Q3 2024 Graphic Packaging Holding Co Earnings Call
Speaker Change: Good day everyone and welcome to the graphic packaging 3rd quarter 2024 earnings call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation.
Speaker Change: It is now my pleasure to turn the floor over to your host Melanie Skijus, man the floor's yours
Melanie Skijus: Good morning and welcome to Graphic Packaging Holding Company's third quarter 2020-4 earnings call. Joining us on our call today are Mike Doss, the company's president and CEO and Steve Scherger, Executive Vice President and CFPH.
Melanie Skijus: To help you follow along with today's call, we will be referencing our third quarter earnings presentation, which can be accessed through the webcast and also on the investor section of our website at www.graphicpkg.com
Speaker Change: Before I turn the call over to Mike, let me remind you that today's press release.
Melanie Skijus: and the presentations made by our executive.
Melanie Skijus: Include four looking statements as defined in the private securities litigation before Max at 1995. These statements are subject to risk and in certain these that could cause actual results to differ materially from our expectations and projections.
Melanie Skijus: Each risk and uncertainties includes, but are not limited to, the factors identified in their release and in our filing specificurities and exchange commission. With that, let me turn the call over to Mike.
Mike Doss: Thank you, Melanie. Good morning, everyone, and thank you for joining our call today. Pressing packaging is a global leader and sustainable consumer packaging, but the portfolio constructed to deliver consistency and growth across a wide range of economic conditions.
Mike Doss: Considering the Unimid Mark Conditions, we have experienced in 2023, 2024, we are indeed delivering solid results.
Mike Doss: and that's a quarter graphic packaging sales for $2.2 billion, for just the David Doss was $433 million and adjusted EPS with 64 cents.
Mike Doss: We saw clear a music pivot to volume growth of 1% during the third quarter at the Europe's return to growth last quarter. Price was down 2% growth through the same as last quarter.
Mike Doss: for companies that just could even talk margin, despite the modest following growth and some weather and power disruptions, was a very solid 19.5% in line with our expectations.
Mike Doss: That speaks to the strength of the business we have built. In a challenging environment, we are delivering strong and consistent margins. You should expect from a consumer packaging leader.
Mike Doss: Turning to slide three, the Wynco-Texes recycled paperboard manufacturing facility investment remains contracts, where the fourth quarter of 2025 startup.
Mike Doss: We have recently begun the hiring process and made our first hires, the full of applicants we are seeing as excellent, as expected, and attractive labor pool is one of the key reasons companies select to wake up for this importance for teaching investment.
Mike Doss: Once Waco is up and running, we will be able to search the entire North American market with the highest quality coded recycling paper for two locations in Michigan and Texas, with will further expand the company's long-term competitive advantage in both costs and quality.
Speaker Change: During the quarter, we also made a number of packaging facility investments, and I'd like to highlight one of the particular that are posed on packaging facility and Poland.
Speaker Change: We recently completed the commissioning of a Hydeberg XL 106 Prohouse with 10 Colors
Speaker Change: Fellow Barnardish, another color at the end of the line, and a cool foil unit. This state-of-the-art equipment is designed for high value, high complexity printing, and significantly enhances our position in the European Health and Beauty Market.
Speaker Change: Post-Nod is an excellent facility with a very strong team.
Speaker Change: and an ideal location of this kind of investment.
Speaker Change: This new press not only strengthens the company's product offerings, but also increases our manufacturing flexibility, both which are especially important to the health and beauty customers.
Speaker Change: You may have seen our August announcement of a virtual-of-power purchase agreement with the Celestero.
Speaker Change: and will build two new solar power generating plants in Spain.
Speaker Change: The agreement is a key component of the company's plan to reduce scope on of scope to greenhouse gas emissions by 50.4% by 2032 and will take the company's purchase renewable electricity equivalent in Europe to approximately 70%.
Speaker Change: reducing the company's carbon footprint, the central to our mission as a leader as sustainable consumer packaging, and part of what makes us the supplier of choice to leading consumer product companies, retailers and restaurants.
Speaker Change: After the Investiture of the University of Georgia, which paperboard manufacturing facility in May,
Speaker Change: Consumer Packaging made several approximately 95% of our sales with the sale of paperboard representing just 5%. As we have discussed in the past, the paperboard of paperboard packaging industry has changed dramatically, both in structure and in pedadistranties.
Speaker Change: As a result, Mark of movement related to the sale and pricing of paper work have become our March challenging for third parties to assess and so perhaps not surprisingly, their results are increasingly inconsistent with what we see in the markets.
Speaker Change: As we have previously disclosed, we are actively working to transition all graphic packaging, customer contracts, some more transparent and more accurate price change in each mechanism.
Speaker Change: The getting in the first quarter of 2025, you will no longer enter into new open market paperboard sales contracts that include third-party price change mechanisms. This move with paperboard sales is a small but important piece of our ongoing transition.
Speaker Change: Turning to the company's packaging results as I noted, we saw pivot to positive buying growth.
Speaker Change: That rich and food surface results were a good solid, and we saw a year over year improvement, food, household, and health and beauty. While we had expected some stronger volumes overall, we were pleased to see improvement across the large number of product categories and geographies.
Speaker Change: Mass retail and superstores can change the gains here on the grocery category, and that includes both significantly more in brand and products.
Speaker Change: We are participating in this shift with a number of recent innovation wins in private label and mass retail, particularly with new multi-packs and our proprietary Oreo Paperboard Canister Solutions.
Speaker Change: Innovation sales growth in third quarter was 54 million dollars in line with our expectations and we've made contracts delivered $200 million for the whole year.
Speaker Change: These results are unprecedented and speed to the high priority customers put and moving to better or sustainable packaging solutions.
Speaker Change: and as a specially-to-in-Europe, where regulations are creating emergency for new solutions, but also in North America where the consumer-driven push for more sustainable packaging remains strong.
Speaker Change: Select Force Reminder of just help rod to companies portfolio really is and why we are able to generate solid results even in challenging market conditions. There's a very good chance that you've probably released one of our products in your hands in the last 24 hours.
Speaker Change: Now let's look at our sales in more detail on slide five. We saw overall packaging sales improved after two quarters of weekness. As you can see, we saw improvement in food, household and health and beauty and continue to sell it performance in beverage and the consumer's markets.
Speaker Change: While we and many of our customers had expected even stronger buying improvement that pivot backed positive buying growth is certainly encouraging.
Speaker Change: Food Barhead's which represent approximately 40% total sales, so improvement across the number of categories. Performance has been uneven and impacted by promotional activity, which was much stronger in some categories than in others.
Speaker Change: Our pair food continues to do well with few of people working from home, but consumers are choosing less expensive options. Frozen prepared meals, for example, remain weeks, but throw us an enthrase, are seeing growth among value conscious consumers who might otherwise to grab dinner and a quick service restaurant.
Speaker Change: We've refrigerated catware, including protein, or mostly softer. Higher prices for both beef and chicken are driving similar to the look for cheaper options.
Speaker Change: Private Label has been making an enros in Bay Area for overall volumes from the enrolatively flat. And while high-coco prices have dampened demand for confectionary in Europe, can't aid dumb and hold up better in the US as an affordable indulgence. Savory snacks and other discretionary food market have been a week for.
Speaker Change: In the beverage market, you've heard producers reporting on even results and we see that in our binds in beer, multi-packed binds are down more than single-serve binds, but it's soft drinks we are outperforming the market.
Speaker Change: These results reflect innovation wins, particularly in Europe where new regulations are facing out-class brain carriers and strength rep. We're also seeing poxist brains in the US and non-alcoholic beverage categories.
Speaker Change: Our motion of violence, increased in our food service visits, and you have all heard in some of the biggest quick service restaurants that they plan to extend their quarter promotions through the fourth quarter.
Speaker Change: Whether increased promotional activity will help restore sustainable buying growth remains an open question so far, but we are working closely with our customers to find the right solutions for their strategies.
Speaker Change: Beyond Promotion Electivity, our Food Service customers are very focused on reducing oral eliminating plastic both in Europe and in the U.S. We have a range of development programs underway with a number of Food Service customers and we'll be highlighting one recent innovation success in just a moment.
Speaker Change: Also, products results improved in the third court as stronger results in tissue, adherent and food storage. Investors often ask.
Speaker Change: Our underdaps, she would like to fill in your portfolio. And the answer broadly is that our portfolio as a whole is very few significant gaps, but in household products, which is an exceptionally broad market.
Speaker Change: We have some very strong positions, but also plenty of categories where you have substantial room to grow here in North America and in Europe.
Speaker Change: and finally, Elfif Beauty continues to improve slowly. This is mainly a European business for us and there, Elf Care Bimes remain relatively weak while beauty is shown more improvement. Recently, we have seen many of the big cosmetic and personal care companies making a push for volumes with self-success.
Speaker Change: We see a very attractive growth opportunity in these businesses in North America with our pace center in the year 100% recycled paper board which performs as well as the more expensive bleach paper board.
Speaker Change: A big packaging and change to Citizens Take Time
Speaker Change: and even more so in markets with very demanding prints and performance requirements like healthcare and cosmetics. We've been very encouraged by the feedback we are getting for customers who are testing the linear paperboard and expect to see solid growth in the years ahead.
Speaker Change: If you will turn with me to slide safe, you will see what typical seasonality looks like on the left and will 2024 has been anything but typical in many respects, is quarterly patterns have all the reasonably well.
Speaker Change: During the third quarter, who was subsequently in beverage with solid, but aggregate packaging sales were pretty flat sequentially.
Speaker Change: Muffin Patterson showing quite a bit more variation in Mr. than�gaard-Mlycey. July, for example, is usually the weakest month of the third quarter. The dis year was actually as strong as Edging Out August, but September wasn't usually quite.
Speaker Change: We saw a return to positive growth on the third quarter as we had expected, which you're continuing to improve after turning positive last quarter. The overall line recovered means quite gradual, however, even when we consider the relative the easier comes to the second half of 2023.
Speaker Change: The timing of promotion activity makes playing some of the variation normal patterns.
Speaker Change: and we are certainly seeing high levels of promotion across food and food service categories, but the stretch consumer is having an impact on overall demand, and so far, higher promotional activity does not appear to be translating into materially higher bonds.
Speaker Change: We saw continues strength and privately-born mastery tale, and overall, missing was not very different from what we saw in the second quarter, down to approximately 2% year over year.
Speaker Change: Looking ahead to the fourth quarter, we expect to seek continued improvement of volumes, through the might ongoing promotional activity, the role of new products and work for full price points, and the continued growth and mass retail superstore volume.
Speaker Change: But as you've been hearing from our customers, the strength in timing of every recovery has become more difficult to estimate.
Speaker Change: The shift from fall to winter means more indoor holiday entertainment, which tends to support strong demand and various food categories, but also is generally good news for food service demand and especially in our product portfolio, not coffee.
Speaker Change: and Simmer's continued to field a pinch of relative behind food prices, and we are working closely with our customers to develop packaging solutions they need to deliver on nearest strategies to private higher bonds.
Speaker Change: to man for packaging that is more circular or functional and more convenient has never been higher. And today's affordability challenges will create some headwinds or also create new occupations for graphic packaging, Mark Connelly with customer-developed new and better solutions.
Speaker Change: Slide 7, outlines the company's five innovation platforms, and I'm happy to report that we are seeing a high level of customer engagement across all five. My sixth substitution is one of the more common themes across many of our innovations, and we're having outstanding commercially tested solutions for wide range of UF applications.
Speaker Change: Terted Slide 8, Best Quarter Out High that had the company's paper seal shape, Trambole Technology, a major upgrade in the way for pair-foods packaged with better product visibility and much less plastic.
Speaker Change: Today, I want to share a new food service innovation that was recently rolled out across the United States in Canada at McDonald's.
Speaker Change: The McDonald's McFlurry is a soft serve for us to observe the makeup with a choice of topics. McDonald's wanted the amorous sustainable container for its North American markets, but less plastic.
Speaker Change: Our development team work closely with McDonald's and hobby, TMS on a packaging solution that reduces operational complexity and improves and user experiences while at the same time providing a reduction in single-use plastic.
Speaker Change: So why don't we open it? You know, when top design makes it easier for employees to fill its search, they also improve the customer experience making mixing easier.
Speaker Change: Plaster production is achieved with a replacement of the clear plastic lid with a built-in for-flap paperboard lid. These innovations in mixed-lerive packaging are helping to tunnel the chief and sustainability goals while improving operational efficiencies and advancing summer experiences.
Speaker Change: The true way to the brand and for the environment, along with the new McFlurred packaging, McDonald's announced to release a smaller size, many McFlurred. We are pleased to support our customer with this new offering as well.
Speaker Change: Finally, I'll end where I usually do with graphic testing, Spision 2030 summary on slide 9. We are global sustainable consumer packaging company.
Speaker Change: and the Philanophone nation, innovation, exceptional people, and a commitment to protecting and preserving the planet.
Speaker Change: And we do that while delivering exceptional results for customers, shareholders, and all of our stakeholders.
Speaker Change: We are making excellent progress towards all of our vision 2030 goals and I am incredibly proud of the results that he used delivering particularly in these challenging markets.
Speaker Change: Now let me turn it over to Steve for review the company's financials and operations.
Speaker Change: Steve?
Steve Scherger: Thank you, Mike.
Steve Scherger: Turning to slide 10. In the third quarter, we again executed very well. Generating the solid, 19.5% adjusted even down margins despite volumes that fell below expectation.
Steve Scherger: or reported sales were down $133 million. $19 million that climb represented the impact of the Augusta Investiture and the dramatic reduction in our participation in open market bleached paperboard sales.
Steve Scherger: Volume Max in our packaging business was up 1% Bob's leave a lower expectations after an encouraging start and July.
Steve Scherger: Rice in the quarter was out 2% similar to last quarter, with the North American and international businesses experiencing similar outcomes.
Steve Scherger: Seal Impact from other M&A and Foreigner Exchange, where it combined $11 million at positive in the quarter.
Steve Scherger: There were two unexpected sources of pressure on our adjusted event ourselves in the quarter. The first was the impact of weather and power disruptions that we disclose mid-quarter, which reduced the deficit event down by $25 million.
Steve Scherger: The second was the office of September sales.
Steve Scherger: with Lev Boyans below our expectations.
Steve Scherger: Even so, excluding the weather and power disruption in back.
Steve Scherger: Strong Network Performance, fully offset the price and inflation headwinds, we experienced during the war.
Steve Scherger: and Eva Dahliam back from other M&A, excluded Augusto, and Foreign Exchange was an 8 million dollar tailwind.
Steve Scherger: The Bell Act position was completed September of 2023 and as such, this is the last quarter that Bell will be included as M&A.
Steve Scherger: As a reminder, the Russia Investiture to place in November of 2023.
Speaker Change: That's leverage at 3.1 times, is that acceptable level.
Speaker Change: and the company's current effort cost of debt is approximately 4.7%.
Speaker Change: We expect to end the year with an average below three times.
Speaker Change: Flight 11, with the strength of the company's business model in the perspective.
Speaker Change: In the past seven quarters, we have experienced the negative impact of a broad-based customer and retailer D. Stocky.
Speaker Change: and a look at some of our underpressor from inflation.
Speaker Change: You can see the impact on Williams on the left side of this bitch.
Speaker Change: On the right side, you see the despite those challenges we have generated strong and consistent adjusted even though March of Rebornments.
Speaker Change: Looking at 2024 years' day, despite the challenges of these docking and consumer affordability.
Speaker Change: Say a little packaging business.
Speaker Change: Excluding the Augustale, are now just 3%.
Speaker Change: With volume, found 1%, found by the strength of a renovation and execution, and price, found 2%.
Speaker Change: All the lower targets, these results are a demonstration of the strength of the business model, under less than ideal conditions.
Speaker Change: Graphic Packaging Transformation was designed to deliver consistency across a wide range of work conditions.
Speaker Change: Prior to the business transformation, we could not have maintained this level of volume, price and margins stability.
Speaker Change: As boys and crew, we expect operational leverage to drive continuous strong margins, significant cash generation, and the both cost-to-cap over-darns.
Speaker Change: Turning to Operations, Capital Investments of Flight 12.
Speaker Change: The CO2-H paperboard manufacturer facilities ran well during the quarter despite the weather and power of disruptions we experience.
Speaker Change: We were fortunate to have no material impact for either hurricane the lead or a mountain.
Speaker Change: The company's global packaging operations also ran very well during the quarter.
Speaker Change: As Mark noted, we continue to invest in the company's packaging facilities with press investments high on our list of priorities.
Speaker Change: He's tend to be relatively modest projects with attractive financial returns that allow the company to deliver better results for customers and shareholders.
Speaker Change: The way to investment is also progressing very well, deliveries are on schedule, and the decision earlier this year to accelerate equipment orders meant that we did not have much exposure to the portstrikes.
Speaker Change: Keep equipment like head boxes, dryers, rolls, etc. Or either already on site, or already in the United States if they were coming from overseas.
Speaker Change: At this point, structural steel for the machine holes complete and preparation for major equipment installation as well underway.
Speaker Change: We have as many as 1400 contractors on site and have begun the hiring process for our full time team.
Speaker Change: We have forever experienced some modest project cost inflation, so we have not been able to all sit elsewhere. And it has made targeted modifications to the facilities front-end processes to drive additional cost and quality advantages.
Speaker Change: Together, these raised expected project costs by approximately $100 million to $1.1 billion.
Speaker Change: The process changes will yield upside beyond our original $160 million being for mental event development.
Speaker Change: and we plan to provide further details on those changes and the expected benefits on our fourth quarter call in February.
Speaker Change: Turning Flight 13 in the Outlook.
Speaker Change: As Mike noted earlier, we saw pivot to oil growth into the record, but to demand recovery remains more gradual than we had anticipated.
Speaker Change: We now expect Boy and Bro in the second half, excluding the impact of the Augusta's editor to be in the 1 to 2% range, down from 3 to 4%.
Speaker Change: Ever flexed the reality of what customers are seeing and expecting relative to where we were a few months ago.
Speaker Change: We are now expecting four-year-old Josephine Bidlingmaier in the 1.68 billion to 1.73 billion dollar range.
Speaker Change: and four-year adjusted EPS in the $2.49 to $2.61.
Speaker Change: In addition to previously disclosed weather and power disruptions, revised guidance reflects the impact of lower-expect second half volume, as well as a decision we may to pull forward maintenance work.
Speaker Change: During the annual maintenance outage at the West Monroe Paper Board Manufactured Facility for a year, we identified additional required maintenance and repair issues with a dye gestor and related equipment.
Speaker Change: When we were able to secure the necessary specialized contractors, we elected to get those repairs done now.
Speaker Change: Given the New York term volume outlook, ground moon weight until 2025.
Speaker Change: The total impact on just DM it's dollar up to less than $20 million, all of which we incur in the fourth quarter.
Speaker Change: We expect four-year test to even dial margin to be in the 19-19.5% range of very good outcome considering the challenge for you environment.
Speaker Change: Looking ahead to 2025.
Speaker Change: We expect financial performance to be consistent with the company's base financial law.
Speaker Change: Low single digit sales growth, mid single digit adjusted EBITDA growth, and high single digit adjusted EBITDA
Speaker Change: I do have her to say 24 represents peak capex.
Speaker Change: and with the increase in anticipated 2024 effects, we are now anticipating its climb in spending in 2025 of approximately $300 million.
Speaker Change: Flight 14, summarized, companies vision 2030, based on antimodal and outlines our capital allocation priorities.
Speaker Change: We go with the last major asset investment in our strategy to capture a unique and powerful, long-term competitive advantage in the North American consumer-backed market.
Speaker Change: Once complete the company's capital allocation priority to turn naturally to a more normal level of the reinvestment, growing the dividend, opportunistic share, repurchase, and talk under M&A.
Speaker Change: Turning to slide 15, over the next several years, we expect to generate substantially more cash than we require for reinvestment.
Speaker Change: 2025, will mark the beginning of a multi-year cash flow expansion cycle, and we intended to deploy that incremental cash to generate returns for shareholders and strengthen graphic positions as the world's leading sustainable consumer-backed income.
Speaker Change: On slide 17, you will find supplemental information that may be useful for modeling purposes.
Speaker Change: That concludes our prepared remarks this morning. We will now turn the call back to the operator to begin Q&A operator.
Speaker Change: Certainly, everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time.
Speaker Change: We do ask that while posing your question, please pick up your hand said, if you're listening on speaker phone to provide optimum sound quality.
Speaker Change: We do ask participants to please limit to one question and one follow-up question.
Speaker Change: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker Change: Your first questions coming from Matt Roberts from Raymond James, Your Line is Live.
Matt Roberts: Hey, good morning everybody and thank you for the time.
Matt Roberts: My first question is on the sales guy in the 2025 so clearly.
Speaker Change: Exiting Second Hat 24 Lower and United Low Single Digits, I believe it was 2024 less 144 million from August in the first few months there.
Speaker Change: So, while early maybe you can help me bridge that in terms of overall volume expectations by end market.
Speaker Change: and any change in timing on innovation, sales, and regard to the price change mechanisms you mentioned. Should we expect a price benefit from that in 2025 or is that more of an evolution that will take time as contracts come up for renewal?
Steve Scherger: Hey Matt, good morning, it's Steve, what are I starting in my canad?
Steve Scherger: I have some color there, I think just in terms of the leap off point for next year in terms of the top line, I think page 14 does a nice job
Steve Scherger: of adjusting for the limited time we have Augusta in 2020.
Steve Scherger: Or so about an 8.8 dollar top line will be the starting point.
Steve Scherger: And what we're indicating is that our innovation engine should continue to provide a couple of under-based points of growth.
Steve Scherger: Next year and overall the market evolving this year being down a little bit at the market level that kind of evolving towards
Steve Scherger: in a neutral, very modest growth. I mean, that's kind of the enabler for low single digit topline growth. I'll let Mike talk about the mechanisms that we're putting in place, we're very excited about the...
Speaker Change: The new price change mechanisms that were executing on in the open market and with customers.
Speaker Change: and so we'll talk about that from a little bit separately but that's overall kind of the enabler for low single digit top-line growth next year. My favorite morning, Matt, can I think maybe just to expose a bit of what's deep.
Matt Roberts: You said...
Speaker Change: Well, it was below our expectations, the pivot to growth was important.
Speaker Change: and the Porter and so that gives us confidence in terms of the gel ball point as we had ended to 25. That's consistent with what we've seen at least, you know, through the month of October here.
Speaker Change: I, as we headed to 2025 in the new year.
Speaker Change: Steve Cover, the Innovation, so I won't go into more detail on that, but in regards to the pricing mechanism
Speaker Change: The answer to remember that on the open market paper board side, really only about 5% of what we do is selling paper board and customer. So the vast majority flows through cartons and cups where we've been on a multi-year journey of modifying those proprietary customer relationships.
Speaker Change: to pricing that we have moving away from third party indexes. So this is really just the ongoing transition that we've been on over several years to move away from those types of mechanisms. And I want to expect that to be a material impact in 2025 just given the. Thank you, George.
Speaker Change: You know the small nature of what we sell on the open market, but it's an important step, and we believe over time Helps give our customers more confidence in their ability to predict their pricing because they want that to be fair They want it to be transparent And they don't want to be surprised and all those things are really what we're aiming to do with our customers
Speaker Change: Mike, Steve, thank you both very much.
Speaker Change: And for my second question, looking out into 2025 and even maybe beyond there,
Speaker Change: How is the competitive landscape shifting or maybe even bifurcating between
Speaker Change: Your bleached and unbleached paperboard products versus recycled products. How does that impact either price, ROIC, or margin in recycled versus other parts of the business?
Speaker Change: And if one side is generally more favorable than the other, are there alternatives that you would consider that could further accelerate that shift towards recycled products? Thank you again for taking the questions.
Speaker Change: Thanks Matt. I appreciate the question. Look, in terms of how we're positioning the company, you saw us make a big move with the sale of the Augusta Mill. And again, the Augusta Mill was a largely open market seller of coated bleached paperboard where we just didn't have a competitive advantage.
Speaker Change: It was different or distinct from other market participants.
Speaker Change: So what we did, and as we talked about this, and I think there's still maybe some confusion around why it was so important, but it's incredibly strategic for us to have the Texarkana mill that's largely integrated into our own operations. The vast majority of what we make in Texarkana is cup stock. We don't sell cup stock in a material way to the open market. We're selling cups.
Speaker Change: And we have the ability to make our own coated bleach to where we need to. And so that really fits us really well and allows us not to have to participate in the open market side of the bleached paperboard market, which is the most fragmented and quite frankly where the biggest challenges are in the market.
Speaker Change: Thank you. Thank you.
Speaker Change: Certainly, if that market gets messy, we get some secondary knock-on benefit, but we don't have the type of exposure we used to have when we had the Augusta mill. We've really focused our investments back in where we can make exceptional returns for our shareholders on the grades that we choose to make, and that being coated, unbleached paperboard, as well as a coated, recycled paperboard.
Speaker Change: Both of those grades, we're the low-cost producer in North America, we generate excellent returns on those, and of course, as you know, we've been making significant investments into both of those systems, with the biggest being the new paperboard manufacturing facilities we've invested in, in both Michigan and Texas.
Speaker Change: The one in Texas will come to life next year, this time in the fourth quarter, as we've committed to.
Speaker Change: And we expect to see some real growth opportunities for us to be able to win with the high quality and low cost position that we have. Steve, maybe you can talk a little bit about the arbitrage and margins. Yeah, the only thing I'd add to that, Matt, is that when you look at coated unbleached
Steve Scherger: our Unbleached participation, our Coded Recycle Board participation. You've got our facilities there incredibly well capitalized and are actually positioned to support
Steve Scherger: the packaging growth algorithm at the couple hundred basis points of growth year after year. So where we choose to make paperboard, it's competitively advantaged.
Steve Scherger: The critical imperative, it's obviously very constructive from a competitive dynamic, and our margin profiles there allow us to generate the above cost of capital returns.
Steve Scherger: that you've seen us pivot to and that we can continue to exercise on.
Steve Scherger: with incredible margin stability, and that really, as you've seen this year, in a pretty tough volume environment, margin stability in that 19-20% range really speaks to the competitive advantage of choosing to make paperboard, where we're competitively well-positioned to make the packaging.
Steve Scherger: Again, we'll be down to five paperboard manufacturing facilities when we're done with this capital expenditure that we're making in Waco. And as you stated, all these are incredibly well-capitalized, low-cost
Steve Scherger: We think we're uniquely positioned to win in the marketplace based on that.
Speaker Change: Bye, everyone. Take care. Bye.
Speaker Change: Very thorough. Thank you both again.
Matt Roberts: Thanks, Matt.
Speaker Change: Thank you. Your next question is coming from Lars Kaelberg from Stiefel. Your line is live.
Speaker Change: Thank you. Thank you.
Lars Kaelberg: Thank you for taking my question. I'm just going to start with a short-term question.
Lars Kaelberg: Your third quarter volumes came in below your expectations. Can you provide any color of where that happened in geography-wise and then markets?
Lars Kaelberg: and also you call out continued growth in Q4.
Lars Kaelberg: with the slowdown you called out in September specifically I think you mentioned now October was looking better but what is happening in that market what happened in September and then that recovery you're now seeing in in October I guess what is driving that and markets and geographies please
Speaker Change: Thank you, Lars. Good afternoon to you.
Speaker Change: I'll take the first part of it and Steve can add on anything that I missed.
Speaker Change: and Steve talked about this in his prepared comments, you know, we started off the quarter, you know, very strong in July.
Speaker Change: August was pretty average, and September was a little bit more muted, and when we kind of look at what fourth quarter looks like, we see it kind of being more that one to, you know, around that one to two percent, you know, volumetric, you know, number based on what our customers are telling us now. Now, based on what we heard coming out of the second quarter, we were hearing from them that we would see stronger sales. That was their plan. They were initiating a number of promotions and things like that, and you have to remember, the vast majority of everything we do is customized printed packaging. So when they say that they're going to grow, they have to have us ready to make those packages. We have to be prepared.
Speaker Change: to be able to do that. Or they have, you know, supply chain issues, out-of-stock issues, which cost them money with retailers. So we have to take that stuff very seriously. As the third quarter played out, we didn't see as much of that as we were expecting, or what they were expecting. You've seen a number of our customers have already released.
Speaker Change: They've talked about some of these muted volumes, so that's really the dynamic that drives it. We've got to be very tight with them, very closely coordinated with them to make sure that we're there when they need us. But when they fall short, it does impact us, and that's what hurt us in the third quarter.
Speaker Change: Yeah, Lars, the only thing I'd add is geographically we continue to see, you know, positive volume growth from Europe driven by our innovation activities there. Last quarter, our European and international operations were 50%.
Speaker Change: But, you know, as we've shared, I mean, sometimes it's a bit uneven. We've got pockets of good, strong, steady growth.
Speaker Change: and then expectations will be set by customers, and they don't necessarily see as much sell-through. But the actual pivot, as Mike said, to real volume growth in the quarter was important, below what we expected, but it's a positive and gives us some of that confidence heading into Q4 and then, of course, heading into 2025.
Speaker Change: Sure, and my follow-up question was actually related to sustainable packaging. You seem to have better visibility in that business. You deliver in line with what you had called out in spite of slower overall market.
Speaker Change: Again, highlighting that importance of that business for you.
Speaker Change: And you're recurrently talking about this as something that will repeat itself over the years ahead. So what gives you the confidence that should be a continued growth driver for you? What are you seeing in terms of innovation that you can talk to and or increase adoption of your solutions down the line that would give this benefit for the years ahead?
Speaker Change: Thanks, Lars. I'll...
Speaker Change: If you take a step back and take a look at really this year, we're telling you we're going to be on track to make the two
Speaker Change: which would be about $200 million of commercial sales through our innovation pipelines. And you go back three additional years, so four years now,
Speaker Change: to find TAM. It's either something that we already have sold or we're very close to selling. And that number has grown quite a bit. It's now almost $15 billion in total. So the market, the addressable market, as we look at it with the products that we make and manufacture has gotten bigger. And that creates more opportunities for us, Lars, to continue to drive those kinds of projects. When I look at the funnel that I see in front of us and the interest from customers, you know, it's hot. Now, I will say it's a bit lumpy from time to time. You know, you'd have a product like the one we profiled here.
Speaker Change: in the third quarter like the McFlurry and that was one that came in and in about six month period of time they knew what they wanted they wanted to get in the marketplace and it flowed through really fast and did a national launch both in the US and Canada.
Speaker Change: On the other side, we've talked to you about Chick-fil-A in the past, and Chick-fil-A was an important, you know, test market that we did. We tested a double wall cup and a premium single wall cup in multiple stores in multiple geographies.
Speaker Change: Thank you so much for joining us today, and we hope to see you again next week. Thank you. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. [inaudible]
Speaker Change: product that is a replacement in the European market, where you're at, for polyester bottles. We invented that in 2009. It was one of the greatest things I'd ever seen and we went 12 years and didn't sell it to anybody.
Speaker Change: And now we've actually got a number of sales that are going in the European market because the market changed and consumers with customers have to move out of high cone rates. And so you've got to have a steady stream of these things and be working on them all the time. But it's not linear in terms of how it plays out, but we've got enough bets that it gives me confidence.
Speaker Change: Thank you.
Speaker Change: That's it, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Your next question is coming from Louis Merrick from BNP Paribas. Your line is live.
Louis Merrick: Thank you. Thank you.
Louis Merrick: Morning Mike and morning Steve, thank you for taking my questions. As you've talked about before you're currently transitioning your customers away from contracts price based on risk indexes, ones indexes more representative of your cost base. Can you just give us an update roughly how much of your packaging business is operated on these new contract structures? I've got a follow-up after that if that's okay, thank you.
Louis Merrick: Thank you.
Louis Merrick: Yeah, Louis and Steve, I'll kind of back up a little bit, as Mike mentioned.
Steve Scherger: We've really been in a multi-year journey of making sure that our contractual relationships with our customers are representative of the value of the packaging.
Steve Scherger: of the package, and keep in mind that every year, we're renegotiating with the good
Steve Scherger: 25 to 35 percent of our customers. So we have to re-earn their business very routinely. And so that's a great opportunity for us to always make sure that we're pricing our products, the packages, for their value.
Steve Scherger: About half of our business is already in a spot where it's attached to
Steve Scherger: either more cost-based models or more annual type.
Steve Scherger: models and what's next for us is the development of the of a new
Steve Scherger: that's actually an index that's attached to known commodities that correlate nicely with our cost structure.
Steve Scherger: We've got a couple of large negotiations underway right now with some very large global customers where we're bringing that into this multi-year relationship. So as we've talked before, it'll be a journey.
Steve Scherger: But we don't want to imply that it's a new journey. We've been well along in value-based pricing for multiple years. This is kind of the next step.
Speaker Change: As Mike mentioned, transitioning our open market paperboard, that remaining 5%, moving that away from a third-party index is just all part of a multi-year initiative that is well along.
Speaker Change: The current large-scale customer negotiations where we're bringing this to life will be a nice proof point that our interest and our customers' interest in the consistency and transparency of an alternative price change mechanism is high.
Speaker Change: I think maybe just one thing to expound upon a little bit, Lou, is there, and Steve did a nice job outlining that, is
Speaker Change: What he outlined was the price change mechanism. Remember, we have to earn this business with tenders and RFPs. So we know we're market competitive at that point in time. All we're talking about is the movement in between the period of time between the tender.
Speaker Change: Perfect. And just on the technicals, on the change to leverage guidance, we were previously 2.7 times, I believe.
Speaker Change: last quarter on the guidance, now less than three times. I understand the CAPEX guidance has been raised and Yvette Dargan has suggested somewhat.
Speaker Change: but just taking into account those effects, it seems like there's possibly some other items contributing that, possibly working capital. Is there anything to call out on that movement? Thank you.
Speaker Change: There was nothing to call out. I think it's really the combination of a midpoint guide that went from $1.78 billion to the low $1.7 billion.
Speaker Change: Extra $100 million on the CapEx, so it...
Speaker Change: Sub 3 is, we think, a good place to end, and obviously we're going to keep the ballot sheet in it.
Speaker Change: in a good spot, but nothing unusual to call out.
Speaker Change: Thank you.
Speaker Change: Thank you, guys.
Speaker Change: Thanks, Lewis.
Speaker Change: Thank you. Your next question is coming from Arun Biswanathan from RBC Capital Markets. Your line is live.
Arun Biswanathan: Great. Thanks for taking my question, guys.
Arun Biswanathan: includes, you know, the contribution from
Arun Biswanathan: and Augusta, but then on the subsequent slide it says 1-7.
Arun Biswanathan: When you say that the base is $174.24, does that include $40 million for EBITDA contribution from Augusta in 2024, and so the real base should be something like $166?
Arun Biswanathan: And I guess the reason I'm asking is because you have called out mid-single-digit growth.
Arun Biswanathan: for 25 on EBITDA. And so, you know, if we apply it to the 166, maybe we would only get to say, you know, 17 or 172. And if we applied it to the 17, we'd get more into the 175 or 176 range. Could you just clarify that for us? Thanks.
Speaker Change: Yeah, I'd be glad to, Arun. I think on page 13, the guide for 2024, of course, includes everything that...
Speaker Change: It was in 2024, which would have a little bit of Augusta in the first four months of the year. Page 14 is a bit intentional. It is, where's the leap off point as you do the work you just did? So 8.8 would exclude, you know, that little bit of Augusta from this year. The 1.7 is roughly where we...
Speaker Change: We see the business kind of functioning as the leap off point for next year. We'll be low one-sevenths here in the guide. There's a little bit of Augusta. We've got a couple of headwinds this year that obviously we've well chronicled here for you.
Speaker Change: But generally speaking, for modeling purposes, right around 1.7 or very slightly below it would be the leap off point for the math that you're doing, not back to a 1.66.
Speaker Change: Okay, thanks. And then another question I had was just on the pricing outlook.
Speaker Change: into North America.
Speaker Change: from some of the Northern European players because of weakness and demand in Europe. I think we've seen some exports from Asia into Europe.
Speaker Change: of Paperboard, and then we've also seen Susanna who's making some strong remarks about entering food service and Cupstock in a big way. So, does that, you know, kind of worry you on the pricing outlook? I mean, we did see down 30 in CUK.
Speaker Change: a month or two ago, and I understand that the indices may not necessarily be getting the same read on the market dynamics as you are from your customers.
Speaker Change: But just wanted to get your thoughts on that, especially in light of the fact that we are seeing some inflation that may push some of your CapEx requirements a little bit higher. But just wanted to see what your thoughts are on some of these differences in supply and demand that we're seeing.
Speaker Change: Yeah, thanks Arun. I'll, uh, I'll...
Speaker Change: I'm going to unpack some numbers here because you've asked kind of a broad range of questions there. I think it's important we use some of the data to help us inform our decision. Before I start, I will say that I think this is the 35th call I've done as CEO. And this question around imports has come up on almost every single call. And yet imports into the U.S. right now in total.
Speaker Change: across all three grades are just a few percent.
Speaker Change: Thank you.
Speaker Change: And, but if you kind of look at the census data, which is the best data we have to look at that, and you unpack it a bit because paperboard tends to be kind of a catch-all for a number of grades.
Speaker Change: The Scandinavian imports are the ones that we would look at as the most relevant for us. And when you kind of drop through that and look at coated unbleached paperboard, it's a 2.5 million ton market. There's been 140,000 tons of imports, so call that 5% roughly.
Speaker Change: Pretty small. You look at SBS, which is what FBB would go after.
Speaker Change: It's a 6 million ton market in the U.S. And in the case of imports, that's about 450,000 tons a year to date. So again, about 7.5%. That's the most that's come into that. And again, I already talked about the fact that we divested our Augusta mill.
Speaker Change: So we're not really in the open market sale of bleached paper born in a material way at all. Then you've got recycled...
Speaker Change: So, the 2020 data, you know paperboard you're being the about a 2.7 million ton market with the imports largely from Canada I might add being about 2%. So it's pretty small. You put that all together. And you even look at you know the 2024 data compared to 23, it's down.
Speaker Change: So when you read some of these things, and it makes it sound like, you know, the numbers are increasing, but they're not, you know, based on the data that we've got. And also, if you go back to 22, it's the same story, which was kind of the high watermark for imports into this market. I'm not really surprised, and I'll tell you why. Because when you look at the fiber costs in Scandinavia, as we talked about on our last call, they've gone up dramatically. Containers are four times more expensive to get from Europe to the United States because
Speaker Change: So, you know, the cost profile that they have to deal with to get that material here is very, very high. Now, in the short term, you know, could someone make a short-term strategy because they're, you know, dealing with a tough market? Of course. And could that have some benefits?
Speaker Change: in this market, I will tell you that over time, low-cost wins, high-cost loses over the medium to long-term. And you wind up seeing a number of these facilities that will ultimately go away because that's just basic economics. And so, could there be some short-term implications?
Speaker Change: Yep, maybe. But for us, it's not something we spend a huge amount of time on, because it's not a big part of the market. There's a couple other changes that have happened.
Speaker Change: really over that period of time too. You look at what's transpired in the North American market on paperboard supply. You know, if you go back 10 years ago, there were 18 suppliers of paperboard in the US.
Speaker Change: Now, that number, there's only 10, and of that 18, only 4 continue to exist. Some have new leadership, there's some new entrants, as you talked about, Susano here. They'll all have to decide how they want to compete in this market.
Speaker Change: But there's two other things that have transpired here that also impact that as well. One is the consolidation of converting. Ten years ago, we estimate that open market was probably almost 70% of the market, meaning that the paperboard was sold into the open market and non-integrated suppliers bought it. Now we would estimate that that 70% goes through integrated packaging companies like Graphic Packaging. We've been a big part of that consolidation that's happened. So you've got to figure out where you're going to sell those tons if you're a non-integrated supplier. And in the case of Graphic, as we've talked about, we're going to run our own stuff and we drove our integration rates up. At the same time, you see the third-party index is talking more and more.
Speaker Change: Mortar, and Janet nós mesmos vamos comentar ban das tal bodyguardas de papel and you know broker strategies and their motivations could be completely different than ours you know for a variety of reasons
Speaker Change: They do what they do and we do what we do, but that's who they're talking to, and there's a disconnect in our opinion in terms of what that looks like. So much so, two years ago, we quit selling all our off-grade and seconds to brokers.
Speaker Change: benefits our customers. So you're going to have different converting strategies and different ways you think about it, but all this kind of comes together. The moves we're making with pricing, the moves we're making around the tuck-under acquisitions that we've done, and the investments we make back into our paperboard manufacturing facilities where we see we can get an outsized return. I know that's a long answer to your question, but it's nuanced and I wanted to make sure that I kind of hit it all, and I'll take any follow-ups you may have on that.
Speaker Change: No, that's awesome. I really appreciate that. The only quick follow-up I had was just on the CAPEX.
Speaker Change: It looks like you're still guiding to $800 to $1 billion in 2026. Do you still see that as likely, especially in light of some inflation on that CapEx? Or are you still pretty confident in that? Thanks.
Speaker Change: Hello, Rune and Steve. I know our confidence in the free cash flow inflection from today's
Speaker Change: Limited free cash flow given the Waco investment next year stepped down to 800 million and then in 2026, a clear step down to sub 5%.
Speaker Change: to 5% of sales, which...
Speaker Change: to be sub $500 million is quite high. And so our confidence in that.
Speaker Change: $800 million to $1 billion of cash flow in 2026. It's absolute.
Speaker Change: Hi, we're reviewing our long-range capital plans literally again this week, as you know, we always have those in place.
Speaker Change: We know the projects. We know the step down. We know where this is going. 1.1, 800, sub 500.
Speaker Change: And that's the path to the cash flow generation that we're committed to. We know it by project. So I think that confidence in the multi-year pre-cash flow step-up is exceptionally high.
Speaker Change: And we know the projects and we know what we'll execute on. Things can move around the edges with growth projects or what have you, but overall, we know where and how we'll invest.
Speaker Change: to support the low and mid-high single-digit growth agenda for the financial model for the company.
Speaker Change: Great. Thanks a lot.
Speaker Change: Thank you, Beara.
Speaker Change: Thank you. Your next question is coming from Ghanshyam Panjabi from Baird. Your line is live.
Ghanshyam Panjabi: Yeah, thanks, operator. Good morning, everybody. I guess going back to slide 11, you know, we have patching volumes and the adjusted EBITDA margins and very nice charts, by the way. What is the base case for 2025 as it relates to market conditions, you know, as it relates to your low single-digit sales guidance? Is it just basically your innovation that's going to drive that and you're assuming the market's kind of flat? What's the base case at this point?
Speaker Change: Yeah, no, you said it well, Gautam. I think the base case would be, you know, a couple hundred basis points from our innovation engine and a, you know, flat to very modestly up consumer, given that this year, if you kind of step back from it,
Speaker Change: with InnovationUp 2%.
Speaker Change: And overall our volumes are going to be, you know, zero to minus one. You've got a consumer that's kind of in the minus two, minus three range.
Speaker Change: So, the base case for us for low single-digit top line is a couple hundred basis points of innovation, you know, zero to one on the rest, which gives us low single-digit top line volume growth, which is what we were trying to convey on the left side of page 11. And thanks for recognizing the chart. It is a good app.
Speaker Change: Okay, terrific. And then as it relates to, you know, the promotional activity and, you know, that's been.
Speaker Change: Throw around and we are seeing signs of that as consumers in food service and to some extent food etc Is that dynamic? Is it building on itself, has it sort of plateaued?
Speaker Change: What are your customers thinking as it relates to going into next year because obviously the consumer affordability component on that chart is not going to change near term, right?
Speaker Change: Food service side, you know, these well-chronical value meals that have been out there. We haven't seen an overall lift. We've seen mixed changes.
Speaker Change: So what they're promoting sells quite well, and that means something else doesn't sell quite as well. We see that, too, on the branded side, where we're seeing promotions on some of the categories that maybe are a little bit down, like cereal cakes.
Speaker Change: are some refrigerated products, but what we'll see is that one of our branded customers will promote and the other won't, meaning there'll be a shift.
Speaker Change: to obviously where the promotion is, and maybe the other one doesn't sell as well, but the overall category doesn't really change too much in terms of the numbers that are out there. So it is the right question. I wish I had a better answer for you today. That's just what we're seeing right now. But what I feel good about is the inflection to growth that we've seen to this 1%. And if we can keep that market relatively stable like that, use the innovation, which we've got a high degree of confidence on, our ability to drive low single digit revenue numbers into 2025 is strong.
Speaker Change: Okay, perfect. Thank you so much.
Speaker Change: Thank God.
Speaker Change: Thank you. Your next question is coming from George Staffos from Bank of America. Your line is live.
George Staffos: Hi everyone, thanks for taking my questions. Thanks for all the details. The question I had related to the last one...
George Staffos: Is there a way, Mike, that you can, obviously, you're very, very integrated with your customers, and that's the lifeline and where you get your innovation from.
George Staffos: But if your customers are still perhaps not...
George Staffos: pricing, promoting where they need to.
George Staffos: Is there information you can relay to them?
George Staffos: and that you could get from leveraging further downstream, talking to retailers, getting their suggestions back, not only on packaging.
George Staffos: for Price Points of Promotion. How do you manage that?
George Staffos: and the related question there, if we think about.
Speaker Change: pricing, you talked a lot about what you're doing, as you're navigating your model to being more of a consumer package packaging.
Speaker Change: commercial model. A lot of the other consumer packaging companies over the years have moved
Speaker Change: their terms to adjust for where the customers take at the level that they indicated and if they don't you know building that into some additional pricing or volume in Subsequent periods, you know, how are you managing that in terms of your your journey in terms of your contracts? Thank you
Speaker Change: Thank you.
Speaker Change: Yeah, thanks, George.
Speaker Change: So you can appreciate that our large CPGs are pretty tied into the retailers that, you know, kind of market their materials and sell their materials. We are as well. Some of those retailers are our customers of ours in terms of, you know, store brand items, private label items that we make for them too. So within the confines of what's appropriate, we try to move any trends that we can to help our customers win in the marketplace. That's a big part of our innovation design, a big part of the focused marketing activities that we have here at Graphic Packaging.
Speaker Change: and a service that we really try to provide our customers.
Speaker Change: They're quite capable marketeers, as you can imagine and know, but there's always room for challenging existing norms and ideas, and that's really what we try to do.
Speaker Change: In regards to the pricing part of your question, yes, I think what you're referencing, and it's true for us, this is a high-fixed-cost business, so if the volume goes down, those costs are under-absorbed. So, I'm not going to get into individual pricing mechanisms, but you're right, that is a factor we need to consider.
Speaker Change: The other part of that holds true too, if their volumes are up quite dramatically,
Speaker Change: then they should expect a more favorable offering from us. And, you know, those are the things when I talk about transparency and, you know, value and fairness that our customers are really looking for.
Speaker Change: Hey, Mike, if I could, as we look to next year, you've got the digester reversal, that's 25, you have the power outage issue from the third quarter, that's 25. Those are bridge items.
Speaker Change #100: Pricing, constant with where it is today, would pricing be a net positive or negative? And are there any other things that we should be building into our preliminary analysis for 25? Thanks and good luck in the quarter.
Speaker Change #101: Hey George and Steve, just briefly, overall right now the pricing flow through in the next year on kind of a market-to-market basis is pretty neutral and traditional commodity inflation pretty neutral.
Speaker Change #101: Those models, so much of the improvement for us will come from earning on
Speaker Change #102: positive volume growth and our traditional strong commitment to driving productivity every year that offsets other inflationary items. So pricing and commodity inflation in traditional terms are both pretty neutral right now.
Speaker Change #103: Thanks so much, Steve. Good luck in the quarter.
Jake Short: , Jake Short
Speaker Change #105: Thank you. That concludes our Q&A session. I will now hand the conference back to Mike Doss for closing remarks. Please go ahead.