All right, guys, I'm Phil Ng, Jefferies' Paper and Packaging analyst. We're delighted to have the Graphic Packaging team here, representing the company. We got Mike Doss, CEO of the company, and Melanie, who heads up the IR efforts, I'm sure you've all spoken to. Well, Mike, I guess to kinda kick things off, there's some exciting M&A news potentially in the paper packaging space-
Mm-hmm
... particularly on boxboard with Smurfit coming potentially into the U.S. market. Any thoughts on what that could mean for the broader industry and yourself as well?
Well, you know, when I jumped on the plane this morning, I was a little worried there'd be no one in the room, and I was feeling a little bit like a down-ballot candidate polling at 2%. So I'm thrilled to see everybody out here today, and thank you for your interest in Graphic Packaging. Yeah, we read that yesterday as well when it started to break after hours. I think the Wall Street Journal reported on it first, and there's been a number of cases filed here on that. Look, we don't know any more than you know you know at this time, and so we're gonna have to wait and see if something actually transpires there.
But what about having a new competitor come in? They're not very big in boxboard, right?
No, they don't do much in boxboard in Europe. They've got a little boxboard business in Central America that they operate. So you know, again, I just don't know enough to comment intelligently on it.
Okay. Well, maybe I should not focus on that. Well, let's pivot on to the sustainability growth story that is really exciting about Graphic going forward. I've seen some news that Pepsi is looking to transition away from the plastic ring collars. Is that a win for you? Certainly, that's another example of that sustainability pivot, but help us think through what that opportunity could be for you guys going forward and how-
Yeah
- you position.
Thanks for the question there. I mean, look, this is an ongoing process that, we've been on this journey now for a number of years. A couple of years back, we came out with our KeelClip, and we've placed over 50 machines, you know, in Europe and a couple of them in North America already, you know, with that technology. So I see this as a continuation there, and a validation of, you know, kind of the momentum that we've been talking about with investors, that, this pivot to a more circular economy, more sustainable packaging is real, and that fiber, fiber-based, consumer packaging in particular, which is really all we do, is, you know, gonna win around the margin. And, this is a great example of that.
Our share of beverage globally is over 60% of all the beverage fiber-based packages. And so, as they continue to make that transition, we expect to participate in that process with them in a meaningful way.
Great, um-
I think if I could, it just further validates the confidence that investors should have in this 100-200 basis points that we've been talking about for growth. It's. You know, these are base hits as they continue to come in, but they're measurable, whether it's foam to paper cups, and, you know, we talked about our Chick-fil-A trial that's underway there, too. Now, you know, Pepsi making this broad-based announcement, you know, Pepsi makes that conversion in North America, you know, it's 70,000-80,000 tons of paperboard that are required to do that. So these are important, you know, proof points, I think, for investors that, you know, this particular type of packaging that we make is going to be a winner with the move towards a more sustainable economy.
Great. There's been a little noise on the demand front for you guys-
Yeah
... with consumers and CPG companies going through some destocking. Any update on that front and how your, your demand's trending into your quarter?
Mm-hmm
... orders and whatnot?
Yeah. So, yeah, we talked about that on our second quarter call. You know, we had, you know, a three-year stack of over 10% volumetric gain as we looked at 2020, 2021, 2022. So if you look at that, a little over 3% a year. You know, this year, we grew a little bit in Q1. Second quarter, as you saw, was down around 4%. We said Q3 would be, you know, similar. It's tracking at that kind of level. And it's against a difficult comp. We grew 5% in Q3 of last year. Q4, last year was about 1%. So we still believe, that, we'll be able to grow, grow modestly in our Q4.
Most of the destocking, in our opinion, is behind us, as many of our customers are wrestling with the question around how to deal with the elasticity of their products and the pricing that they talked during, you know, the run-up of inflation and the supply chain disruptions there. But we are seeing green shoots, some green shoots, I should say, around promotional activity. You know, Melanie was talking to me on the flight up, you know, she was at the store yesterday. There were a lot of buy one, get one frees. I think our customers are gonna look pretty hard at how do they not take, you know, any reduction in price, but they still get the volume moves that they need to get?
As you know, that's important for their stocks, and I expect that they'll be spending a lot of time in the fourth quarter of this year and into 2024, figuring out just how to do that. So our food service business has remained very vibrant and very solid. You know, you'd expect it to be with unemployment in North America around 3.8%. So the consumer's mobile, they would like convenience, they're busy, and we've really been crushing it with our food service business here, you know, since we acquired that business.
I was just curious, how do you think your business would hold up in a moderate recession? And, and frankly, Mike, I would argue that, the packaging space, more broadly, has gone through a recession - the last 12-18 months just because of destocking and the consumer dealing with a lot of inflation. And perhaps maybe now that we're in an endemic, rather a pandemic, away from home consumption is really dialed up.
Yeah.
In a softer macro backdrop, how do you think that all plays out?
Yeah, so if you think destocking, and you just look at, kind of, an algorithm between packaging sales and CPG sales over a two-year period of time, it was a little over 3% that was kind of built higher. So the destocking kind of clears that out, and what you'd expect then as you go into fourth quarter in 2024, is our volume should behave much more closely with what, you know, consumer product goods companies, you know, sales are tracking at, because that inventory's been burned out of the system, out of the supply chain, if you will. I would also agree with you that volumetrically, I think packaging companies have been dealing with a bit of a, a modest recession here.
And it behaved that way too, where we've seen some deflationary aspects of some of the input costs that we purchase as well. I think the oddity in this one is just, you know, the vibrancy of the U.S. consumer in particular, with 3.8% unemployment. Anybody who wants a job's got one. That's a good thing. And really, the products that we make are non-discretionary in nature. People need to eat and drink. 90% of everything we do falls in that category, whether it's mobile, on the move away from home or at home, those are the products that we make. So we really like our diverse customer portfolio and expect to, you know, continue to have momentum as we go into 2024.
There's a slide in the back of the deck that's out there if you wanna see how we, how we performed in 2008, 2009. It'll give you some insight. Our volumes are down around 3.8%. That might sound familiar, given what we've just been talking about here, and our margins expanded, we generated more cash flow, and of course, we're a much different company than we were then. We were levered almost 7x, you know, in, in that, you know, environment, and we'll finish this year somewhere around probably 2.5 or 2.6, depending on when we are able to close the Bell transaction that we announced on our second quarter call, which we're really excited about, by the way.
Mike, like you pointed out, during the financial crisis, you were a very different company.
Mm-hmm.
Give us a little flavor on how you guys are better positioned to navigate potentially a modern recession?
Oh, look, our customer portfolio is just so different than it was then. I mean, our top 25 accounts were 80% of our sales, which is nice from an SG&A standpoint, but if one of those customers got, you know, cold, we got the flu. Now, if you take a look at our top 25 accounts, it's below 45% of our overall volume. We didn't even have a food service business back then. We didn't have SBS as part of our portfolio, so we couldn't balance the substrates across one another like we can now. And of course, just having revenues and cash flow, you know, that are associated with a $10 billion company versus, you know, at that time, you know, basically about a $4 billion company, it's just a whole different set of dynamics.
So we're well positioned to be able to, to weather whatever comes our way.
Okay. Boxboard prices have been obviously quite robust the last few years, so it's not a terrible surprise we're seeing some pullback here. We've seen you and WestRock take a decent amount of downtime and committed to managing supply and demand-
Mm-hmm.
But, you know, we see obviously lower SBS prices recently.
Yeah.
Give us a little flavor on one. It's often backward-looking.
Mm-hmm.
But give us a little flavor in what you're seeing in the marketplace, where you're seeing some of the competition, and how do you kinda think about boxboard prices kinda holding up this year?
There's really one substrate that's, you know, seeing the pressure, and that's coated SBS. And I have to remind investors, you know, here a little bit of the math. We make 1.2 million tons of coated and uncoated SBS. 400,000 of the tons that we make are uncoated SBS, and that's for our cup stock business, which, as I mentioned earlier, is growing, and there's been really no reductions in any of the pricings associated with that because demand is solid. So that leaves 800,000 tons of capacity uncoated, which is a little less than 20% of all the tons that we make. So it's meaningful for us, but not material if you think about what it looks like relative to the overall profile of the company.
We have taken and publicly talked about the fact, you know, around 100,000 tons of market-related downtime, you know, through the end of July. We're very committed to continue to match our supply and our demand. There's really no sense in us making a ton we don't have sold, either to ourselves or to a, you know, a long-term customer on our open market side. So you can expect us to continue to be very disciplined along those lines, and we will do so.
When you look at all your different grades, and markets, maybe even comment on your own, perhaps-
Mm-hmm.
Is SBS the one market that feels a little more wobbly versus, let's say, CRB, CUK?
Yeah, look-
Just give us a little more flavor on that.
Our CRB, our CUK business, you know, those are solid businesses. We're running, we're running those mills, you know, steady. You know, I think the other thing you should realize relative to what our strategy is on SBS, is we're gonna grow our cup business, which means we're gonna need more uncoated, you know, cup stock. And so, you know, our approach is to, you know, convert more and more of our coated SBS into uncoated SBS, which is, you know, integrated into our cup operations. And so we've got a strategy and a plan to be able to do that, and then over time, we'll just reduce our exposure to the open market sales of, of, SBS, coated SBS, I should say, Phil.
Okay, super. On the last earnings call, I think, Steve gave us an early look for 2024 in terms of-
Yeah
... price cost being fairly neutral to positive. So if you kinda unpack some of the levers that you have at your disposal-
Yeah
... it kinda implied that EBITDA would be, you know, flat to maybe up in 2024. Is that still a realistic target at this point, just given some, the movement in SBS prices?
Yeah, look, it's early September, so there's a lot of time between now and then. But if you just, to use your word, unpack a little bit of what we talked about there. So the midpoint of our guidance for 2023 is $1.9 billion. We have announced, you know, the deal with Bell, said that was gonna generate an incremental $30 million of EBITDA with $10 million of synergy, so a total of $40 million. We expect that we should be able to close that relatively soon. And so you get a full run rate on that and probably the synergies next year as well. Price cost is probably just modestly down right now with the recent risk moves.
We've got some, you know, resets of some contracts that are actually on the positive side there, as we talked about on the call. And then, you know, we've taken a lot of downtime this year to match our supply and our demand, and so what I would expect as we move back into a growth mode again, volumetrically, we grow 100-200 basis points in 2024. We'll harvest some of that productivity that right now this year has, you know, worked against us. So you put that all together, Phil, you add it up, we'd expect to, you know, see growth of EBITDA next year. Modest, but, you know, you know, based on everything we're seeing right now, you know, we'd build on our $1.9 billion.
Okay, that's great.
Mm-hmm.
Certainly there are some concerns about supply, demand, and we look out to 2025 and beyond.
Mm-hmm.
But it would be helpful to understand how your position versus some of your competitors-
Yeah
... who are not vertically integrated, especially the Sappi's and Billeruds of the world. And, how are they gonna be stacked up from a cost curve standpoint?
Yeah. So, a couple things that I think we should think about there. First, the world changes and moves pretty quickly as we saw yesterday with a couple of pretty big announcements.
Sure.
And so a lot of things can happen, and you know, between now and then. There is no new capacity in our market coming online before the end of 2025, so call it 2026, and that would be Sappi's, you know, startup and our startup in Waco. Of course, we'll manage our startup in Waco quite intelligently. We've got some mills, higher-cost mills, that will go down as we ramp that mill up. We'll be very thoughtful in terms of how we do that, so that won't be an issue. Relative to other capacity that comes online, you know, we've been asked a lot about Billerud. I just don't know what they're going to do. I mean, they said again, there'll be an update here towards the end of the year.
If they do decide to do something, even then, you're looking probably three years out, you know, before you see any tonnage that comes online. It takes a while to order the machinery, you know, install it, get it operational. Of course, we're continuing to build the company, get stronger, drive our integration rates up, drive our top line up, delever the balance sheet, and, and improve the overall business. We're not gonna stand still. So I like our relative positioning here over the next, you know, two, three years because there isn't a lot that's gonna be in our way.
Are you doing anything on the contract front, locking up some of these customers longer term and-
Little bit. We're looking at it, but we don't wanna give anything away we don't need to because, again, you've gotta get... It's one thing to be able to get paperboard, it's another thing to actually get cartons, and we're selling the customers cartons and cups, and we've got the lowest cost and, you know, most geographic dispersed, you know, converting network in North America and in Europe. So, that's how we're running the company. It's really a packaging company. Sometimes we spend a lot of time talking around the paperboard, and I get it.
You know, it's on investors' minds, but, you know, really the strategy is to grow, you know, the packaging and cup sales here, 100-200 basis points, and pull that material through our low-cost mills, that we, integrate on our, on our own because we make good returns on that, as you know. So, that's how I think we should think about the business.
As you pull more of that demand for your cups business, is there investment you need to make to kinda unlock more converting capacity on, on the cup side? Are there any real bottlenecks to that?
You know, it's all within, you know, and as you kinda think about your models, we're gonna have elevated CapEx between now and 2025 as we build out Waco, as we've kind of, you know, already taken everybody through that. Then you're gonna see our CapEx as a percentage of sales revert back to, you know, 5% or below of sales. And that's still a very healthy number. And that will more than allow us to drive the type of productivity we need to drive. We're not gonna need to do a big investment into converting that's gonna be above and beyond that.
We've done a nice job keeping our fleet up to speed, you know, investing in our lowest cost assets, over a multiple years, and then, you know, shutting down the high-cost ones, when they're no longer viable for us. So, yeah, that's I think, another real great thing about where the business is gonna be positioned. We'll wind up with 6 very well-capitalized, low-cost mills when Waco is operational. A very low-cost converting platform, excellent customer relationships and contracts. So, you know, that's, that's where Graphic Packaging is heading with our strategy, and I'm really excited, you know, here to be, working on our Vision 2030. Many of you know, we laid out our Vision 2025 in, you know, the fall of 2019.
We'll achieve most of those, financial goals actually, this year, so a couple of years ahead of time. We're working with our board right now on our Vision 2030, and probably be in a position to roll that out externally, you know, sometime early next year. That's where our focus is.
Okay, that's super. You're planning that far out.
Yeah. Well, it's important to do so because these are, these are long-term capital allocations, and you need to make sure you get the strategy right. And one thing about Graphic Packaging, we've got a strategy, and we keep reinforcing it, keep executing. We don't, you know, change, you know, course here, you know, over time, so at least not without reason.
... Well, Mike, since you're planning on your 2030 strategy going forward, you guys have done a phenomenal job in unlocking cost out productivity.
Mm-hmm.
Is that run rate still a good way to think about it?
Yeah.
'Cause you guys have extracted a lot in the last 5, 10 years.
Oh, yeah. Look, I think, look, Waco's a separate, you know, allocation, and we said, you can write down $80 million in 2026 and $80 million in 2027. So we need to deliver that to shareholders because we're spending $1 billion on that project. And we will, just like we did in Kalamazoo. We actually got it a year early, as you know, and got a little more. So our confidence level's high that we can do that, but yeah, cost out, that's a big part of our DNA. We've got to make sure every year we offset our labor and benefit inflation.
This year was kind of a high water mark for, you know, certain other costs, like insurance and, you know, some of the other things that, you know, were just kind of one-time, you know, resets, given some of the things that are going on in the market. So we're off a little bit this year in terms of offsetting it completely, but, I expect that we'll be able to do that again as we roll out of 2023 and 2024. Volume will certainly help us if we're running the mills full, and, we'll pick up all that, all those, underabsorbed fixed costs that we had this year that we won't have next year.
Okay. Just given your strong free cash flow profile, you should bring your leverage down pretty meaningfully by this year-end.
Yeah.
At that point, I think you're pretty much at your leverage target. So how should we think about your capital deployment priorities between, you know, paying down more debt, buybacks, and M&A?
All of them. All of the above. I mean, and we've done all of the above. I mean, I think, look, we'll look, you know, for how to best utilize, you know, a strong free cash flow position that we're gonna have. To your point, you know, we'll be down, you know, 2.5, 2.6, depending on when we close the Bell transaction here at the, at year-end. That's phenomenal. We haven't been there since 2016, and we're a much bigger company now. And so, you know, we've got. You know, next year's a heavy CapEx year. We've got to be smart about how we kind of manage through that as we get Waco up and going.
25 will ramp down a little bit, still be above that 5% target I talked about, but then we will ramp down in 2026 meaningfully, and the cash flow generation will be quite large. And so, yeah, you can expect that we'll continue to be opportunistic in terms of share repurchases. We increased our dividend last year. We'll continue to look at that with the board. We'll do smart M&A, but that'll be balanced against share buybacks, you know, and relative, you know, returns that we're getting, you know, in an interest rate environment that we've got right now. So I, I like the fact that we're gonna have our debt down to 2.5.
And look, if we went down to two, you know, for a little while here and kept our powder dry, you know, for something that's out there, there's a lot of things going on, as we talked about earlier here. Maybe there's some opportunities for Graphic, and we'll be able to execute on those if they are.
That's great. Can you give us a little perspective on Europe? Your business is hanging in there actually.
Yeah
... really, really well versus the broader market and maybe some of your European peers that are vertically integrated. What is Graphic doing right, and how do you kind of see that outlook in the, call it, medium term?
Well, being non-integrated in Europe right now is a really good thing. Particularly being a large buyer of paperboard in Europe, which we are, maybe the largest. So it gives us a pretty big lever to pull, and we've pulled on it hard. Our volumes have held up reasonably well in that macro, you know, geography, I should say, 'cause it is a tough macro. I mean, there's inflation that's pretty significant in Europe. As all of you know, there's supply chains that are just being reset with, you know, the sanctions, you know, given Russia's invasion of Ukraine and the war that's going on there. So a lot of dislocation, but dislocation brings opportunity for us. My team on the ground there is executing incredibly well.
They've done a great job positioning that business, delivering on the synergies, and finding ways to grow. And I'm excited about our prospects into 2024 as well, and you know, we always said, you know, maybe we backward integrate in Europe, but it's not a strategic imperative. You know, for the near-term future, maybe the medium-term future, with all that's going on over there, it seems like a nice business to have from an ROIC standpoint, not having those assets that we have to worry about.
Once again, it feels like you're taking share. What's driving some of that dynamic versus,
It's the investment. I mean, you look at our company, we've invested, you know, here, you know, significantly for a competitive advantage. The quality, the cost structure we have in this company, we can go toe-to-toe with anybody. I would say some of the things that are going on in the marketplace are probably a function of some of the things we've done in terms of relative competitive positioning. We do have a value offering for, you know, our customers that's unique and different. We back it up. We're very consistent. They understand how we're gonna operate, and, you know, that's just really important in terms of, you know, them, you know, being able to manage their brands.
'Cause the worst thing they can have is some kind of, you know, variation, where they don't get what they need, and they got a stock outage, or, we can't deliver on, you know, some of the commitments we made around the economics of a package. They can count on us at Graphic Packaging, and, and we've got long-term relationships with the largest CPGs in the world. And we do business with them every day, and, they're appreciative of the fact we're investing as heavily back into the business as we are.
Oh, that's great. So you commented earlier, it feels like destocking is largely winding down at this point.
Yeah.
Any more color in terms of what are you seeing between end markets, private label, beer versus food, food service? I mean, certainly there's been some dislocation with the biggest brewer in the country. Just help us unpack some of the nuances between all these different end markets and trends you're seeing?
Certainly more of a focus right now on value. There's, and that shouldn't be a surprise to anybody. Stores like Walmart, the Great Value brand, they just reported their results. They had an excellent, you know, quarter in terms of grocery sales. That shouldn't be a surprise. Costco also with the Kirkland brand, you know, these are brands that are, you know, very large when you take them even individually. And you'd expect them to win in this kind of environment. We're seeing that. We participate in that sector, you know, at scale. And you know, they talked about it on their earnings call, so you know, you guys have already seen that. But yeah, I'd expect that to continue to be the case.
But on the other side, the branded teams, you know, they're finding ways to, you know, reposition their brands. You know, it's been a tough slog for all of us because we had to offset all that inflation. You work so hard to get your pricing up, you gotta be real smarter on how you work your promotional activities. But I'm confident they'll do that, and we'll see a return to growth, you know, here as we inflect into 2024.
From a private label mix dynamic, how does that impact your business?
It-
margin-wise and what not?
Yeah, we're a bit agnostic because we participate at share on both branded and at the private label. So it, it's, you know, basically moves to one side of the equation or the other.
Okay.
And that's purposeful. We built the business to be able to do that. You know, that's another difference from 2008, 2009. We did not have a material presence in the store brand or private label side of the business. Now we do.
Okay. Mike, anything I'm missing that you want... Or maybe perhaps the investment community, like, the community underappreciates the Graphic story?
I don't think it's an underappreciation. I think it is—if I have 33 seconds here, I would just give a little plug to our PaceSetter Rainier paperboard, that the new grade that we've got coming out of Kalamazoo, and we'll be able to make it in Waco as well. I was there earlier this week. The quality and you know, basically the appearance and the smoothness, if you if you look at that sheet, it'll rival anything we're doing on our coated SBS side of the equation. As I mentioned, we're making a pivot out of coated SBS and into more uncoated cup stock. This particular board is able to compete with that substrate, and it's able to do it you know, at a significant cost advantage. So we like the positioning.
We got a lot of trials going on with customers. I think it's gonna be a real winner for us, so keep an eye on, for that. Keep asking questions about that one.
All right, sounds good.
Thank you.
Well, Mike-
Appreciate all the interest today. Thank you for coming.