Q4 2024 Graphic Packaging Holding Co Earnings Call
Greetings. Welcome to the Graphic Packaging Holding Company fourth quarter and full year 2024 conference call.
At this time, all participants are in a listen-only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: Please note this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. You may begin.
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Melanie Skijus: Good morning and welcome to Graphic Packaging Holdings Company's fourth quarter and full year 2024 earnings call.
Melanie Skijus: On today's call, we will be referencing our fourth quarter and full year 2024 earnings presentation, which you can access through the webcast and also on the investor section of our website at www.graphikkg.com.
Melanie Skijus: Today's press release and the presentations made by our executives include four looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Melanie Skijus: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Speaker Change: Thank you, Melanie. Good morning, everyone, and thank you for joining our call today. Graphic Packaging is a global leader in sustainable consumer packaging.
Speaker Change: In 2024, we demonstrated the strength of our business model, delivering strong and steady margins in challenging market conditions. We are well positioned for 2025 and to meet our Vision 2030 aspirations in the years ahead.
Speaker Change: For the full year 2024, graphic packaging sales were $8.8 billion, adjusted EBITDA was $1.7 billion, margins were 19.1%, and adjusted EPS was $2.49.
Speaker Change: In the fourth quarter, graphic packaging sales were $2.1 billion, adjusted EBITDA was $404 million, margins were 19.3%, and adjusted EPS was 59 cents.
Speaker Change: Turning to slide 3, 2024 marked the start of our transition from our Vision 2025 Transformation Plan to Vision 2030, which we presented at our Investor Day last February, our transformation to a leading consumer packaging company.
Speaker Change: will be largely complete later this year. I will come back to Vision 2030 later in my remarks.
Speaker Change: In May of 2024, we divested our Augusta, Georgia, bleach paperboard manufacturing facility along with most of our open market bleach paperboard sales exposure.
Speaker Change: Augusta was a high-quality asset with a strong team, but did not have the level of competitive advantage we believe was required to support our ongoing capital investment.
Speaker Change: We elected to put the capital to better use for our stockholders. After the divestiture, 95% of our sales come from high-value consumer packaging.
Speaker Change: We made a number of moves during 2024 to improve our environmental footprint, including the execution of a Virtual Power Purchase Agreement, which significantly increases renewable energy use in our European operations.
Speaker Change: Minimizing our environmental footprint and helping our customers minimize theirs is fundamental to our mission.
Speaker Change: During the second quarter, we applied $200 million to the Augusta divestiture proceeds to repurchase approximately 2% of our common shares outstanding. During the full year 2024, we paid dividends of $122 million.
Speaker Change: After the close of 2024 and in recognition of the strong results our business model is delivering, as well as declining capital spending needs, the Board of Directors approved a 10% increase in our quarterly dividend to 11 cents per share, effective with the April 2025 dividend payment.
Speaker Change: Volumes did turn positive in the second half, up 1%, although the pace of normalization was slower than we and many of our customers had anticipated. Full-year volumes are down approximately 1%.
Speaker Change: We delivered a strong 19.1% adjusted EBITDA margin for the full year 2024 with outstanding quarter-to-quarter stability despite a challenging market environment. Our financial performance demonstrates just how much graphic packaging has evolved.
Speaker Change: which was about half the size, far less balanced than it is today, wasn't capable of generating the consistency that we now deliver. Our team has done an outstanding job executing at a high level to build a consumer packaging business capable of generating strong and steady margins and cash flow across a variety of market environments.
2024 saw a clear consumer focus on finding value.
Significant Growth in Private Label.
Speaker Change: and more consumers shopping for groceries at clubs and superstores. Our portfolio, which is designed to move with the consumer, responded well to those trends.
Speaker Change: We introduce new packaging innovations in all categories, with significant new product innovations for our private label customers across the U.S. and Canada and Europe.
Speaker Change: As our experience demonstrates, our private label customers and retailers are just as committed as our branded customers.
Speaker Change: to plastic reduction and to a more circular, more functional, and more convenient packaging that consumers prefer.
Speaker Change: And finally, we delivered innovation sales growth to $205 million in 2024.
Speaker Change: Turning to the fourth quarter on slide four, our Waco, Texas recycled paperboard investment is moving ahead well and remains on schedule for start-up in the fourth quarter.
Speaker Change: On a smaller scale, but no less important strategically, we continue to make targeted investments in our packaging facilities to drive productivity and expand our capabilities.
Speaker Change: Culture is the second pillar of our Vision 2030, and keeping our team safe and focused on delivering results for customers is essential to our success.
Speaker Change: We continue to have one of the industry's best safety records, and in the fourth quarter, we saw improvement in employee engagement.
Speaker Change: We had 87% global participation in our recent employee survey, which is really outstanding, and we saw meaningful improvement in 11 of the 12 categories we measured. Engagement and safety go hand in hand and are two of my pious priorities.
Speaker Change: In the fourth quarter, volume was up 1%. Price was down 2%, consistent with the second and third quarter results. Results in beverage, food service, and household were relatively steady overall, while food was modestly weaker and health and beauty remained mixed.
Speaker Change: We saw further gains during the quarter with our private label customers and participated in the continued growth in grocery sales by club and super stores.
Speaker Change: In Europe, where consumers tend to shop more often for prepared, ready-to-eat foods, we are seeing volume gains with our convenience channel customers.
Speaker Change: As I noted, innovation sales growth of $63 million in the quarter brought our full year innovation sales growth to $205 million.
Speaker Change: We are well positioned to achieve our goal of at least 2% innovation sales growth again in 2025.
Speaker Change: Our customers are always looking for better, more sustainable packaging solutions, and no one has invested as much or built as powerful a platform as we have to deliver the more circular, more functional, and more convenient packaging solutions that consumers prefer.
Speaker Change: Slide 5 is a reminder of just how broad our portfolio really is and why we are able to generate strong results even in challenging market conditions.
Speaker Change: Turning to slide 6, let's look at our sales in more detail. Overall, year-over-year fourth quarter and full-year packaging sales roughly flat with a relatively steady performance in beverage, food service, and household of modestly weaker results in food.
Speaker Change: Food represented approximately 38% of our packaging sales in 2024, and here we saw a continuation of the uneven results we experienced all year.
Speaker Change: We saw significant gains in pasta, which is seeing growth from consumers looking for simple and less expensive alternatives to prepared meals and takeout.
Speaker Change: We are also participating in the growth in mac and cheese.
Speaker Change: Always an affordable choice, mac and cheese is also benefiting from the newer gourmet varieties, which are taking a classic comfort food off-market while remaining relatively affordable.
Speaker Change: It is worth noting that in both the Americas and in Europe, private label represented the biggest share of the growth we are seeing in both pasta and mac and cheese, although branded is also doing well. But these gains were not enough to offset the continued weakness in frozen and refrigerated prepared foods categories, which tend to come in at a higher price point.
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Speaker Change: Confectionery continues to see weakness in Europe as a result of high cocoa prices while the U.S. demand has been more stable.
Speaker Change: Coffee and tea saw significant gains, thanks in part to our boreal product innovation, but also from a shift in coffee consumption to home and office and away from coffee shops driven in part by the consumer focus on value.
Speaker Change: Categories like yogurt did well in both the Americas and Europe as consumers opt for this less expensive source of protein.
Speaker Change: As we think about shifting food purchasing behavior, it is important to consider the role retailers are playing.
Speaker Change: While growth in private label is significant, retailers are also creating and expanding loyalty programs.
Speaker Change: Loyalty programs are designed to keep consumers coming back at a time when consumers are increasingly visiting more stores but spending less in each one.
Speaker Change: The market will continue to shift, and Graphic Packaging is one of the very few companies with the capabilities to execute quickly and in scale for the largest CPGs, co-packers, and smaller regional customers.
Speaker Change: Beverage, which represents about 25% of our overall packaging sales, saw some modest improvement with continued solid growth in Europe. Our European business is benefiting from regulatory requirements to eliminate plastic and we expect those regulations to support growth in the business for several years to come.
Speaker Change: We are well-positioned after the investments we have made in anticipation of this trend including at Bristol in the UK Where we've doubled the size of our facility and built a world-class innovation center
Speaker Change: Food Service represented 21% of our packaging sales in 2024. After 11 consecutive positive quarters, nine in a row, with over 5% year-over-year growth, we saw stability in the fourth quarter against a very strong comp last year.
Speaker Change: Our multi-year outperformance of the food service market has been driven by the growth in investments we've made and in innovations that are helping our customers meet their goals to reduce plastic consumption and improve functionality.
Speaker Change: Food service continues to represent a big opportunity for us, driven by plastic and foam replacement, and the demand for better, easier to use, and easier to recycle containers.
Speaker Change: Promotional activity by quick service restaurants remains strong. Our food service customers continue to focus on value options and are making other menu changes to drive volume and we are working closely with them to develop best solutions for their strategies.
Speaker Change: Household Products represents approximately 12% of our packaging sales and the results were generally flat year-over-year.
Speaker Change: Tissue continues to be one of the weaker year-over-year, but we are seeing better growth in cleaning products, particularly in Europe, as we are in pet care. Over time, we see clear opportunities to expand this part of the portfolio in both the Americas and in Europe.
Speaker Change: And finally, Pelton Beauty, a small but promising part of our overall packaging sales, continues to show mixed results.
Speaker Change: This is mainly a European business for us now. Although we have some very exciting opportunities here in North America, thanks in part to Paysette-Renier, our 100% recycled paperboard that performs as well as more expensive bleached paperboard.
Speaker Change: The high end of the cosmetics market remains challenged, but we are seeing improvement at the lower price points. Biofragrance is also showing encouraging gains, healthcare remains challenging, but we suspect the majority of the destocking is over.
Speaker Change: If you'll turn with me to slide 7, we present typical seasonal patterns on the left and our actual and expected experience on the right. Seasonality in the fourth quarter was relatively normal at beverage where we saw the usual dip, but as I noted, after 11 quarters of impressive gains, our food service results were relatively flat in the fourth quarter.
Speaker Change: Our other markets, food, household, health and beauty, perform broadly in line with normal seasonality patterns overall, but with quite a bit of variation within those segments, driven by the consumer search for value.
Speaker Change: Monthly patterns were also mixed. October overall was not as strong as we typically see. November was fairly normal and December followed the typical pattern, but with incremental impact from the timing of the holidays this year, as expected.
Speaker Change: I have already summarized our fourth quarter experience. Looking ahead to the first quarter, we expect the consumer's focus on value to remain strong. And importantly, as you are hearing from many of our customers,
Speaker Change: driving volume is moving up in priority. Many of our food and beverage customers are rolling out more new products and new configurations to reach consumers in new and existing channels.
Speaker Change: In food service, we continue to see focus on promotion, with new menu choices emphasizing value and more limited time offerings designed to drive foot traffic.
Speaker Change: Each of these represent an opportunity for us to partner with our customers to create real value, and we are encouraged by the level of engagement we are experiencing.
Speaker Change: Slide 8 outlines the company's five packaging innovation platforms and notes the scale of the opportunity we see in each one. Each of these five platforms made important contributions to our innovation sales growth in 2024 and will again in 2025.
Speaker Change: Alongside volume growth, plastic substitution is a top priority for many of our customers and we have outstanding commercially proven solutions for a very wide range of new applications.
Speaker Change: Turning to slide 9, I thought it would be useful to step back and look at the breadth of the innovation we delivered in 2024. Each quarter I've been highlighting an innovation win, but there are dozens of exciting new packaging innovations that we haven't talked about.
Speaker Change: From trays and bowls, to beverage multi-packs, to toothpaste, to razor blade packaging, we have introduced some of the most innovative, most functional, and most convenient new packaging available anywhere.
Speaker Change: We are a clear global leader in sustainable consumer packaging innovation and we are excited about the opportunities we see in the year ahead.
Speaker Change: On slide 10, you can see from the picture that our Waco, Texas recycled paperboard investment is moving ahead nicely.
Speaker Change: Our decision to accelerate equipment purchases has helped us de-risk key elements of the project. Today, we have all the major equipment on site, and that gives our contractors more flexibility and more ways to stay on schedule.
Speaker Change: We are signing recovered fiber contracts to coincide with the startup, setting up the logistics to bring trimmings from our own packaging plants to Waco, and talking to a wide range of sources to collect and recover paper cups.
Speaker Change: We designed WICA to be able to recycle up to 15 million paper cups per day.
Speaker Change: because cups are an outstanding fiber source. Our ability to process paper cups generated in the Texas Triangle of Houston, Dallas, and San Antonio is one of the many competitive advantages that we've designed into this important strategic investment.
Speaker Change: Stepping back for just a moment, Vision 2025 was about transformational investment.
investment in capabilities to drive greater top-line consistency.
Speaker Change: Waco is the last major investment of Vision 2025 and will allow us to fully capture the competitive advantage in quality and economics that started with our Kalamazoo investment and will soon be in place throughout North America.
Turn to slide 11.
Speaker Change: Vision 2030 marks our transition from major transformational investment to innovation and execution.
Speaker Change: We have built a world-leading sustainable consumer packaging company on a foundation of innovation, an exceptional team, and a commitment to protecting and preserving the planet.
Speaker Change: We focus our resources to deliver outstanding results for customers, stockholders, and all our stakeholders.
Speaker Change: We are already making excellent progress towards our Vision 2030 goals and aspirations, and I am incredibly proud of the results our team delivered in the challenging market environment we and our customers faced in 2024.
Speaker Change: Now, let me turn it over to Steve for a review of our company's financials and operations. Steve?
Steve: Thank you, Mike. Turning to slide 12. Sales for the full year 2024 were $8.8 billion. Fourth quarter sales were $2.1 billion.
Steve: Volumes, which turned positive in the third quarter, were up 1% in the fourth quarter.
A modest decline given the challenging market environment.
consistent with the second and third quarters.
Prices are stable as we begin 2025.
Steve: The divestiture of Augusta and lower open market bleach paperboard sales reduced reported sales by $389 million for the year.
and by $103 million for the quarter.
Steve: Other M&A, excluding Augusta, was a $27 million positive for the year and a $14 million negative for the fourth quarter.
Steve: The fourth quarter reflects two months of sales impact from the rush of divestiture.
which took place in November 2023.
Steve: Recent currency movement has been noteworthy following the November election in the United States.
Steve: Foreign Exchange was a $15 million sales headwind in the fourth quarter, taking the full year to an approximately $24 million headwind.
Steve: I'll come back to the implications that a strong U.S. dollar could have on our 2025 results in just a few minutes.
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Adjusted EBITDA for the full year was 1.7 billion dollars.
and $404 million for the fourth quarter.
Steve: Adjusted EBITDA margins remain strong and steady at 19.1% for the full year and 19.3% for the fourth quarter.
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Steve: Net performance was an outstanding $270 million for the 4th year and $80 million for the 4th quarter.
Offsetting Lower Pricing and Inflation
Steve: The adjusted EBITDA impact of the Augusta divestiture and lower bleached paperboard sales was a negative $164 million for the 4-year and a negative $39 million in the 4-quarter.
Steve: power issues in the third quarter, and the decision to accelerate digester maintenance into the fourth quarter reduced 2024 adjusted EBITDA by approximately $30 million for the full year and $5 million in the fourth quarter.
These items should not repeat in 2025.
Steve: Other M&A, excluding Augusta, was a positive $10 million for the year and a negative $3 million in the fourth quarter.
Steve: Foreign Exchange with a $9 million adjusted EBITDA headwind for the year and $5 million in the fourth quarter.
Steve: The swing we saw in Foreign Exchange was the largest piece of the shortfall versus our Q4 expectations.
We ended the year with $5 billion in net debt.
Steve: and net leverage of three times, in line with our expectations.
Steve: That debt is at a reasonable level for us, given the consistency of our sales and margins.
Steve: our declining capital spending needs, and the rapidly rising cash flow generation we are anticipating as we move toward 2026 and beyond.
Steve: We have no death maturities in 2025 and only modest maturities in 2026.
Thank you. Thank you.
Steve: During 2024, we reduced outstanding shares by 5.6 million, or approximately 2%, even as the company invested $1.2 billion of capital and kept leverage within the target range.
Steve: Slide 13 highlights the impressive margins that are delivered in a challenging volume environment.
Steve: Despite a broad-based customer and retailer destocking, and consumers under pressure from inflation, both of which reduced our volumes, we are generating appropriate value for the packages we deliver, and that is translating into strong and steady margins.
Steve: That, of course, includes our 2% of expected innovation sales growth.
Steve: Given the volume challenges our customers are facing, the bottom of our 2025 adjusted EBITDA range assumes a year not very different from the one just ended.
Steve: Even at that level, margins would be in the 19% range, which again speaks to the strength of the business model.
Steve: Over the next six years of Vision 2030, we are confident in our ability to achieve our base model of low, mid, and high single-digit growth for sales, adjusted EBITDA, and adjusted EPS.
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Steve: We have quantified the impact of the foreign exchange headwind that developed in late 2024.
Steve: At current forward rates from Bloomberg, Foreign Exchange is an approximately $120 million sales headwind and an approximately $20 million adjusted EBITDA headwind in 2025 as compared to 2024.
Steve: Our largest currency exposure is to the Euro, but we also have meaningful exposure to the peso, pound, Swedish krona, Canadian dollar, and yen.
Steve: Our base financial model and our 2025 core guidance as presented on slide 14 exclude the foreign currency impact.
Steve: The column on the right adjusts those core figures to incorporate the currency headwinds.
Steve: If we leave currency aside for a moment, our expectation for 2025 would call for a relatively normal overall quarterly cadence broadly in line with the pattern outlined on slide 7.
In the fourth quarter, we successfully accelerated capital spending again.
Steve: taking total capital expenditures in 2024 to approximately $1.2 billion versus our previous estimate of $1.1 billion.
Steve: 2024 was peak capex for graphic packaging, and we are now targeting 2025 capital spending in the range of $700 million, down $100 million from our previous estimate.
As a reminder, beginning in 2026,
We expect capital spending to be roughly 5% of sales.
Steve: with 2% of that representing maintenance capital spending and the rest available for growth projects, greenhouse gas emission projects, and other productivity initiatives.
Steve: Slide 15 summarizes the company's Vision 2030-based financial model and our capital allocation priorities.
Steve: Once the WACO investment is completed later this year, our priorities turn to a more normal level of reinvestment for growth.
which is included in our 5% sales CapEx target.
Steve: Growing the Dividend, Opportunistic Share Repurchase, Deleveraging, and Tuck Under M&A.
Steve: Turning to slide 16, over the next several years, we expect to generate significantly more cash than we require for reinvestment.
Steve: 2025 marks the beginning of a multi-year cash flow expansion cycle.
Steve: And we intend to deploy that incremental cash to generate outstanding returns for stockholders while we further strengthen Graphic Packaging's position as the world's leading producer of sustainable consumer packaging.
Steve: On slide 18, you will find supplemental information that may be useful for modeling purposes.
Steve: That concludes our prepared remarks. We will now turn the call back to the operator to begin Q&A. Operator?
Speaker Change: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Your first question for today is from Lewis Merrick with BNP Paribas Exane.
Speaker Change: We've had mention from President Trump of the sales in the wider industry and if there are any potential second order effects that might entail. And now I've just got a quick follow up.
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Speaker Change: Yeah, thank you, Lewis. I'll start with some of the macro on that, and I'll turn it over to Steve to make some commentary, perhaps, on the financial side of that.
Speaker Change: I guess if you just think for a minute around what was announced here at the end of last week in terms of Canada and Mexico, kind of high level.
Speaker Change: We manufacture products largely for customers in those geographies and the facilities we have both in Mexico and in Canada. If you look at kind of the cross-border in North America
Speaker Change: We would estimate that around $300 million of paperboard in some cases.
Speaker Change: that's flowing in, and some cartons that would flow out of the U.S. and into Canada as an example. So it's relatively small, I think around 3% of our total sales. We really don't have exposure to China in a material way at all. And so, you know, as you kind of look through that, the biggest impact we've seen so far has really been on, you know, the translational impact on strengthening these currencies. And Steve gave a pretty good, you know, explanation of what that looks like. Of course, he's Chair of CERN Owen.
all here thank you.
Speaker Change: Once we have a clear line of sight, if in fact something does go in, we need to respond.
Speaker Change: Perfect, thank you. And then just focusing a bit more on the volumes, clearly return to positive volumes in the second half of 2024. Have you seen that trajectory sort of continue as you've, as that played out in January?
Yeah, thanks for the question on that.
Speaker Change: If you kind of look macro, you know, 2024, you know, the first half we were, we were down 2%, second half we were up one. We delivered $205 million of innovation sales. I'm really proud of that. Our funnel for innovation remains very strong and our confidence level, we continue at that kind of pace.
with what you see on page 8 and 9.
Speaker Change: of our deck remains very, very high. So as we look at 2025, we've given you a guide of 1% to 3%. It's early in the year. But if you look at January, we saw it's our weakest quarter, as you can see on slide 7, relative to how the timing plays out with our customers.
Speaker Change: But we actually expect it will grow up here in Q1, and that's consistent with what we saw here in January.
Great, thank you. I'll pass it over.
Thank you.
Your next question is from Anthony Pettinari with Citi.
Good morning.
Speaker Change: Mike, could you talk a little bit about kind of the relative strength in the different substrates that you produce, maybe kind of industry operating rates and, you know, how your system is operating, obviously, you know, post-divestiture with Augustine.
Speaker Change: Well, our system is operating very well, as you saw from the performance that we generated on a year-over-year basis, and I guess...
Speaker Change: You know, the relevancy of operating rates for us is a bit diminished, as you know, Anthony, relative to how we think about the business, specifically when I'm talking about us on our...
Speaker Change: and our solid bleached paper board that's made from folding cartons and our unbleached, excuse me, our bleached...
Speaker Change: Uncoded paperboard that we use for CubStock, you know, that's almost 100% integrated into our own operations, so it's really not as relevant for us anymore. We get a ton of questions on imports. The reality of it is, as I've told you guys in the past, it really doesn't, you know, make my list of things that keeps me up at night because it doesn't impact our overall business.
and Erin Hays.
Speaker Change: Once that machine is up and running, which we expect to be making commercial paperboard on it in Q4 of this year, so when you kind of think about where that positions us, we're going to have five incredibly well-capitalized
assets.
Speaker Change: that are making the paperboard that we need and that flow through our 120 converting facilities spread around the globe. And that's the business we're running, really selling packaging, we're selling cups.
Speaker Change: And that's why you've seen our disclosures really make more of a shift towards end-use markets. What's the consumer doing? How we're performing in those markets? Because it's really more relevant for how we're running the company and how we think investors should be looking at us.
Thank you for watching. Bye.
Speaker Change: Got it. Got it. That's very helpful. And then you talked about volume assumptions for 25. I'm just wondering if you could talk a little bit about pricing assumptions or at least the pricing environment as you start the year, both in terms of just kind of the strength of the market, but also your efforts to move customers off of the RISI index.
Thank you.
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Speaker Change: Yeah, Anthony, it's Steve. Good morning. Just a couple things there. Overall, in our guide, as Mike just said, we're assuming
Speaker Change: You know, continued modest volume growth, kind of in that 2% range, consistent with our innovation engine year-over-year.
Speaker Change: managed through in 2024 are fundamentally behind us, so we've got relative price.
Speaker Change: Neutrality heading in to 2025 and that's pretty consistent with what we're seeing on the input cost side as well which is
pretty neutral on a year-over-year basis.
Speaker Change: And actually we've been very pleased, Mike and I were talking about it this morning, with the progress we're making.
Speaker Change: with our long-term customers who are on multi-year contracts. And so overall, interest and receptivity has been high, and we're executing on those on a proprietary basis with our customers. So we're actually very pleased with the momentum on that front.
Okay, that's helpful. I'll turn it over.
Thank you. Thanks Anthony.
Speaker Change: Your next question for tonight is from Phil Ng with Jeffreys.
Phil Ng: Hey guys, I was curious to get your latest thoughts on
Thank you.
Phil Ng: The core itself is a little softer than we expected, just a little noise with some of the movements. Can you kind of help us flush out, you know, whatever it was, productivity or just how Augusta kind of shook out? Just give us a little more color and how that kind of plays into 25.
Speaker Change: Phil and Steve, you broke up a little. Are you referring to Q4? Yes, Q4. I mean, I thought volume and price largely were in line. Yup. The relative consensus was a little lighter. Help us think through.
Speaker Change: Were there any big surprises that we should be mindful of? Yeah, thanks Bill.
Speaker Change: Really two things. First, our expectations. One, volume came in at 1%. We had kind of guided for the quarter inherently in a one to three. So volume was a little bit lighter than we expected, a little bit less promotional.
Speaker Change: activity and volume from our from our customers. So about 1% was volume driven at 1% of the top line. Of course that flows through our EBITDA. And then really it was FX. This move post the election was
Speaker Change: You know, kind of an eight to $10 million hit for us relative to what we expected it to be when we last chatted and put out our
Speaker Change: overall stability very high at 19.3%, so a little bit of a late FX move and 1% volume versus an expectation of modestly higher were the two things that caused a little bit of shortfall versus our expectations in Q4.
Speaker Change: Okay, and when we think about 25, your 1 in 3 percent volume growth, that's kind of largely assuming...
Speaker Change: Mark, if they're still pretty muted and a lot of that's innovation, is that the right way to think about, Steve? And I guess the reason why I'm asking is where you seeing some of the biggest wins on the innovation side of things? You know, some of the CPG companies I've called talk about maybe dying down backs in those sustainability ambitions as consumers.
Speaker Change: dealing with inflation. So just kind of give us a little more perspective. Where are some of the winds? Were you super excited? And in any way to kind of quantify perhaps any winds you've picked up on the rainier side, just because it's a low cost, really high quality product.
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Speaker Change: Yeah, why don't I start, Phil, and then Mike can bring some additional context.
Speaker Change: You summarized it well. In 2025, our primary assumption is that the 2% innovation growth will be the primary driver of volume growth for the year, which assumes pretty market neutral. So, market neutrality. Now, keep in mind, 2024, we were down 1% on volume.
Speaker Change: Inside of that, up 2% innovation, minus 3% on the market.
Speaker Change: minus three to pretty neutral on a year-over-year basis, hence the 2%.
Speaker Change: volume growth on the top line, price relative stability. So that's kind of the context around that. Mike laid it out in his commentary extremely well. The portfolio of innovation is quite wide.
Speaker Change: And it's dozens and dozens of categories, and they fall across the portfolio, which is good to see, a lot of singles and doubles.
Speaker Change: baseball terms. And I'll let Mike talk about Rainier, where we're actually feeling quite good about the testing and the momentum on that front. We appreciate the question on that, Phil. I guess from our standpoint.
Our proctors were near.
Speaker Change: continues to accelerate. We're very pleased with what we've seen. We've got commercial
Speaker Change: We'll continue to give everybody an update on that, we're just not going to break it out every quarter. We kind of see it as one of the innovations that is part of what Steve just referenced.
Speaker Change: Your next question is from Gabe Hoddy with Wells Fargo Securities.
Mike, Steve, good morning.
Morning, Gabe.
Speaker Change: I had a question about inventory levels, and I'm looking at inventory days.
Speaker Change: that have kind of jumped up since 2018, and I suspect part of that might be related to
Speaker Change: The CUPS business may be holding a little bit more inventory for QSR to make sure that they have what they need.
Speaker Change: but it also kicked up a little bit in 23 and 24. I'm just curious if there's anything that that's intentional, number one, and then number two, on the production side, the paper side, or maybe folding cartons, I don't suspect you guys are holding a whole lot of inventory there.
Speaker Change: What that might imply for your own operating rates in 25, meaning it matched up with what you expect to be kind of 2%-ish volume rates.
Speaker Change: You're reading good. I appreciate the question you're asking there. I mean, in some cases we did have inventories that were a bit depleted coming out of the...
Speaker Change: The rush through the pandemic, if you will. And so our customers wanted us to get those back to contracted levels, which we've done. The biggest impact on a year-over-year basis, though, gave some of the planning we're already doing to get ready for the Waco startup. As you can appreciate, we've got a couple of
Speaker Change: You know, an eye on, we want to normalize our paperboard and the levels that we have. But when you're going through a big start-up like that, you've got to make sure that you cover for some of the contingencies. That's what we're doing. There's nothing more to it than that.
Speaker Change: Got it. Okay. And then maybe, Steve, you talked about kind of, it sounded like price-cost neutrality, and maybe that includes productivity. We've only heard from a couple of companies thus far, but it seems like labor and some of these indirect costs are still rising.
Speaker Change: And so I'm curious, you know, what maybe assumption you have for the more visible direct inputs that we can track on the outside world versus maybe where you guys are doing better on the indirect side?
Speaker Change: Yeah, okay, you're spot on there. You summarized it well. Overall, our pricing, as we mentioned, pretty stable heading into 2025, along with
Speaker Change: the accumulation of our input cost, the input commodity cost. We continue to have labor and benefits and other inflation that's in that, you know,
Speaker Change: and David Morgan. The total range is 3-4% range as we've seen in the past, maybe a little higher than historical. But it's in that $100 million range for us on a total basis. And as such, we're looking forward to seeing what the future holds for the future of the industry. Thank you.
Speaker Change: Our confidence that our productivity initiatives will more than offset that again in 2025 remains high given the productivity initiatives that we have in place. So those fundamentals
Speaker Change: And then, of course, we'd expect to earn on the volume growth that we've...
Speaker Change: that we've shared with you. So know those overall fundamental components of the business all around very high levels of margin stability as we head out of 2024 and into 25 really remain intact.
Thank you.
Thank you.
Your next question is from Ghanshyam Punjabi with Baird.
Ghanshyam Punjabi: Hey guys, good morning. You know, my kind of thinking back to 2024, you know, it's clear that you have major customers.
Speaker Change: started ramping promotional activity higher, but frankly, it just was not enough to move volume velocity in a material way. Do you sense any shift in terms of what they may do different in 2025, if anything, you know, maybe in terms of packaging mix or lower price point, architecture, etc?
Speaker Change: Well, you certainly heard it in my prepared remarks that we're seeing a lot of activity around new products and trying to position things. Some of that is tied to the GLP-1 drug set there.
Speaker Change: that our customers are reacting to, and that creates opportunities for us. Anytime there's a change, as you know, gotcha, that's an opportunity for us to have a conversation with our customers, and we are seeking those. But your read is right. Look, promotional activity, what we really saw in 2024 was one customer in a category promoted. The overall segment of the category didn't really grow. It shifted. That producer or that promoter actually won that at the expense of somebody else, but
Speaker Change: We saw it on food service, too, where some of those promotional...
Speaker Change: were really high. The $5 value meal is an example where you saw a mix that improved, but then a portion of the mix actually declined. And so it was really just prioritizing.
Speaker Change: Michael Doss, Stephen Scherger, Maggie Bidlingmaier, Melanie Skijus, Stephen Scherger, Maggie Bidlingmaier,
Speaker Change: I guess it's got to play out here over the next quarter or two, but that's kind of how we're thinking about it and what we saw last year.
Speaker Change: Okay and then for a second question as it relates to, you know, you made some comments on tariffs and the direct impact on you, but if we kind of zoom out on the supply chain and, you know, including your customers, etc., you know, just based in terms of your conversations with them, is there any consideration to change the network of production in any way to offset what looks like is going to be a secular issue in terms of tariffs?
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Speaker Change: Yeah, I think, look, every one of our customers has got a war room set up trying to game theory this thing out because, as you well know, it's moving pretty quickly.
Speaker Change: And so I think they're all trying to get a pretty good beat on what...
Speaker Change: what kind of the path is going to be and what it looks like. And I mentioned, and we know there's a 30-day reprieve now for both Canada and Mexico. But to your point, something that we're most likely going to have to deal with, there are a fair amount of consumer goods applications that are imported.
Speaker Change: to the U.S. And any of that stuff that would be made domestically ultimately benefits us. And so, you know, I think if we look at that.
Speaker Change: I already kind of mentioned, you know, imports, paperboard, you know, something, you know, I guess we could ask them, Bob, what does that mean to you? You heard my explanation in terms of how we compete in the marketplace, but it's probably
Speaker Change: a modest tailwind for us. That actually happened. So we're trying to think through all that stuff, leveraging a large platform that we have in North America. And again, we've got 85 converting facilities.
Speaker Change: all of these spread across North America, that gives us a lot more options than most packaging companies. And we'll obviously work really hard with our customers.
Speaker Change: optimize our supply chain, and there's two. You know, once we've got a clear line of sight in terms of how it all gets implemented and plays out, assuming it does.
Speaker Change: I think the modest potential tailwind is just a little more of a localization, if you will, of raw material production and ability to produce packaging in our 120,000 square miles.
Speaker Change: facility network is nicely positioned to be, as you know, you know, close to those customers and in reasonable proximity. And the vast majority of the paperboard that we produce for our own packages are for consumption here quite locally as well.
Perfect. Thank you guys.
You bet.
Your next question is from Matt Roberts with Raymond James.
Hey, Mike, Steve, good morning.
Speaker Change: Steve, you touched on this a little bit earlier, but I want to dig into the ongoing contract and it's just a bit more
Speaker Change: So, last quarter, you announced you did address the remaining 5% of open market contracts, and so the open market portion is now addressed.
Speaker Change: Is there some type of natural price benefit we should see in 2025 from that?
Speaker Change: and looking at the contract resets in the consumer packaging products.
Speaker Change: I believe he's noted that 50% are still tied to the index. Are you able to provide more color in terms of how many contracts have come up since the initiative was undertaken, what has the conversion rate of those been, or when we should start to see more of a material benefit flow through from that initiative?
Speaker Change: Yeah, Matt, it's Steve. I think we might take a little different take on what you're asking. I mean, as you know, we've been on a five-year journey of
Steve Owen: really being compensated appropriately for the value of our packages and we've made a lot of progress in that in that regard and hence the margin stability of the business.
Steve Owen: On the open market, 5% of the company, yes, we've made those transitions and we're being compensated appropriately for the paperboard at market rates.
Steve Owen: and we'll have other mechanisms in place if there is a need to move that pricing with those, that small section of the customers.
Steve Owen: packaging customer contracts and we don't really have plans to kind of put that out in percentage terms and the like because
Steve Owen: This is a journey that we've been on and we're going to stay on. What we like is that receptivity is high, there's a general recognition that having a transparent price change mechanism that works with our customers.
Steve Owen: is something that they want as well. So I think overall, I would just put it into the context of the consumer packaging company that we've become and our ability to be compensated appropriately for the packages we produce and maintain those longstanding relationships with our customers.
Steve Owen: the stability of our margins in and out of quarters. And if you look back in five years before we started that process, there was a lot more variation in that process. So it's clear it's working and our investors are benefiting from that.
No, it's all very helpful and certainly makes sense.
Speaker Change: Maybe holistically, if I could ask another question on the unbelief side of the business. Maybe could you talk about how your share is trended over time? Is that market relatively stable and given the structure?
Speaker Change: Are there any differences in the contracts there versus either bleached or recycled or any color you could give on kind of the different dynamics that would be helpful? Thank you again for taking the questions.
Speaker Change: No, I appreciate the question. I think on the Unbleached Paperboard side, there's been a lot in RISD about weakness there, and we just haven't seen that. I mean, our overall beverage business, as you saw, has performed quite well. It's a global business. The vast majority of that material flows through our own converting facilities. We sell very little of that.
Speaker Change: into the open market, you know, and it's a very good grade paperboard. So, you know, and of course, you know, what we think about coated recycled paperboard, we've made two very large scale investments, one in Michigan, and now one in Texas.
Thanks mate, appreciate it.
Thanks, Ben.
Speaker Change: Your next question for today is from George Staphos with Bank of America.
George Staphos: Hi, everyone. Good morning. Thanks for the details and taking the question, guys. I guess I had three questions. I'll ask them in sequence. So, first of all, as we
consider the guidance for the year.
George Staphos: and the fact that this juncture XFX will be a little bit below your normal target of mid-single digit. What would be the biggest sort of risk factor you see in guidance and sort of the variance? Or is it just the fact that we're stepping off at a lower point?
George Staphos: and you were flat. The industry data shows some pickup in food service volume, recognizing it's production, not consumption. Have you seen any pickup in your data looking at it's 25 on the food service side? Cause that's been somewhat encouraging.
George Staphos: And then last, help us understand how you'll be able to use cash flow and maybe the beginning of Waco and its production to support earnings perhaps in 2025. Thanks, guys, and good luck in the quarter.
Thank you.
George Staphos: So I'm going to ask Steve to do one and three, and I'll handle two then, Steve. All right. Thanks, Mike. So, George, on one, you know, on the guidance risk, in terms of the, you know, if you will, the closer-in controllables, I mean, overall, of course, volume will be, you know, critical there, and we're assuming some modest volume growth.
George Staphos: that has a market assumption that is pretty neutral, as we talked earlier.
George Staphos: And as we've described here, that just requires our customers to have some commitments to promotion and to managing through that day-to-day life of a reasonably stretched consumer. So I think it really kind of there evolves around
George Staphos: around volume, our productivity, the initiatives we have in place. We have a lot of confidence in our innovation pipeline, a lot of confidence in
George Staphos: Price and Margin Stability Contract Negotiations are kind of in front of us. Obviously, FX, George, can move, and that's mostly just a translation.
Speaker Change: activity, which is the reason we kind of called it out for you here. No, I understand. I was asking before foreign exchange, but it's both basically it's the volume and the consumer variability that that's in the in the guide that you're you're calling out. That's true.
That's correct, George. Yeah, thank you. Thanks, Steve.
Speaker Change: And then your question on cash flow is an important one, and one, our confidence in the cash flow inflection for the business.
Speaker Change: is very high, particularly given the catalyst that it will provide for margin enhancement as we move out of 2025 and into 2026.
Speaker Change: We bring Waco to life and really inflect on the cash flow front.
Speaker Change: And that is an enabler for earnings capacity as well as cash flow generation.
Speaker Change: We're looking forward to the startup of WACO, obviously the difficult decisions to close down other facilities as part of that, but that is in motion and as Mike talked earlier to Gabe's question
Speaker Change: You know, we're doing some building on the inventory front and prep, and we're looking forward to having that capacity for
Speaker Change: for doing so, and for that being a significant enabler for earnings and cash flow generation. And it also, related to capital allocation, I mean, it's allowing us to have confidence in how we allocate capital. Today's announcement increased the dividend.
Speaker Change: a good steady growing dividend, an important part of our capital allocation priorities, and then obviously the other priorities that we've spoken about. So yeah, they're all related in terms of EBITDA improvement, cash flow improvement, and how we allocate capital going forward.
George Staphos: In regards to food service growth, George, and you referenced it right, we have outperformed in that space pretty dramatically, so we do have tough comps that we have to meet, but having said that...
We're investing heavily in innovation.
George Staphos: We profiled on our last earnings call, one really great one that we put in place with McDonald's.
that actually, I really like it because it's...
Of course, it's not up.
George Staphos: Paperboard application, but for them it ultimately eliminated two SKUs and made it into one We got a couple of sizes out there So seeing the roll through of that on the McFlurry You know out there and we've got a number of other things we're working on this year So I anticipate we're going to continue to grow You know on in the food service space and that's our expectation if we go into 2020
Thanks so much.
Thank you. Thank you.
Speaker Change: Your next question is from Arun Viswanathan with RBC Capital Markets.
Arun Viswanathan: Thanks for taking my question, guys. You guys are well. I guess the first question, going back to the inventory side, so it looks like you took...
Arun Viswanathan: Quite a bit of action over the last half year or so. I know there was some downtime. There was also some downtime a year ago in the second half.
Arun Viswanathan: I guess as it stands, would you say that your inventories are balanced where you want to be, or is there still some more work to bring those down? You also, I think, built some inventory ahead of the Augusta closure, so maybe you can just update us on that first.
Arun Viswanathan: We made a decision to build a little bit of paperboard inventory here as we prepare for the start of the Waco paperboard mill. But as I mentioned earlier in my comments,
Arun Viswanathan: You know, that'll wash through pretty quickly as we bring that mill up and running. So by and large, we like where we're at with our finished goods. We've got a little work to do on our raw materials side. It's a focus for us, but it's a balance too to make sure that we're able to respond to customer needs in a highly variable market.
Okay, that's helpful. And then... Okay.
Speaker Change: I was just hoping we could address some of the concerns in the market out there around new capacity as well as imports. So, several of us have seen the reports of imports coming in from Europe, given maybe a softer demand environment there. Are you still seeing that? Is that a credible threat to oversupply?
Speaker Change: And then similarly, there were, you know, some announcements of new capacity in CRB. There were conversions from SBS into CUK. So maybe you can just give us your thoughts on, yeah, new capacity as well as, you know, import threats.
Speaker Change: You know, I think, Arun, and I'll make a few comments on it, but this question is much better for people that are actually in the marketplace selling paperboard, which is not graphic packaging. We're selling packages.
In particular, I think what you're referencing...
Speaker Change: and some of the FPP board that's coming into the North American market from Europe, which was up, I think, modestly last year as I look at the numbers. But again, as I indicated, it really doesn't impact our business much, if at all.
Thank you. Thank you.
Speaker Change: You know, we're integrated into that in our own paperwork facility.
Speaker Change: Manufacturing Facility in Texarkana. We use almost 100% of our own material. So the impact on that really falls on others that are, you know, participating in that market. It's the biggest market out there. It's over four and a half million tons. And again, I'd encourage you to ask.
Speaker Change: You know, the major producers of that paperboard grid, what their thoughts are on that. They'll have a more informed view than me.
Speaker Change: As it relates to people converting into encoded unbleached graph, I think you're referencing, yeah, we've got that question.
Again, as I mentioned, we run a highly integrated process.
Speaker Change: with specifications, you know, that are very, you know, particular in terms of strength and tear. And that's based on, you know, decades of experience that we have flowing through our own packaging operations.
Speaker Change: and customer lines that run at incredibly high speeds and are intolerable of any variation that, you know, is met. So I like the way we're positioned on that. We're clearly the low-cost producer of uncoded, you know,
Speaker Change: continue to go up on that grade. So that's how we compete there. It's really not a big issue for us. Yeah, and Arun and Steve, I think, and just, there are no low-cost alternatives for converting something from a bleached paperboard into an un...
Speaker Change: Unbleached Coated, that is our product category, so as Mike said it's highly integrated and there are no low-cost alternatives to do that. It's just an idea.
Great, thanks.
Thank you.
Speaker Change: We have reached the end of the question and answer session and I will now turn a call over to Mike Doss for closing remarks.
Mike Doss: Thank you, operator. And thank you for joining us on our call today. There's no doubt that 2024 was a challenging year for consumer product and quick service restaurant customers.
for Graphic Action. It was challenging, but an exciting year.
Mike Doss: We harvested capital from the business that lacked competitive advantage, we delivered significant packaging innovations to new and existing customers, and we made outstanding progress at Waco.
Mike Doss: And despite the headwinds, we returned to growth in the second half and delivered exceptional margin stability. Graphic packaging is demonstrating the strength of its business model. I'm proud of our team, excited about our innovation pipeline, and optimistic about our future. Thank you, and have a good day.