Q1 2025 Graphic Packaging Holding Co Earnings Call
Good day, everyone and welcome to the graphic packaging first quarter 2025 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.
It is now my pleasure to turn the floor over to your host Mark Connelly's Senior Vice President Investor strategy and development.
Speaker Change: Sir the floor is yours.
Speaker Change: Good morning, and welcome to graphic packaging holding company's first quarter 2025 earnings call, we have with US today, Mike Doss, President and Chief Executive Officer, and Steve Scherger, Executive Vice President and Chief Financial Officer.
Speaker Change: On this call we will be referencing our first quarter 2025 earnings presentation, which is available through this webcast and on the investors section of our website at www graphic Teekay Dot com.
Speaker Change: Today's press release and presentation include forward looking statements as defined in the private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the SEC.
Mike: Now, let me turn the call over to Mike.
Mike: Thank you Mark good morning, everyone and thank you for joining our call today graphic packaging as a global leader in sustainable consumer packaging in the first quarter. Our business faced considerable pressure is already stretched consumers pulled back further promotional activity by our customers did not drive meaningful volume improvement.
Mike: And we experienced.
Mike: Cost inflation.
Mike: While these challenges won't be resolved overnight. Neither are they long term in nature, we have taken actions to offset higher costs and continue to generate innovation sales growth that is helping us grow faster than the end markets we serve.
Mike: Despite near term challenges, we remain well positioned to generate substantial cash flow in the quarters and years ahead.
Mike: In the first quarter graphic packaging sales were $2 1 billion.
Mike: Adjusted EBITDA was $365 million and margins were 17, 2% and adjusted EPS was <unk> 51 sets those.
Mike: Those results were significantly below our expectations, driven mainly by weaker volumes in the Americas business and broad based input cost inflation.
Mike: Turning to slide three our Waco recycled paperboard investment is on track for the fourth quarter startup.
Mike: Eric just effectively complete and I have been extremely pleased with the quality of the team we've been able to assemble.
Mike: Training is well underway and as you may remember the Waco machine is nearly identical to our ATM machine in Kalamazoo. So we are experienced operators training our new team members on essentially the same equipment they will be running a few months now.
Mike: After ensuring an appropriate level of paperboard inventory for the transition.
Mike: We announced that our Middletown, Ohio recycled paperboard manufacturing facility will close on June <unk>.
Mike: Middletown was built in 19 or nine and has served our company well, we announced our intention to close Middletown. Some time ago. So the transition was not a surprise to the affected employees.
Mike: We are working with the team there to provide outplacement assistance and other services I want to personally thank the Middletown team for their dedication and commitment to excellence.
Mike: With a period of major investment competitive advantage coming to a close we expect to generate substantial excess cash over the next several years yesterday, our board approved a new $1 $5 billion share repurchase authorization.
Mike: As we transition from our vision 2025 to vision 2030, our capital allocation priorities shift primarily to reinvestment and return of capital to stock and debt holders.
Mike: This new repurchase authorization reflects the board's commitment to our vision 2030 priorities and their confidence in the strength of graphic packaging team and business model.
Mike: Volumes across consumer Staples remain uneven and below our expectations address consumer has seen no significant relief from price inflation and consumer confidence has declined significantly in the U S and in the other markets we serve.
Mike: Our volumes in the Americas, which were down about 1% were disappointing.
Speaker Change: Yes, still broadly outperformed the CPG and <unk> markets, we serve.
Speaker Change: In our international business, where volumes turned positive in the second quarter of 2024, we continue to see growth, but we also see signs that consumers in international markets are beginning to pull back in a response to higher prices and greater economic uncertainty.
Speaker Change: The combination of slightly positive overall volumes and modest price pressure left our reported revenue was essentially flat excluding the effect of May one 2024 Augusta divestiture.
Speaker Change: The modest price pressure, mostly reflects the impact of third party prices recognition made in the middle of 2024, and some mix shifts.
Speaker Change: On April 15th we announced a $40 price increase on all of our recycled and unbleached paperboard grades effective may 15th.
Speaker Change: We have a very good record of offsetting labor benefits and other costs through efficiency and that performance of games and we did that again in the quarter when we experienced meaningful input cost inflation like we did in the first quarter, we will pass those costs through to our customers.
Speaker Change: Turning to the five major markets we serve.
Speaker Change: Food and health and beauty saw some modest improvement versus last quarter foodservice and household products were relatively flat and beverage was down against a strong comparison last year, despite the higher promotional activity and soft drinks.
Speaker Change: With food price was still high we are seeing the consumers search for value expand shopper.
Speaker Change: <unk> across both income brackets are now making different choices in response to relatively high food and household product prices and that appears to be particularly benefiting our mass retail superstore and discount grocery customers.
Speaker Change: Im sure you read the same reports that we have of consumer shopping in more stores.
Speaker Change: Fewer items in each one as they seek out the best value.
Speaker Change: Consumers shop doesn't have a big impact on us, but our customers are seeing real volume to clients and total goods purchased and that certainly does impact us directly.
Speaker Change: We continue to broadly outperform north American CPG and <unk> markets largely as a result of our innovation sales growth, which came in at $44 million for the quarter.
Speaker Change: That growth came across a wide range of product categories, where several new contributions and strength packaging.
Speaker Change: Coffee snacks and cleaning products. Meanwhile, our boreal paperboard canister continues to expand into new products, new markets and we see a good tailwind in Europe and beverage <unk> demand based regulatory requirements that are phasing in over the next few years.
Speaker Change: I am often asked consumers are pulling away from innovation and sustainability initiatives to save money in this uncertain environment in the first quarter, we did see a few customers slow down their rollouts, but most launches remain on schedule.
Speaker Change: We tend to have about a six to nine months of visibility in terms of new product development and I feel very good about reaching our innovation sales growth target of at least 2% in 2025.
Speaker Change: Turning to slide four the breadth and depth of our consumer staples packaging portfolio as the foundation of our strength.
Speaker Change: We are in every aisle in the supermarket are major packaging supplier to quick service restaurants, and expect to grow our presence substantially over time across household products and health and beauty.
Speaker Change: We can't change the macro environment, but our ability to move with the consumer as a key source top line consistency over time.
Speaker Change: Turning to slide five let's look at sales by market overall first quarter sales were basically flat year over year.
Speaker Change: It represents approximately 38% of our packaging sales and we saw some overall improvement but results by product category remains very high.
Speaker Change: Promotional activity was not materially different from the fourth quarter.
Speaker Change: Appears to have again, driven more branded mix changed and overall category volume growth.
Speaker Change: Volumes improved modestly with gains by branded products more than offsetting weaker private label results, mostly as a result promotional activity.
Speaker Change: Dry processing and drive prepared foods like Mac and cheese showed incremental strength, while some frozen prepared food categories lost ground.
Speaker Change: Frozen complete meals for example continues to lag as consumers balanced cost against convenience.
Speaker Change: As a snack and meal replacement continue to gain supported by trends, including higher protein diets G. L. P. One returning to the office convenience and portion control.
Speaker Change: Coffee and tea again showed solid gains thanks in part to our audio product innovation, but also from a shift in coffee consumption to the home and office and waste coffee shops.
Speaker Change: Tariffs could have a material impact on European causing producers given the higher proportion of European coffee that is exported to the U S.
Speaker Change: Beverage, which represents about 25% of our overall packaging sales saw its first decline after two years historic performance.
Speaker Change: Their consumption trends continue to slow we did see some positive impact on promotion and soft drinks in the quarter as well as gains by alternative beverage.
Speaker Change: Energy and nutritional drinks and then that alternative categories. We saw notable gains by private label producers continuing the trend that we've seen in soft drinks foodservice represents 21% of our packaging sales year over year results were relatively unchanged with basically flat performance in the Americas.
Speaker Change: And a pickup in our smaller international business, while we saw higher promotional activity by our quick service restaurants traffic remained relatively flat, even as the shift towards value menus and limited time offerings became more pronounced.
Speaker Change: Saw growth in foodservice demand from supermarkets, and U S convenience stores, where investments in freshly prepared foods and bakery items issuance of success, taking volume from the <unk> channel.
Speaker Change: Oswald products represented approximately 12% of our packaging sales so uneven results with modest weakness in the Americas offset by pockets of significant improvement internationally.
Speaker Change: Laundry detergent pause, where our child resistant paperboard solution is it replacing plastic plastic film from major European brands continues to be solid growth opportunity for us as food remains strong while tissues weakness continued and finally health and beauty small, but promising part of our overall packaging.
Speaker Change: <unk> saw mixed results in international by better results in the Americas.
Speaker Change: In international we saw incremental weakness in everyday skincare and other wellness products as consumers tightened their belts.
Speaker Change: We saw modest gains in the Americas healthcare was about flat in both markets.
Speaker Change: If you'll turn with me to slide six we present typical seasonal patterns on the left and our actual to expected experience on the right.
Speaker Change: While normal quarterly seasonality was evident in most categories food was modestly weaker than normal.
As we noted in our February earnings call January started out slow in large part to unusually cold weather that led to fewer trips to the grocery store.
Speaker Change: Quarter progressed, our customers continue to see relatively weak volumes without a normal February jet in the market rebound.
Speaker Change: And as you've read elsewhere. The search for value is not just focused on lower income brackets consumers across the income spectrum and increasingly across our international business are searching for better value and many are cutting back or they can Meanwhile, as I noted earlier promotional activity by our CPG and <unk> customers.
Speaker Change: Non translated into meaningful volume improvement or higher foot traffic.
Speaker Change: Private label in mass retail continues to gain in that environment cost inflation, which looked relatively benign early in the quarter picked up considerably across most of our inputs other than fiber as we look to the second quarter input cost inflation remains significant.
Speaker Change: And at the consumer level, some categories, particularly the food are experiencing renewed retail level price increases when.
Speaker Change: When we spoke last quarter, we said, we weren't banking on consumer recovery as we look to 2025 outlook a 2% volume decline is now our base case that is a very challenging backdrop for our CPG and <unk> customers and we continue to work with them to deliver the best packaging solutions for their strategies.
Speaker Change: Another trend I'm, often asked about is private label and a growing private label has implications for innovation and growth and for our margins.
Speaker Change: The reality is that private label has been significant part of our innovation sales growth and particularly with some of our highest value innovations like Oreo and pay per sale.
Speaker Change: Retailers want their own brands and out on the shelves and are just as committed to plasma production as most cpg's.
Speaker Change: Our experience has been that our margin with private label customers is not materially different.
Customer margins.
Speaker Change: Slide seven highlights our five packaging innovation platforms, and noting the scale the opportunity we see in each one.
Speaker Change: My confidence in the size and scope of the opportunity in each of these areas continues to rise each new commercial success paper steel for prepared food for example, not only adds to our sales, but also adds to our insights and our confidence in our ability to expand in new markets and we are doing just that.
Speaker Change: Turning to slide eight.
Speaker Change: And <unk> is our proprietary solution for PT bottle multi packs developed in the United States and is now rolling out with our first customer in the U K rapidly growing independent beverage producer and.
Speaker Change: The viral plate beams and outstanding low impact alternatives to plastic ring carriers and shrink wrap that offer exceptional product stability.
Speaker Change: Superior marketing.
Speaker Change: And as plastic and gluten free baking it fully recycled.
Speaker Change: Turning to slide nine our vision for graphic packaging is declared.
Speaker Change: After a half decade of transformational investment capabilities innovation and competitive advantage, our focus turns to innovation and execution. We have built our company culture around safety engagement and delivering for our customers our commitment to improving the environmental footprint of consumer packaging is at the center.
Speaker Change: Our mission.
Speaker Change: All of those three things together innovation culture and commitment to sustainability is how we generate best in class results for customers and for all our stakeholders.
Speaker Change: Now, let me turn it over to Steve for a review of the company's financials and operations Steve.
Steve: Thank you Mike.
Speaker Change: Turning to slide 10.
As noted in the first quarter was a challenging one with.
Speaker Change: Volume was below expectation and inflation pressure across a range of inputs.
Speaker Change: Sales for the first quarter of 2025 or $2 1 billion.
Speaker Change: If we exclude the impact of the Augusta divestiture and the impact of foreign exchange in the quarter packaging sales were basically flat year over year.
Speaker Change: Packaging price was approximately 1% lower in volume of approximately 1% higher.
Speaker Change: Price largely reflected the impact of a third party price recognition in the middle of 2024.
Speaker Change: Which will roll off after next quarter and some minor mix effects.
Speaker Change: Behind the 1% volume growth, our Americas business with its higher integrated margins was actually down approximately 1%.
Speaker Change: While our smaller non integrated international business was up approximately 3%.
Speaker Change: Adjusted EBITDA was $365 million.
Speaker Change: Well below our original expectations, primarily as a result of the weaker than expected volumes and higher than expected inflation.
Speaker Change: Although we spoke on last quarter's earnings call. We described cost inflation is relatively benign.
Speaker Change: We weren't surprised by the higher cost, which came with the cold weather in January.
Speaker Change: Input costs rise and production efficiency drops with cold weather and this year's weather was particularly ours.
Speaker Change: But as the weather improved it became clear that the upward pressure on input cost was not went away.
Speaker Change: The increases that we saw in January and energy chemicals logistics and transportation and other categories remained elevated throughout the quarter and has continued into the second quarter.
Speaker Change: Responding to that input cost inflation on April 15th we announced a $40 per ton price increase for recycled and unbleached paperboard.
Speaker Change: We expect those price increases to help bring margins back to more normal levels over the coming quarters.
Speaker Change: During the first quarter, the impact price volume and mix together amounted to $34 million headwind.
Speaker Change: Net performance of $33 million, largely offset labor benefits and other inflation of approximately $25 million.
Speaker Change: But it was not enough to offset input cost inflation of $21 million.
Speaker Change: The absence of Augusta and 2025 reduced reported adjusted EBITDA by approximately $25 million.
Speaker Change: We ended the quarter with net leverage of three five times.
Speaker Change: Cash outlays for taxes, and wingo spending were notably higher in the first quarter, and we expect them to be in future quarters.
Speaker Change: Slide 11 highlights the challenging consumer packaging environment on the left and the strength of our business model and execution on the right.
Speaker Change: While lower than expected volume and input cost inflation pushed margins lower in the quarter.
Speaker Change: Our price actions are expected to improve margins as the year progresses.
Speaker Change: Second quarter will be a heavy planned maintenance quarter as it was in both over the past two years and as such we expect second quarter margins to again fall modestly below first quarter margins.
Speaker Change: Turning to the outlook on slide 12, we have adjusted guidance to reflect a higher level of uncertainty around volumes and a broad based increase in input cost inflation.
Speaker Change: We lowered and widened the range of expected volume outcomes.
Speaker Change: To a 4% volume decline at the low end to flat volumes at the Hyatt.
Speaker Change: Previous guidance had assumed that market volumes will be relatively flat.
Speaker Change: And then layered on 2% innovation sales growth to arrive at a range of plus one to plus 3%.
Speaker Change: But it is clear that our CPG and <unk> our customers are in many cases experiencing volume declines in the low to mid single digits with little help from promotional activity.
Speaker Change: Meanwhile, consumer confidence has dropped in both the Americas and in our international markets, which may lead to even more consumer retrenchment.
Speaker Change: The continued weak consumer response to promotional activity leaves us increasingly cautious about potential volumes in 2025.
Speaker Change: Our adjusted EBITDA, and EPS guidance reflect the impact of those lower and wider volume assumptions as well as an expectation that input cost inflation will continue in coming quarters.
Speaker Change: We have taken a number of actions to ensure that our own resources are appropriately scaled and deployed.
Speaker Change: And as mentioned earlier, we are in the market with price increase announcements.
Speaker Change: We continue to expect capital spending to fall in the $700 million range and as Mike noted, we expect to generate innovation sales growth of at least 2% of sales.
Speaker Change: Slide 13 summarizes the company's vision 2030, based financial model and capital allocation priorities, which are unchanged.
Speaker Change: With Waco nearing completion, our priorities turn to a more normal level of reinvestment for growth and productivity.
Which is included in our 5% of sales Capex target.
Speaker Change: And returning capital to stockholders.
Speaker Change: In February we announced a 10% increase in the quarterly dividend.
Speaker Change: Got it back do you believe that a growing dividend is appropriate capital allocation, given the relative consistency and strength of our business model.
Speaker Change: Our future cash flow expectations.
Speaker Change: We expect to generate substantial cash in excess of our needs for years to come.
Speaker Change: And as Mike mentioned earlier, our board of Directors has approved a new one 5 billion share repurchase authorization.
Speaker Change: That takes our total available authorization to more than one $8 billion.
Speaker Change: Graphic packaging has a strong history of opportunistic share repurchase activity.
Speaker Change: And we will compare ever use of cash against the alternative of repurchasing our own stock.
Speaker Change: The new authorization includes the ability to enter into <unk>, one plans to give the company a higher level of flexibility over the coming months and years.
Speaker Change: While we continue to expect to be investment grade by 2030.
Speaker Change: Given our declining capital spending needs and limited near term debt maturities, we are comfortable with our current debt levels.
Speaker Change: We are targeting net leverage for year end 2025.
Speaker Change: Below three five times.
Speaker Change: Inclusive of any share repurchase activity or other capital deployment initiatives, we may undertake.
Speaker Change: Slide 14 describes some of the milestones on the path to our vision 2030 goals.
Speaker Change: 2024 was peak Capex at $1 2 billion.
Speaker Change: In 2025 capital spending is expected to be in the range of $700 million.
Speaker Change: And in 2026 and each subsequent year, we wont hold capital spending to approximately 5% of sales.
Speaker Change: Which includes sustaining capital needs greenhouse gas reduction projects and growth capital.
Speaker Change: In each of 2026 and 2027, we expect the Waco project to deliver incremental EBITDA of approximately $80 million.
Speaker Change: Despite trade and market growth uncertainty 2025 marks the beginning of a multi year free cash flow expansion cycle and graphic packaging.
Speaker Change: We intend to deploy that incremental cash to generate outstanding returns for stockholders, while further strengthening <unk> position as the world's leading producer of sustainable consumer packaging.
Speaker Change: On Slide 16, you will find supplemental information that may be useful for modeling purposes.
Speaker Change: That concludes our prepared remarks.
Speaker Change: Before I turn the call back to the operator.
Speaker Change: I'll, let everyone know that we will be adhering to the one question one follow up guideline.
Speaker Change: In order to allow as many of you to participate on the call as possible.
Speaker Change: Operator, let's begin the Q&A.
Speaker Change: Certainly everyone. At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
Speaker Change: We do ask that while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Speaker Change: We do ask that participants please limit to one question and one follow up.
Speaker Change: Once again, if you have any questions or comments. Please press star one on your phone.
Speaker Change: Thank you. Your first question is coming from Ghansham Panjabi from Baird. Your line is live.
Ghansham Panjabi: Hey, guys good morning.
Speaker Change: Hello.
Speaker Change: Good morning, So I guess first off just on the volume.
Speaker Change: Component I mean, clearly you know, Mike and see what I mean by.
Speaker Change: We're at a low point to begin with right. So you had the Covid surge you had the destock you had consumer affordability issues and.
Speaker Change: Maybe we're sort of at the tail portion of that is still feeling the lags of previous price increases et cetera, but you also have this dynamic of G. L. P. Dash, one and you know the impact on packaged food, especially center of the store so.
Speaker Change: Are you able to see any trends within your own data that would.
Speaker Change: That it's really an affordability issue versus anything else at this point.
Speaker Change: Yes. Thanks for the question I guess, if you kind of go back and look at the second half of last year Ghansham and you look at.
Speaker Change: What how we were operating the business and we talked to all of you.
Speaker Change: Our second quarter call that when our customers were telling us is that they were going to grow their volumes roughly 3%.
Speaker Change: So we geared up and they wanted us to gear up for that and that's exactly what we did.
Speaker Change: And as you saw we finished the year the second half of the year, we were slightly up I think about a half of 1%. So essentially flat that was the basis for the plan that we put forward to you heard Steve talk to his prepared comments that our assumption going into this year was kind of a flat volume to your point coming off some challenging years in 'twenty three 'twenty four.
Speaker Change: Our innovation would be plus two and so we kind of built our business on that.
Speaker Change: And kind of quickly ended the quarter, we saw that that really wasn't happening we talked to a couple of investor conferences about our volumes being flat.
Speaker Change: And of course, what you have seen in the last two to three weeks.
Speaker Change: Including today with Mcdonald's announcement, or the vast majority of our customers have been pointing volumes down roughly 3% to 4% against relatively easy comps now to your question around kind of what is driving all of that we actually believe affordability is a key part of that.
Speaker Change: If you think about <unk>, you mentioned that that's a little bit above opportunity and a challenge for our customers in some cases, the additional protein creates opportunities need for protein I should say creates additional opportunities for re.
Speaker Change: <unk>, which several of our customers have done on the other side of impacts from their snack sales.
Speaker Change: I'd say the Maha piece of this is also pretty significant for our customers, particularly those who could potentially be impacted by the snap programs not being a <unk>.
Speaker Change: <unk> to be used in other other government assistant programs for.
Speaker Change: Certain soft drinks in carpet.
Speaker Change: Salty snacks and those types of things so that's a challenge in.
Speaker Change: And the reformulation.
Speaker Change: Piece with some of the.
Speaker Change: Requirements coming up yet from the FDA around removing.
Speaker Change: Certain of dies, they will reformulate, they're really good at reformulate their customers are but it takes some time and ultimately as you know those re formulations are usually more expensive and so then that creates additional pressure on consumer theyre already came into the year.
Speaker Change: Pretty stretched and now if you lay on.
Speaker Change: And trade and tariff you backdrop here other nervous and so where they used to go to the store and maybe by 15 things now they'll go into the store and buying 13 things.
Speaker Change: And ultimately as we've talked about we're not immune from our customers' volume shortfall. So even at the 2% down in our guide here were actually outperforming what we're currently seeing and we felt it was important that we actually take a hard look at what our customers numbers are telling us and their releases and.
Speaker Change: The business along those lines of course, we are helping them reformulate, we're cheering for them with their promotions, but to this point across a wide range of customers, we have not seen that translate into <unk>.
Speaker Change: Volume stability or certainly growth and so as we look at the full year and how we want to operate the business. What we can control our volumes what we can control is our cash flow.
Speaker Change: And we want to run our business related demand and making sure that we're running to the requirements that we see in front of us that will eliminate some of the inventory that correctly. So some of the analysts pointed out.
Speaker Change: That we built at the end of last year as we were kind of preparing for the growth that didn't show up. So that's how we think about it it will in the short term that's got some negative implications for EBITDA, but it helps us make sure that we maximize our cash flow really positions our business for a rebound, which eventually will happen I just can't tell you when.
Speaker Change: Okay. That's really good perspective, thank you for that and then just quickly on <unk> as.
Speaker Change: As it relates to guidance, maybe for Steve you know what what's the embedded assumption for when price cost will turn at least neutral to positive in 2025.
Speaker Change: Yeah, Thanks, Scott, but Steve our embedded assumption in the midpoint of $1 five.
Speaker Change: Dollars of EBITDA, just touching on that briefly.
Speaker Change: Embedded in that is the minus 2% volume assumptions and we've got about 80 plus million dollars of inflation in the business we.
Speaker Change: We are pursuing price actions on multiple fronts. We obviously have our cost models that will inflect with some pricing we have our new index model, which will inflect positive on pricing and then we've announced a third party increase it's our expectation that will flip to positive late this year and <unk>.
Speaker Change: Recover the inflation as we roll into 2026, so we will see modest benefit of our pricing actions. This year and would expect that our pricing initiatives multiple of them.
Speaker Change: We will recover the inflation that we're seeing as we roll out of 25 and enter 26. So we have full intent obviously to recover the inflation that we're seeing just given some of the modest delays it will take place more as we enter into 26.
Speaker Change: Relative to that recover we've got about $100 million of price actions that we're executing on right now across all of the options that we have for pursuing pricing.
Speaker Change: Very helpful. Thank you again.
Speaker Change: Thanks Catherine.
Speaker Change: Thank you. Your next question is coming from a ruined viswanathan from RBC capital markets. Your line is live.
Ruined Viswanathan: Great. Thanks for taking my question I Hope you guys are well.
Ruined Viswanathan: I guess, just kind of curious are going back to the volume side. So.
Ruined Viswanathan: You know this this volume kind of decline has been going on for a little while you guys have taken some downtime in the past but.
Ruined Viswanathan: Just curious if that's still kind of what you're contemplating and then would you consider doing.
Ruined Viswanathan: The market is kind of oversupplied or maybe you can just kind of go through the supply demand balance in each of your three grades.
Ruined Viswanathan: You know I know has to be as you know have much exposure to but what's really you know do you think there's any footprint actions that have to be undertaken by the industry and yourselves included thanks.
Ruined Viswanathan: Thanks, a room and so.
Speaker Change: Answer the question this way as I mentioned in my comment my answer to Ghansham, we are going to run our business to requirements demand so that will.
Ruined Viswanathan: Necessitate from time to time us taking some rolling.
Ruined Viswanathan: Market related downtime through our system and Thats reflected in the guide that we've given you and ultimately that's the impact of going from a plus two to a minus two at the midpoint, that's 4% and thats. The paperboard that were pulling out of there and there's a fair amount of absorption issue know that ultimately we generate on that it will help us maximize our cash flow in the short term, we believe that's the right way to <unk>.
Ruined Viswanathan: <unk> business I'd also make sure that inventories stay very tight.
Ruined Viswanathan: And along those lines.
Ruined Viswanathan: It really does a nice setup for our Waco project here, which I'll comment on I'm sure there'll be a question on that later on in regards to kind of the supply and demand balanced by the grades look and you probably saw.
Ruined Viswanathan: Two of our competitors this morning announced closures of coated recycled paperboard mills.
Ruined Viswanathan: Which added capacity levels well over 200000 tons that would represented in the North American market certainly in the U S somewhere between seven and 9% of reduction and if you look at the actions that we've already announced for Middletown and East Angus here, So we get wake up and running and the capacity that comes on line with Waco.
Ruined Viswanathan: Essentially ties out and there is really no net ton add you to the coated recycled paperboard side of the market. So that's really.
Speaker Change: Good spot and our confidence level and Steve said in his prepared comments, the $80 million and 26 in the $80 million or 27, I've got a high degree of confidence in that and I think that those actions really further Smith support that as you kind of look out over the next two years.
Speaker Change: So U K is a great great I know, sometimes we see in the trade journals that the beverage season didn't show up last year that was news to us because we had pretty normal beverage system season last year and this one is off to a decent start to one of the can suppliers has gone earlier, they talked about expecting to have a decent.
Speaker Change: Summer beverage.
Speaker Change: Beverage season, the area, we see the biggest uneven behavior right now or volume is really our food business and it's one of our biggest businesses and it's just been that way now for the better part of a year and a half and.
Speaker Change: Like I said, our customers are working on this they're busy.
Speaker Change: Got a lot of different things, we're trying to do but ultimately you know it has to start to show up on the bottom line in the form of orders at this point it hasn't so we can earn on what we don't have but if you look at the SBS side of it and you answered the question.
Speaker Change: We're doing well there because our Texarkana mill is essentially 100% integrated as you know a combination of our cough paperboard as well as our coated.
Speaker Change: Solid bleach sulfate paperboard that we use internally within our own operations. There is additional capacity coming online on the SBS side of the business our producers, bringing on a new machine here in the second quarter I get asked a lot you know what does that all mean that Oh as I kind of told you guys the analysts that.
Speaker Change: Youre going to have to ask someone that's really much more in the open market sales than I am because we just start in that market, but clearly there needs to be capacity that comes out but graphic packaging along with you will be watching on the sidelines there because we're essentially 100% integrated so as we kind of look at the grades and what we're making we feel like we're really set up well.
Speaker Change: As we wind our yield through here twenty-five ramp Waco in the fall and head into 2026 focused on delivering our $80 million of EBITDA improvement. So hopefully that helps answer your question.
Speaker Change: Great. Thanks, and I, just said just to clarify so the one four to $1 6 billion of EBITDA guidance for this year would you consider that you know kind of a 1.4 level are you know worst case scenario, you know and I guess are you now.
Speaker Change: If volumes do say go to is the midpoint kind of assume kind of flattish volumes and 1.4 as down to or how should we think about that thanks.
Speaker Change: Yes, Reuben Steve specifically the 1.4.
Speaker Change: Low end of the case would be an extremely unusual case, we bracketed it because we didn't want to take off the table, but maybe it would actually be a 4% volume decline and upwards of $150 million of inflation. So that would be a truly unique environment not seen before where we have both a combination of inflation ads.
Speaker Change: Yeah for Cat volume erosion Gotta make deep recessionary stagflation type scenario, the midpoint assumes the minus 2% volume.
And then roughly $80 million or so of inflation, which we will recover it just won't get recovered in 2026 and beyond a 1.6 assumes roughly flat volume and a more modest level of inflation, it's something in the $50 million range. So everything is bracketed.
Speaker Change: Around volume and inflation assumptions with inflation planning to be recovered. It will occur late this year and into next year, but desktop bracket, it's basically flat to minus 4% volume and a bracket around inflation and 50 to 150 billion with kind of the midpoint being more into that.
Speaker Change: $8 million range slightly below the average and two.
Speaker Change: Got it thanks a lot.
Speaker Change: Thank you. Your next question is coming from Matt Roberts from Raymond James Your line is live.
Speaker Change: Hey, Mark.
Speaker Change: Sorry, Mike.
Speaker Change: Mike Steve Mark Guy Good morning, all.
Speaker Change: Steve you gave some color on inflation, but I was wondering if you could dig into those buckets a little bit further I mean, if I think about it seems like OCC is flat.
Speaker Change: Fuel is down natural gas has certainly been volatile, but there's a portion of that hedged to protect their or any cost benefit pull forward, you're expecting from either Middletown or net performance offsets, but just trying to think about the bucket contribution and any offsets you may have exclusive at price impact that benefits 2026.
Speaker Change: More so.
Speaker Change: Yeah, Mark it's Steve. Thank you as we mentioned on our prepared remarks.
Speaker Change: The inflation was a little bit across the board for us. So the $20 million was it really four or five categories energy was up chemicals were up modestly the external paper that we acquire was up logistics was up modestly and then some of our other inputs that you kind of had five categories all up.
Speaker Change: Modestly for a $5 million and then as you mentioned wood OCC.
Speaker Change: It was modestly favorable so it wasn't fiber and that's important so it wasn't what caused it wasn't OCC, but it was across the rest of the other major categories. We've assumed that that will continue on the midpoint of our guide 20 million roughly becomes 80 to Europe.
Speaker Change: There will be variability there we do have some hedges in place as well for things like Nat gas, but we have assumed that the 20 that we saw in the quarter would continue on for the year across a basket of commodities really not focused around wood or OCC.
Speaker Change: That's helpful. Thank you Steve.
Speaker Change: Steve if I may stick with you, but switch gears a little bit.
Speaker Change: In the remarks, you also know that there is on the repurchase program. You know there is optionality in how you approach that I believe you said even in the coming months. So as you look at the Capex timing.
Speaker Change: Net leverage of three <unk> by year end and weigh that versus where the stock sits currently.
Speaker Change: Are there any leverage limits or spend buckets that you need to get through before you really start executing on that shareholder return agenda. Thanks for taking the questions.
Speaker Change: Yeah, Mark I'll start and Mike can add some commentary here I think with everything that we've provided you with a bit intentional what we we've taken our leverage.
Speaker Change: Acceptable year end.
Speaker Change: Target from three prior to kind of just sub three five times that gives us some opportunity.
Speaker Change: For share repurchase Optionality as we roll through the rest of this year given that we have no debt due coming due we're in a good spot on our borrowing we don't necessarily see the need for that to be taken down in the short to medium term and so it does open up the window for opportunistic share repurchases, particularly.
Speaker Change: Given our confidence in the future cash flows and given what we see is we were just talking about our vision 2030.
Speaker Change: Waco come into life with the significant cash flow generation. So we are providing ourselves with the optionality around share repurchases here in the short term and then obviously, what we've just really committed to as a multi year vast majority of our cash flow is being applied to.
Speaker Change: To share repurchases modest growing dividend for the next several years. So optionality in the short term real strong commitment very strong commitment with our board providing us with the confidence in the one eight cumulative billions of dollars of share repurchase authorization over the next couple of years maybe.
Speaker Change: The only thing I'd add to that.
Speaker Change: Is that every Investor conference I've gone to in the last two years I have been asked okay. What's the next Waco.
Speaker Change: And my answer has been there is the one we have everything we need to do to run the company that we want to deliver on our vision 2030, it's about execution and innovation, obviously, we need our customers volumes to cooperate and get back to at least.
Speaker Change: Our flat level here and I believe they will even though we are dealing with the dislocation right now, but if there was ever any question around what our intention is it should be clear, we're focused on delivering and returning that cash flow back to our investors and debtholders archstone.
Speaker Change: Okay.
Speaker Change: Thank you both again.
Speaker Change: Thank you. Your next question is coming from Mark Weintraub from Seaport Research. Your line is live.
Mark Weintraub: Hey, Thanks, very much so just wanted to follow up on the the change in the guidance at the midpoint, it's about $210 million.
Mark Weintraub: You mentioned like 80 million from inflation and I think that's going from zero to 80, So I'd say I think that $80 million of change just wanted to confirm that and then that would leave a $130 million and you've talked about 2% volume declines.
Mark Weintraub: I recognize there's presumably mill downtime as well related to that but is that what's driving the rest of that that 130. It seems like a pretty big number or are there other variables that we should be thinking about at the midpoint for your change of guidance.
Mark Weintraub: Yes, Mark its Steve you're fundamentally right as Mike mentioned, we are going to run to demand. This year will be matching supply and demand we will be.
Mark Weintraub: Be taking inventory out of the business. So the inflation assumption from zero to 80 is correct, that's $80 million of the roughly $200 million.
Mark Weintraub: Down at the midpoint.
Mark Weintraub: There was a 400 basis point call down at the mid point on volume plus two going to minus two that's a solid $350 million topline call down 30% margins. We've talked historically at just kind of a simple math get you above $100 million and then the aggressively imagine.
Mark Weintraub: Supply and demand.
Mark Weintraub: For the remainder of the year as Mike mentioned kind of picks up the rest. So it's all about volume and inflation. The inflation, we will recover the volume aggressively matching supply and demand for the year, It's really all about volume Mark.
Mark Weintraub: Gotcha, I apologize I that four 4% makes perfect sense, then to that to the 130.
Mark Weintraub: Okay, that's it I'll stop there.
Mark: Thanks, Mark. Thank you thanks for clarifying that Mark.
Speaker Change: Thank you. Your next question is coming from Louis <unk> from BNP Paribas. Your line is live.
Louis: Good morning, Mike morning, Steve. Thank you for taking my questions just on the revised guidance the upper and the lower end of the range now implies an EBITDA margin of 17% to 19% down from your prior to 19% to 21% TV. How should we think about this mid term sustainable margin and more.
Speaker Change: Longer times.
Speaker Change: Based on your comments I think there's no structural change anneal tools, but maybe you could perhaps elaborate or lay out what the building blocks to get back to that 19% to 21% range. Thank.
Speaker Change: Thank you.
Speaker Change: Yes, Louis it's Steve I'll start again, and Mike can add on but you touched on it actually extremely well if you look at the midpoint of our guided to 18%.
Speaker Change: About 100 basis points of that is the temporary are realities of inflation coming into the business that we would plan to recover which would return margins.
Speaker Change: Back towards that 19% range and then as we've articulated our confidence in the value.
Speaker Change: Waco coming to life at $160 million of EBITDA over a couple of years is really the path back towards those 19%, 20% margins that we have experienced over the last couple of years. So it's really why our commitment to vision 2030, our commitment to the cash flows remains intact, we've got to get.
Speaker Change: Through this inflation environment and recover that with price.
Speaker Change: But waco very derisked as Mike talked about a couple of moments ago, given the supply demand dynamic.
Speaker Change: So that combination of price realization and then of course, our returns on ongoing investments and Waco is really the path back towards the kind of margins that you just articulated.
Speaker Change: So I've just got one more.
Speaker Change: And just on pricing I believe last quarter, you spoke about stable on neutral pricing environment with today's announcement, saying now guiding to a net positive contribution in 2025.
Speaker Change: No no we didn't.
Speaker Change: What's inherent in.
Speaker Change: In the guidance. Louis we knew we would be modestly negative on pricing here. This year. When we provided our original guide that really hasn't changed I think what Ghansham was asking earlier is when you start to see some inflection we would expect to see some inflection in late this year and then recovery as we roll into 26. So we will have some modest net.
Speaker Change: <unk> pricing here in 2025, and we had expected that there has been no real change in that expectation.
Speaker Change: Who is the combination of all those pricing mechanisms as Steve outlined here as Youre aware have about a six month offset between when we actually get the inflation, we ultimately gold recovery.
Speaker Change: So.
Speaker Change: It will have a de minimis impact on 25, but the setup for 26 that we're focused on.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you. Your next question is coming from Mike <unk> from true Securities. Your line is live.
Thank you, Mike Steve market, taking my questions.
Speaker Change: Just one from me just looking at it.
Slide 14.
Speaker Change: The cash flow trajectory.
Speaker Change: Wondering if there's any change in their trajectory given that you're starting from a lower base now. So in terms of 2024 I believe it was negative cash flow Gibbons on Capex here.
Speaker Change: 2025 EBITDA.
Speaker Change: As pointed out earlier is $200 million lower at the midpoint. So in terms of trying to hit that $2 $5 billion of free cash flow from 2024 and 2027.
Speaker Change: Can you help us understand how do you get there given the last few years have been a little more challenging than expected.
Speaker Change: Yes, Thanks, Mike It's Steve you are correct in terms of that trajectory for us. If we can do we haven't moved off of that trajectory of the business being capable of inflicting into that $800 million to $1 billion. You are correct. The leap off point right here in 2025 would be at the lower end.
Speaker Change: That range, but the positive cash flow inflection for us is a bit undeniable given that capex will come down materially next year. The rest of the cash required to run the business interest taxes et cetera does pretty well bracketed in so our long term confidence in those cash flows remains very high believe ballpoint coming out of 25.
Speaker Change: <unk> and into 'twenty, six modestly below that but as Mike was mentioning earlier, we've been very aggressive about cash flow generation. This year inventory will be going down as the year plays itself out so actual cash flow generation. This year is going to be really at or above where we originally had expected.
Speaker Change: We're getting there with little different EBITDA outcome, given the challenges our customers are facing volumetric like Mike.
Speaker Change: Thank you summarized it well, Steve I mean, Michael you know last year, we did $1 2 billion of Capex. This year 700 million and next year, we'll ramp to 5% or below. So that's those are hard numbers I mentioned, the Waco startup being derisked and I saw your note.
Speaker Change: About the the capacity that's been removed.
Speaker Change: Absolutely right from a from a net standpoint, when you look at the Waco ramp.
Speaker Change: These coated recycled paperboard market is in balance and so our confidence that will deliver that $160 million.
Speaker Change: That project is incredibly high and so you put the combination of those things together focused on running to demand.
Speaker Change: We are expecting that our customers will do better in 2026, we need them to get back to at least.
Speaker Change: That volumetric balance there or better look they've been doing this for decades and they have been through tough times before.
And while this is a challenge for them for the reasons I've articulated earlier in the call my confidence level that they will figure it out is high and so you put that all together our confidence in our vision 2030, and the cash flows that are going to be generated.
Speaker Change: <unk> is extremely high and that's really why the board of directors along with management made the decision to announce today the share buyback that we're putting in place. So hopefully that gives you a little bit more context.
Assumptions underlying that he'd begun.
Speaker Change: Well, it's a couple of things as we've talked about I think in the past close to a $100 million of it is just fixed cost removal again.
Speaker Change: Smaller older facilities set of our own that will be closed down and then the balance of it was incremental tons that would flow through it and again I think today's announcement by several of our competitors both in removing capacity from the marketplace should again give a lot of confidence that that remaining $60 million is solid. So that's that's how it works and it's over.
Speaker Change: Two year period of time, we've already announced.
Speaker Change: The Middletown closure it will be down by the end of May June 1st and then.
Speaker Change: Are you, saying just facility in Quebec will also be closed we're taking a look at the timing just slightly might just change modestly depending on trade and tariffs here, we need to make sure that we take care of our our customers our Canadian customers, but ultimately it will also go down and that's a key part of.
Speaker Change: The ramp of the EBITDA.
Speaker Change: Got it thank you very much.
Speaker Change: Thank you. Your next question is coming from Gabe <unk> from Wells Fargo Securities. Your line is live.
Speaker Change: Mike theme Mark good morning.
Speaker Change: I gave there with any first.
Speaker Change: Thanks for taking the question bear with me for a second if I were putting together a case study and thinking about the North American consumer board market.
Speaker Change: One could argue you had a competitor that maybe your largest that was undergoing a pretty big transition change of ownership et cetera.
Speaker Change: Meanwhile, you guys were really kind of had offense on the field and low cost assets.
Speaker Change: Incumbent supplier position et cetera, I'm curious, Mike if we play that forward for the next couple of years now these folks they've got their feet under them.
Speaker Change: Are you seeing more rfps come into the business.
Speaker Change: Your customers, maybe coming back to you and asking for better terms as they are facing their own inflationary headwinds.
Speaker Change: And somewhat related.
Speaker Change: You mentioned snap and Maha I don't think we've yet seen any impacts of that correctly.
Speaker Change: Just curious if that's in your forward guide.
Speaker Change: Of course, if you've seen anything and we're just not aware of it.
Speaker Change: Well I'll take that one first the answer that's all relatively new stuff. So the answer is thats considered in the guide, but it isn't something we've seen yet which is part of why you see our moved minus two for the full year.
Speaker Change: Because theres a lot of headwinds out there in the near term Gabe So I'll start with that in terms of the competitive landscape look I think in the last 24 hours you see that the move that we're making in Waco, which not just cost structure, we've got the quality and the capability that we have on that.
Speaker Change: We're manufacturing facility that we havent wait on that one we haven't Kalamazoo, they're tough to compete with and people are deciding where they want to put their capex and how they want to spend their money.
Speaker Change: The new entrant you are talking about to be fair. They just bought somebody else's.
Speaker Change: <unk> mill that was already there so it's not like they may be new to this market, but it's not new capacity.
Speaker Change: Capacity in here, we've been competing against that already the one that is due is.
Speaker Change: The Sps piece that I referenced earlier in my comments and that will come online in the second quarter of this year that helps to add 450000 tons and so they'll have to be dealt with and I already kind of gave the answer there so I won't repeat myself, but.
Speaker Change: Look our customers, they're always trying to find value. They have two these are these are very sophisticated global consumer goods companies and beverage companies. This is not new we've dealt with that kind of competitive pressure for a long time, we do well in that environment, We've got a well invested low cost.
Speaker Change: Well geographically covered footprint in North America, and Europe that really help us take care of those customers and again now more than ever they need to make sure that they've got regional supply change that actually take care of them, particularly on this this tariff and trade.
Speaker Change: <unk> imbalances that are kind of going on right now and well well documented and discussed so I like how we're.
Speaker Change: <unk> and I would actually argue were still on offense.
Speaker Change: And focused on taking care of our customers each and every day. So we don't mind that kind of competition as a matter of fact, we embraced it.
Speaker Change: Thank you for that Mike one last one we talked about bridges for this year's.
Speaker Change: EBITDA.
Speaker Change: Hi, I didn't hear much in the way of startup costs associated with Waco is there a number associated with that is it in the one five.
Speaker Change: Thank you.
Gabe: Yeah Gabe Steve.
Gabe: In the appendix of our materials, we've provided their.
Gabe: Sort of ash costs.
Gabe: Provided the range in the appendix 65 to 75 million most of that will be below the line just got startup related associated with that it's also embedded obviously in our cash flow expectations for the year. So that's coming in about where we expected it to be as it gets moved around a few million dollars, but just wanted to provide.
Gabe: The clarity.
Gabe: The 1.5 is has within it our expected adjusted EBITDA midpoint for the year. So we have some cash startup costs modestly.
Gabe: So the line and a $1 five as the operating and go forward expectations for this year.
Gabe: Thank you.
Speaker Change: Thank you. Your next question is coming from George Staphos from Bank of America. Your line is live.
George Staphos: Thanks, very much everyone. Good morning, thanks for the details.
Speaker Change: Steve first question, just a point of clarification.
George Staphos: So.
George Staphos: You talked about the Optionality on cash flow and the fact that you like your balance sheet position, you're giving yourself a little bit of additional headroom. That's my phrasing that yours for the end of the year in terms of where leverage should be.
George Staphos: And the fact that you have optionality now, but then ongoing repurchases.
George Staphos: But I also thought I heard you say at one point that you want to see the volume picture improve for your customers. So just wanted to make sure.
George Staphos: Whatever options you have right now.
George Staphos: You have them.
If you'd like to buy stock back you can do right. Now you are not waiting on your customers' volumes to improve or are you. How should I think about that and then I had a question on sort of volume and the rest of the year.
George Staphos: Yeah, George Thank you for that clarification, no we don't need to wait for customers to have volume inflection for us to be opportunistic in buying back share. So that if there was a correlation there unintended. We obviously believe over time that our customers will address.
George Staphos: The issues around them and a return to more normalized Oems, but no we don't need to wait for that our cash flow generation capabilities. This year very good balance sheets in a good place.
George Staphos: And obviously, we have the optionality to do so.
George Staphos: Now.
Speaker Change: Okay. Thanks for that Steve. This is the second question I had as we look out to the rest of the year.
Speaker Change: Did the math right I think youre looking at roughly about an 8% drop year on year in EBITDA over the remaining nine months.
Speaker Change: And I think the first quarter. When we just regards to was down over double digits like 12%, 13% somewhere in that range.
Speaker Change: Yet, even though the EBITDA year on year comparisons getting better.
Speaker Change: The worst thing you would have liked but it is getting better the volume picture has seemingly gotten a bit worse in terms of your guidance change.
Speaker Change: The pricing effect that you talk that doesn't really happen till later in the year, it's really more of a 'twenty six phenomenon. So what else might help you close the gap.
Speaker Change: <unk> performance over the rest of the nine months that's embedded in your guidance.
Speaker Change: Even as volume has gotten a little bit worse, how how would you have us think about that thanks and good luck in the quarter.
Speaker Change: Yeah, Thanks, George the first half for us.
Speaker Change: Is more assertive relative to planned maintenance downtime, we have a very large normal maintenance downtime at Texarkana in Q2.
Speaker Change: And obviously, we were matching supply and demand pretty aggressively here in Q1 and that will continue into Q2. The second half of the year does allow us to run a little more efficiently at them at a little higher rate, even with the volume assumptions that are here. So it's more of a maintenance cost issue first.
Speaker Change: Half second half such that margins in the first half will be modestly below kind of in that 17% range and then we expect to inflect back into the 19% range in the second half of the year and the midpoint of our guidance. So it's a little more maintenance oriented as opposed to a different stance.
Speaker Change: Volume assumptions.
George Staphos: The only thing I would add to that George is that.
Speaker Change: Usually what we see when we see a volumetric slowdown we see our input costs go down in this case, we actually saw that go up.
Speaker Change: And if you look back to 2008 your inflation went from 3% down to like 5% by 2010. So if we do in the back half of this year see less inflation.
Speaker Change: Then the $80 million at the midpoint that we've targeted that could be a positive too, but it's just this.
Speaker Change: This one's a little different because just the dislocation of some of the trade flows is causing some distortion of some of the things that we buy.
Speaker Change: But maybe that settles down it gets a little bit more normalized year, the months to come and that could be a tailwind.
Speaker Change: The thoughts guys. Good luck in the quarter. Thank you.
Speaker Change: Thank you Jordan.
Speaker Change: Thank you we have reached the allotted time for Q&A I'll now hand, the conference back to Mr. Doss for closing remarks. Please go ahead.
Speaker Change: Thank you operator, and thank you everyone for joining us on the call today 2025 would be a challenging year for our CPG and <unk> customers.
Speaker Change: Food prices and an uncertain economic environment caused consumers to pullback embrace private label alternatives.
Speaker Change: New medical developments like <unk>, and the new MA policy initiatives are both risks and opportunities.
Yes, if we stand back.
Speaker Change: We can put these near term pressures into better inspect product re formulation is nothing new or customers are experts at that aligning and realigning products to deliver what consumers want and need and at a reasonable price point.
Speaker Change: The skill sets that help make our customers' global leaders they are.
Speaker Change: Finding the right formula for success doesn't happen overnight. It at graphic packaging. We spent the last eight years building and expanding our innovation and execution capabilities and we are exceptionally well positioned to meet our customers' changing needs.
Speaker Change: To support their growth strategies.
Speaker Change: We are positioned to generate cash well in excess of our needs and to use that cash spreads substantial value for our stockholders for years to come.
Speaker Change: I want to thank our 23000 employees for their dedication and our and our stockholders for their confidence in graphic packaging. Thank you and have a good day.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.