Everybody, thanks for joining us. My name is Ghansham Panjabi. I'm the Packaging and Coatings Equity Research Analyst at Baird. This is our 55th Industrials Conference here in Chicago. This is my 16th, and each year it gets better thanks to folks like Mike Doss at Graphic Packaging and you all in the audience. So we're going to kick things off with the packaging track with Graphic Packaging. Mike Doss has been CEO since 2016, Chief Operating Officer prior to that, joined in 1990. We also have Mark Connelly from Investor Relations and Melanie Skijus as well. I'm sure listening in somewhere. So with that, let me introduce you. Thanks again for joining us, Mike. And Mike's got a few slides that he's going to go through, and then we'll start with the fireside. So thank you.
First off, thanks for having us here.
Absolutely.
Really excited to be at the Baird Conference today. As always, a really nice dance card. So I appreciate the opportunity to do that. Thanks for your interest in Graphic Packaging. I do have a few slides to kick off, just to talk a little bit about the company. Maybe some of you aren't as familiar as others. Take a look here. So we've got an at-a-glance there. You can kind of see who we are. A little over $9 billion in revenues, got 23,500 employees. We operate principally in the North American and European market, although we do have operations in some other countries as well, primarily focused on our core beverage business, which we'll probably talk a little bit about. Look, and you know this, Ghansham, the company's changed a lot since I've become CEO.
In February of this year, we rolled out a new Vision 2030, which replaced our Vision 2025. The reason for that is the company just was very different. What we needed to do to drive overall results and really take care of our customers had changed. You see the pillars that we've got listed there. I'm not going to drain this slide. It's in the investor deck, which we've got plenty of those here to cover today. The good news is we have everything we need to be successful to hit our Vision 2030 goals, which I'll show you here in a minute.
If you look at this slide, and what I really like talking about, my little elevator pitch is there isn't a person in this room that in the last 24 or 36 hours you have not touched something that we make or manufacture, whether it's the cup that started your morning off here, like this one that I've got, a snack you had between now and lunch, maybe the frozen entrée you had for lunch, a refreshment in the afternoon, a beer after work. If we didn't get you any of those things, you've got you feeding your pet or brushing your teeth. When you think about the reach of Graphic Packaging, it's pretty far and comprehensive. Here are the markets that we operate. Oh, excuse me. I've got a table in front of me.
Here's where we used to be in terms of the center of the store, markets that we were in. And we were pretty focused on doing these things and doing things well. The problem was when one of those customers got a cold, we got the flu. And so we needed to expand our portfolio so that we could move with the consumer, regardless of whether they were mobile and in the food service space. We didn't even have a food service space when I became CEO. Now we do. You can see that on this slide here and how we built out around the store, the perimeter of the store. We're heavily into club stores as well. And we've got a very large food service business, which you can see. Did we have that slide? I guess we didn't. That's OK.
This slide really shows why we're confident in our ability to grow, low single-digit growth over the next few years. This is our TAM, and when we call our TAM $15 billion worth of opportunity, it's because we either have a product that currently is able to meet one of those needs or something that's in our pipeline and we're really, really close, so our confidence level is high that we can continue to do that over time. Last slide I'll show you here this morning is really one that kind of shows where PCAP acts in 2024. We've invested heavily in our business, specifically recycling. If you think about the investment we made in Michigan here in Kalamazoo, we announced it in 2019, brought it to life in 2022. The highest quality, lowest cost, coated recycled paperboard manufacturing facility in North America, if not the world.
And we're duplicating that capability in Texas here. And that machine will come to life sometime in the fourth quarter of next year. So we will then shut down our remaining smaller, higher cost facilities. And as you can kind of see from that chart, you see the value creation that starts to really occur as CapEx normalizes. And we wind up at about a 5% CapEx level as a percentage of sales and throw off a lot of cash flow over the next seven years. So that's kind of who we are in a nutshell.
OK. Session 5 at rwbaird.com. There's a little bit of confusion, but please send me your questions. I'll also prompt the audience at some point. So maybe, Mike, maybe we can kind of step back because there's been a lot of volatility in the consumer packaging supply chain over the last five years, pre-COVID all the way through. Oscillations in terms of demand. You had the inventory destock that a lot of companies started to see in the fourth quarter of 2022 that accelerated in 2023, and then that morphed into consumer affordability this year. So how have those dynamics impacted Graphic Packaging?
I think you've seen it in our overall results. We've actually outperformed our customers, which really says that our new product development and innovation pipeline is working. We're certainly not immune to some of those headwinds given the high percentage of sales that we have with those customers in specifics. But what we have to do is continue to find ways to help them win in the marketplace. And when you think about our innovation platforms and I showed you the TAM and the different areas where we're focusing our efforts, we're replacing a lot of single-use plastics. And these things add up over time. There are singles and doubles, but you put them all together, they end up with meaningful volume. And that's really how we're thinking about it. You saw it in our third quarter. We actually pivoted back to growth.
It wasn't as strong as what we had hoped for. We are at 1% volumetrically year on year. And that's what we kind of see as we're in the fourth quarter as we head into 2025.
OK. In terms of the affordability dynamic that your customers are dealing with, with the consumer, have you seen any shift in terms of their strategy, promos, innovation, affordability stressing, and so on?
I think they're talking about it a lot. I think they're all trying to find their way. I mean, there's still inflation they're dealing with, whether it's labor inflation or input cost inflation. Some of those things seem to be moderating a little bit. But like anything else, they're hesitant to do too much promotion because, as we see, even within a category, one of our customers may promote and another one doesn't. And that drives the volumetric gain for the one that does promote but doesn't really increase the overall category. And that's really what they've seen so far. You see it on the $5 value meal that's been out there. Those who are doing that are winning, and it's coming at the expense of others. It's really not building the pie bigger, at least not yet.
Any trends you can sort of highlight between Europe, which has led the industry, if you will, in terms of sustainability and new products and so on and so forth, that sort of aligns with your sweet spot of your portfolio that you built over time and your capability? So what's been going on in Europe in context of economic challenges for the consumer there?
We've got a slide in our investor deck that really kind of shows where we were and then with the acquisition of AR Packaging and how valuable that was to us. One of our big hypotheses was that we were going to learn a lot because they had intellectual human capital that was very, very knowledgeable. AR Packaging did around how to grow in those markets, and without question, the European consumer is the most environmentally sustainably conscious consumer in the world. So we got the benefit of getting all those trends, and we have outperformed the European market pretty handily, and it's worked just like we thought it would, that we're able to take some of those trends back here to North America and take advantage of them faster, so we like that.
Europe is more driven by the E.U. doing statutory type rulings that the entire E.U. has to follow. In the U.S., it's a little different. The states drive a lot of that. There isn't a lot of federal regulation. For example, there's polystyrene bans in 17 states, and we make paper cups, and so we benefit from that. We're really not looking to win on regulation. We want to earn it in the marketplace, and I think the one thing that I will say, Ghansham, without question, is the end-use consumers have really decided they want to support those brands that are doing the right things over time. That doesn't mean that we can't. We have to not be competitive. We have to find ways to shrink that gap between the product they're in and the one that we're able to supply.
And in many cases, we've been able to do just that. And that allows us to kind of drive and win in those applications. And so when you look at all of that together and our ability to drive new product development, and I showed you our TAM, it gives us a lot of confidence in our ability to grow.
OK. As it relates to the various substrates you're exposed to and pricing and so on and so forth, obviously during COVID, there's big impacts in terms of disruptions. Commodity prices went up significantly. You were a little bit behind at the beginning, as were most companies. You caught up pretty quickly. Margins are at a new high watermark, if you will, at least looking at the history. But there has been some oscillations in terms of pricing between the various grades. So maybe just give us a sense as to how those different grades are performing for you.
The first thing I'd say is they performed exceptionally well. When you look at the price increases that did get passed through, and this is a multi-year phenomenon now that we've been able to not only keep that, but really kind of control that pretty steadily in terms of how we are pricing our products to our customers, which are really value-based. And so we really don't think about it in terms of the individual bespoke SBS or we don't even call it that anymore. We're thinking more around selling packages and cups to end-use consumers and really bringing that value forward. And I think when you look at the pricing and how we've done that, it's been remarkably steady over a multi-year period of time now.
There has been some modest leakage around the edges on a few of those grades, as you've mentioned, but it's really de minimis in terms of the overall impact, and if you look at a slide we've got in there, we show the volumes and how they've oscillated and what our pricing and margins have done during that period of time, and it's held up incredibly well, and I expect that to continue.
Your favorite topic about supply demand in the industry across paperboard and imports and movements from Europe to here, Brazil to here, so on and so forth.
I feel like it's training day. It's 9:00 A.M., and I've got because that always comes up. I think, look, from our standpoint, imports are not something that's real high up our list because, first off, they're going down year on year. They get a lot of headlines from one of the trade journals. They like to talk about that a lot. I think it makes for good news. But when you really look at the data, it doesn't support many of the things that they're saying. We certainly don't see that in the marketplace as the largest producer of that. It's true there is more capacity coming online. It's also true that the U.S. is a really big island when you think about Graphic. And we're not a high-cost producer. We're the low-cost producer of all the grades that we make.
So we're well entrenched in position to be able to take full advantage of that. And then if you want to service some of our big CPG customers, you've got to have a packaging network like we do. And we have 65 facilities geographically located to take advantage of where our customers are to really supply what they need in the way they need it. And it's really true. And you've wrote about this before. I mean, all packaging tends to be local. So it's one thing, look, if you've got a paperboard mill in the Nordic countries, that doesn't really put you in great stead to be a great supplier when they're making pizzas in Omaha.
Something that's more topical that we're asking all our companies, all the Baird analysts are asking about, but the election impact. There's been theorization about not theorization, sort of narrative about tariffs and so on and so forth. How would that impact your business if they were instituted, if at all?
Maybe if we take a step back, I think one of the things I'm most excited about being a North American and U.S.-based manufacturer is the Trump tax laws being extended. When you think about full expensing for CapEx and investment that you make in the business, that's a real positive for manufacturers. And we see that as a good thing for us, for sure. And we're very supportive of that type of tax code. In terms of tariffs, I think it's too early to really talk about it. Without question, that's something that is going to be considered by this new administration. And it's hard to know exactly whether it all will or next quarter too. But on a net-net basis, I certainly don't see it as a negative for us. I see it probably more as a tailwind.
Sure. Before we go to your long-duration targets, Vision 2030, anything you want to update in terms of how the quarter is unfolding since it is being webcast, et cetera?
No, I don't think we have any new news to share today. I mean, it's really consistent with what we rolled out there with our guide in the fourth quarter.
Gotcha. Perfect. 2030, can you just sort of give us some highlights in terms of the business model and the shift towards what seems to be a defined algorithm at Graphic Packaging, and something that really hasn't been as explicit from the company in the past?
Yeah. Look, our operational leverage is very high with the model that we've built together. And that algorithm is tried and true for us. If we can drive low single-digit volumetric growth, we'll drive mid-single-digit EBITDA growth and high single-digit, if not low double-digit EPS growth. And so that's really how we want to position the company. We truly are a consumer packaging company. We get lumped in a lot with the container board group just simply because there isn't a great comp for us. But that is not us. It's not how our business runs. We're really a packaging company. And that's why we've changed the narrative in how we talk about our business. We talk more about end-use markets and how those customers are performing. And we expect to perform similar to them, if not slightly better, given we've got more growth opportunities.
OK. The $15 billion addressable market that you cited, I think you had a slide in here as well. There's a bunch of different end markets, product categories, trays, cups, paperboard canisters, et cetera. Where are the near-term opportunities? Where are the medium-term opportunities as you think about those?
I think cups and containers are a big one for us, as you saw on that. Maybe I'll pull that slide back up. Just talk about it right there. You can see it as you kind of go across. That's probably the biggest market, and then you've got some of the trays and bowls are also, you've seen us do that with our types of products we've introduced in Europe and the US, where there's a thin layer of polyethylene on the inside, but it's easily removed, and then you can recycle the tray itself as opposed to a C-PET tray, which really doesn't get recycled, and I think these recovery rates are something that the end-use consumers really understand.
In the U.S. and in Europe, PAPETUS, the Waco mill that we're building there, we're going to have the ability to actually take up to 15 million of these paper cups a day, clean that fiber up, take the polyethylene off the cup, and really take advantage of the fiber that ultimately is going to be on the top wire of that paperboard machine, and that'll make us unique and have our fiber stream be much more cost-effective going forward. As a matter of fact, there's a couple hundred thousand tons of material that we cut up at Graphic that right now goes offshore. All that stuff will wind up in Waco as we'll have the cleaning capabilities to clean it all up, so we're not only talking about it, we're actually investing heavy behind it to take advantage of that, so we really believe it.
Waco in terms of.
And by the way, consumers really believe it. I mean, if they have the opportunity to take something that's recycled, every time they'll pick that.
In terms of Waco, in terms of timeline of the build-out, it's obviously a very complicated facility. You have a lot going on with labor and training and so on and so forth. Could you just update us on the timing of that?
Yeah. We're feeling really good about the commitment we made. Fourth quarter of next year, we'll be bringing that paperboard machine to life.
In terms of the incremental EBITDA contributions, just so people can frame the return.
Yeah. So we upped our CapEx to about $1.01 billion. Was it $1 billion? And the original commitment was $160 million of EBITDA, split $80 million in 2026 and $80 million in 2027. And we said there's upside to that now with the additional money we spent, which really creates this whole fiber line. We found some opportunities to harvest some additional EBITDA and take some more cost out. So you can see us probably increase that number a little bit as we get into it here.
Sure. Before we head to some things that are more company-specific, any questions from the audience? Again, it's session5@rwbaird.com. If you want to raise your hand, please feel free to do so. But in terms of what you outlined on the last call in terms of the pricing model, can you just give us more color on that?
Yeah. Look, I think what we want to do, first off, in our industry, we always compete on the actual bid or the RFP. And so prices are always set at market through that process. They have been forever, and they will continue to be done that way. All we're talking about is the mechanism that changes prices through the length of that agreement. Our agreements tend to be anywhere in North America from two to five years. In Europe, they're a little shorter, maybe one to three years. And so we spend a whole lot of time talking about price change mechanisms. And really, all our customers want is to be treated fairly during that process. And of course, we need to be able to recover true input cost increases that move in a timely fashion that we can't offset.
Our labor and benefits costs, we've got to offset ourselves. Our customers aren't going to pay for that. Our track record's long and distinguished in being able to do that. And so when we looked at kind of the historical model, and this has been a multi-year journey for us. We just didn't start in Q3, as you know. It's probably been almost four years now that I've been talking about moving away from a third-party index, which is an index that isn't that relevant for us anymore, given we're not in the open market as a seller of paperboard. We're selling packaging. Paperboard is a big part of that overall COGS. And so we need to have something that works fairly. We've got some proprietary solutions that our customers are embracing. And you'll see us continue to make a journey away from third-party indexes.
And on the third quarter call, we said that the amount of paperboard we do sell to the open market, which is about 5% of our overall company, we will no longer peg that to a third-party index either. We'll probably end up with shorter contractual commitments on that. And that's just fine with us, given the overall strategy we have. We have some customers that are very valuable to us. They are in markets where we are not. And so we want to retain those customers, but we'll just have different ways of doing that with them. So we're pretty excited about that.
What is the goal of this?
To basically smooth out the volatility of our earnings stream.
What would that do relative to the historical context?
Allow us to really operate around that 20% EBITDA goal and take some of that volatility out that historically investors have not liked. They don't want to wake up every fourth Friday and find out they got surprised by something, nor do we, because that's not how it works.
Nor do we, by the way.
Right. It's really a flawed process and one that we've been very vocal on, probably more vocal than anybody else, and you can expect us to continue to do that because we don't think it's right for our customers, our shareholders, or our company.
In a lower-for-longer volume dynamic, just we started asking about these companies maybe a year ago, and your customers are under enormous pressure with all the various challenges from the retailers pushing upstream and so on and so forth to boost volume velocity, so they start to promote directionally a little bit more than they used to. Have you seen the pushback other than sort of what you would normally see as it relates to your operating at all-time highs in terms of margins?
You're just trying to adjust the pricing model at a time when volumes aren't great at the consumer level?
I expect our customers are always going to try to do a really good job. And these are large global CPGs. And I expect them to be tough negotiators along those lines. But yes, our margins are at high levels, but we've also invested heavily back in the business to take out a huge amount of cost and supply chain cost for them too. And so ultimately, we're benefiting from that. And I think the other part of it that they see is the quality that we're able to provide. And this isn't just me saying it. Our largest competitor got on a call and talked about their challenges they have with matching their other competitor, who is us, quality in terms of coated recycled paperboard. And you look at it on the shelf, it's not even close.
I think if you want to get paid, you have to provide exceptional service, exceptional quality, and offset your labor benefit costs. That's exactly what we're doing. We're doing a really good job with it.
And the timeline for us.
Which gives me confidence we can hold that kind of margin profile. And we spend a lot of time talking about that internally. Is that the right way to think about the business? And we believe it is.
Assuming it's successful, which I'm sure you will try very hard to do that, when should we expect a more stable EBITDA margin profile for Graphic Packaging?
I think you've seen it. I think what you should see is you can expect to continue to see it. We've now been doing it for eight quarters in a row. Sooner or later, that becomes a trend.
Yeah. OK. Perfect. In terms of 2025 and the world as you see it at this point from a volume standpoint, what does it feel like?
You know, I wish I could sit up here and tell you exactly how that's going to play out. But what I like about how we've positioned the company is we're well positioned to be able to respond almost regardless of what the macro ends up doing. I mean, look, would I like a macro that is more constructive? Our customers are able to actually drive the volumes and promotional activity. I just don't know exactly what that all looks like. But what I'll tell you this is with our integration rates now approaching 95%, Waco coming online, that's going to pull some more cost out and improve our overall quality. We've got an excellent TAM with a number of different platforms that you see there with new products that are coming online. I like our odds to be able to deliver our low single-digit growth in 2025.
There's a question from the audience about the collection of cups to recycle in Michigan and Waco. How is it expanding?
Yeah, so we're working with our customers right now because it's important. Thank you for the question. Ultimately, we've got to build that infrastructure within about a 200-mile radius of our paperboard manufacturing facility in Michigan and in Texas, and our customers, as you can appreciate, are quite excited about that because ultimately, we want them to get some revenue for this. Right now, they're getting none. They're paying money to get it landfilled or take it away somewhere else, so to be a similar model to what you see the big box stores where you see the banded or the baled OCC containers out back, we want to do the same thing with cups, and we believe over a multi-year period of time, we'll be able to do just that.
Another question from the audience about the comment about peak CapEx.
And the confidence that investors should have that a substantial amount of free cash will be returned to shareholders versus acquisitions and, I guess, other CapEx projects.
It should be high because ultimately, I'm responsible for that. I'm making that commitment here. And it's been something that, look, I'm really proud of the investments we've made in Michigan and now we're making in Waco. But our investors have been quite patient with us because we've had a lot of capital going out the door. A lot of our cash flow went through for these projects. They've worked. And we've generated an EBITDA profile and grown the company in a way that's created a cash-generating machine. But they need to benefit from that. And we're well aware of that, both at my level and at the board level. So when you see that slide up there that we have, that's something that you should have a high degree of confidence in.
OK. Another question.
And I think the other reason is we've got a very well-invested asset base. We're not like others who don't have what they need to deliver their goals. I'm telling you, we've got everything that we need to deliver Vision 2030. And 5% of CapEx is still quite healthy. Our CapEx, if we had to invest it just for maintenance only, we could do that at 2% a year. So we're improving the company with projects that are going on there. That's the model we have.
Yep. In terms of what's been going on with interest rates and obviously the short end of the curve, the Fed's cutting rates, and then the long end seems to be, at least for now, starting to go back up. How does this dynamic of, let's say, persistence of inflation and interest rates being at a higher level, right?
How does that impact your long-term target for the balance sheet in terms of leverage and so on and so forth?
We've got a very good balance sheet. We'll finish the year under three times levered with Waco largely in our rearview mirror. And so we're going to have good optionality there. Mark and I were talking this morning on this topic that with bonds continuing to be stubbornly high. And I think that'll be something we see going forward. We're well positioned to be able to do that. We don't have any of our debt maturities come due until 2026. And then we'll have options to be able to deal with those things. So I think we're in really good shape there.
Two questions to sort of finish up at the time that we do have, Mike. New products. We had Pack Expo recently. The guys on the team saw some of your new products. Anything you'd want to highlight for us?
I think, look, we continue to find ways with our Boardio solution that actually is replacing rigid plastic-type applications. Of course, a lot of paper going at the expense of polystyrene, which is a resin that, as you know, as a chemical engineer, is an awesome resin in terms of cost and thermal capabilities. It just, once you crack it, it's in the environment for 400 years. And so we're seeing a lot of applications for that too. And these are singles and doubles. It takes time. It's lumpy. Customers tend to, because it is a hit to their COGS, they ultimately kind of go along for as long as they can. And then suddenly, they have to make those conversions. But I'm confident in our ability to deliver that low single-digit growth with these types of products we have.
OK. One more question that I just have to ask, given that it was a theme last year as well. GLP-1 and the impact on your customers. Have you seen them start to pivot towards new dimensions of innovation? Because obviously, there's consumers still left that are on those drugs and so on. Are you seeing anything there?
Yeah. Without question. Our customers are actually seeing it more as an opportunity, I guess, than a threat, I would say, based about how they're talking about it. Smaller portion control is actually good for a packager as opposed to the big bulk stuff that you get. And so I think ultimately, I don't see that as a big threat for our business. If anything, it'd be probably a slight tailwind.
OK. All right. Great. And then just to kind of finish up, yeah, just leave us with your pitch.
I think, look, I gave you a little bit of overview of our overall algorithm. I'm really excited about having the big CapEx cycle for us getting in our rearview mirror. That's hard when you're a public company. Because you announce a big investment like that, you've got cash going out the door for two years. And even if it's a good project and you've got confidence in me, it's like, and we've had investors tell us this. It's like, hey, great project. We'll see you in two years. And I think as you think about Waco coming online next year, and we saw this with Kalamazoo too, then it starts to become a little bit more real. As you bring it in, if you see our volumes continue to grow at single-digit levels like we've talked about here, our algorithm really holds up well.
And we generate an enormous amount of cash. And that's what we're going to do. And we're going to be investor-friendly here, as we've talked about here, and really controlling future things to make sure our investors win.
Right. Right. Well, it's been a fantastic execution story from our perspective.
Thank you.
A lot of shareholder value creation. So we look forward to how things unfold. All right. This does conclude the Graphic Packaging presentation. Thank you for joining us. The next presenter in this room will be Sealed Air.