do you have any thoughts on the current market size for CRB mailers and what's the conversion opportunity do that opportunity there.
Sure. So a couple of questions there relative to Chipotle are overall trials are going as planned we're ramping up towards that 10%.
That we talked about in terms of the number of stores that.
Our products are being sold in or distributed to.
Feedback to date has been solid they've been.
As you can imagine its a bit of an iterative process I mean, we learn things together as we go along but overall the general consumer reaction has been.
Ben.
Very positive.
We'd expect that seems to be the case, we will continue to work with them through the course of the summer and into the fall is.
Really do all their work in studies associated with this.
As you know it <unk>, a very well run company they do their their homework they make sure that.
The materials are going to resonate with their customers and they don't move quickly until they know exactly that everything is going to meet their quality expectations. So I would expect this situation to be no different relative to what's going on with other competitors of theirs I'm going to refrain from commenting on that that wouldn't be appropriate for me to comment on.
On a call like this.
But I will tell you that the conversion of <unk> into our Cup is an important one is.
Vast majority of people in the Fusin service market really look up the Chick Fil, a and what they've been able to accomplish it's been quite remarkable.
So in that regard this as a very important initiative for us in regards to mailers.
We're learning that space, we still got some work to do there. It's early days for us, but that was a key consideration in terms of.
The acquisition of Bell, because thats a market we didn't have.
And we didn't have a position. It. So this allows us to actually have a little bit more of a e-commerce position with.
Paperboard, if you will and this is all coated recycled paperboard. So again it fits right into our wheelhouse with the investments that we've made in both Kalamazoo and now Waco. So we really liked that a lot.
Great. Thank you very much.
Our last question comes from Pasha <unk> from Wells Fargo. Your line is open.
Mike Steve Thanks for taking my question.
I have three hopefully I can get my quick.
First one on slide 14, I think you talked about Steve the net productivity number 15 million being related to under absorbed fixed overhead.
One hand, I would think to myself well normally you guys deliver productivity so.
The under absorbed fixed overhead number is actually bigger than that but even if I just take the $15 million and the 30000 tons of downtime that you talked about of EDT.
$500 a ton of under absorbed fixed overhead I know, it's kind of putting a finer point on that but is that maybe do two things.
Sneaking up on you and not being able to plan around that a little bit better.
Or is there something unique about the mills and once you've taken the downtime that impacted.
That number.
Yeah, No David Steve I think.
At minus $15 million, you're roughly right in terms of the impact of the 30000 tons and narrow the positive Kalamazoo is in there and then keep in mind, the actual impact of minus 4% organic sales volume flows through productivity as well and so that's kind of the combination.
I think we don't think about it the way you just suggested I mean, this obviously destocking happened over a relatively short period of time, we took 30000 tons.
Out in the quarter and then as Mike mentioned in a timeline that really works for US in July we took 80000 tonnes, which matches up extremely well with our teammates are.
Mills right time to do it leveraging our holiday.
So no we actually moved with a sense of urgency it just fell just outside the quarter.
Relative to the timeline around which we were actively addressing.
This short term destocking.
Okay.
Okay, and then I guess relatedly on the guidance I mean, it sounds like you're reasonably confident on the price cost elements.
You suggested kind of Q4 rebounding a little bit on the volume side.
As you pointed out.
No one else in your Crystal ball isn't any better than anyone else's.
Why such the Big range I mean last year, you guys were able to kind of tightened to $100 million range and I. Appreciate there is maybe a little bit more uncertainty as we sit today.
A year ago.
There anything else in there.
We should be mindful and thinking about.
As it relates to the range.
No Gabe I mean, we just chose not to touch it I mean at the end of the day, we have a long history of our range has been guided towards the midpoint, that's our history.
We just didn't touch it theres no there's no message in there around variability that is any different than anything we've handled it in the past.
Okay.
Okay, and then last one.
The number that you threw out there Mike was.
One is kind of fully integrated and I again I appreciate.
It has not closed yet but to sell deal.
It sounds like you would in fact be able to integrate nearly all of the 95000 tons.
Which again, if I kind of do the backward math implies maybe $100 a ton.
The incremental EBITDA that you are assuming as part of the synergy number and that would sort of suggest maybe nothing on that.
SG&A or procurement or otherwise.
Are you guys being conservative there or is there something else that we should maybe just proximity to metals and things like that.
About you mentioned, it's mostly all CRB.
Synergies are a multitude of different things. We go after as you can appreciate given our size. There are savings that we can generate in terms of procurement. So it's bigger than a $200 million business on things like games coatings adhesives corrugated boxes for aid all of those kinds of things. So of course, we get the leverage on SG&A profile of <unk>.
With that as well I would be careful just trying to back into numbers dividing the tonnage by what the synergy number or there are also sometimes some offsets relative to systems, we have to install for a larger company that we've got here and how do we do all that stuff, but in general look we're thrilled.
Had those tons assuming.
When we get approval to close the business here, which we expect that we will.
But ultimately integrating those in there were well over 80% now in terms of our integrated <unk>.
<unk> in the marketplace and as all of you recall when we closed the deal with international paper and purchase our consumer packaging business as Steve mentioned this in his prepared remarks. It was 67%. So that's a key strategy of ours, both organic and inorganic and we've made tremendous progress on and Thats, just kind of de risks our business going forward in terms.
While we operate the mills.
And the business.
Yes, no. Thank you Mike.
You bet. Thanks Kate.
This concludes our Q&A I'll now hand back to Michael Doss, President and CEO for closing remarks.
I'd like to thank everybody for joining us for our second quarter call today and look forward to talking to you again in October with our Q3 results have a great day.
Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
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Okay.
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