Graphic Packaging Holding Co Q4 FY2021 Earnings Call

Good morning. It's great to see all of you here today. It's been a while. Thank you for coming, and thank you to everyone joining us on the webcast. We will get started shortly. Is everyone here? Welcome. Today, speaking on behalf of Graphic Packaging are Michael Doss, President and CEO; Stephen Scherger, EVP and CFO; and Ricardo De Genova, SVP of Global Innovation and New Business. Before I turn the presentation over to Mike, I want to go over our forward-looking statements disclosure. We will be making forward-looking statements today, which are based on current expectations and are subject to various risks and uncertainties. For more information regarding these risks and uncertainties, please refer to our periodic filings with the SEC. Now I'll hand it over to Mike.

Great. Thank you, Melanie. Can you hear me okay? I need to use this mic, right? First off, welcome. Great to have all of you here with us this morning. Those of you who are in person as well as those of you who are listening on Webex this morning, we're looking forward to seeing you in the next couple of weeks and months that come along here as well. It is nice to be back at The Exchange. It's actually been 2.5 years since we rolled out our Vision 2025 ambitions. And at that time, we didn't even know what COVID was. So a lot of things have changed in the last 2.5 years. Steve and I thought it'd be a great opportunity to get together with our investors and hold an Investor Day to talk about some of the things we've accomplished, which has been a lot over the last 2.5 years, as well as releasing our results here in Q4 today. So our goal for the day is really to have you leave as excited as we are about the prospects for the company's future as well as our ability to hit our enhanced targets that we put out yesterday as part of our Vision 2025. Before I get into some of the materials, I want to acknowledge a few of our people who are here today. So we've got Ricardo De Genova here on the far side. Everybody knows Steve. I always say the great ones only have one name, Steve. And then we've got Melanie, who just introduced all of us. We've got Roxanne McSpadden in the back. She's Director of Marketing, came up and helped us put the materials together as did Catherine Berich, there's Catherine. Thank you, Catherine. We've got Brad Ankerholz, who's our Senior VP and Treasurer. And he'll tell you, he touched off $5 billion of our debt last year. And so he was a busy guy last year. We're glad to have you here with us today as well, Brad. Lauren Tashma, our Executive Vice President and General Counsel. Good to have you with us today, Lauren, as well. And Brian Davison is in the front by Melanie. Brian joined us a couple of years ago, and he runs strategy for us as Senior Vice President of Strategy. So just looking around, making sure I didn't miss anybody because they're dispersed. Okay, great. Let's jump into it. Really what I want to do today, our agenda for today, since we have some new investors as well as some new employees that I'm sure are listening on the phone, I want to ground everybody in terms of the company we have and the relative competitive positioning of the business that we've built. Once I do that, Steve is going to come up and talk a little bit about our fourth quarter results as well as our guidance for 2022. And then we're going to spend the rest of the day really focused on our Vision 2025 in terms of our prepared comments. We really want to take you through the goals that we put out. Why we've got confidence in our 100 to 200 basis points of sustainable organic growth, which we've delivered on here over the past couple of years. Ricardo will come up and talk about some of the pipeline projects we have. And I encourage you at one of the breaks to look around and take a look at some of the materials on the table. There's a lot of things to see there as well. Then I'll come back and talk a little bit about the productivity initiatives that we've got in place, both in terms of the ongoing productivity to fund our growth as well as special projects that we do. The biggest one right now that we're finishing up is our Kalamazoo, K2 paperboard machine and I'll bring you up to speed on how we're doing there. And then lastly, we'll round out with People and Planet give you some insight into the progress we've made against those objectives. And then Steve is going to spend a fair amount of time before we close or the break with our prepared comments, kind of going through a number of different scenarios in terms of capital allocation and value creation that I think you'll find pretty interesting. So that's our goal for today. And I guess as I start, one of the things that you've heard us talk about, given the results that we've generated in the business that we've built, is we fundamentally believe that we are in a different race than the rest of our competition. When you look at the fact that we're the leading global fiber-based consumer packaging company, you look at our assets, our asset base and our operating assets that we've got in place, they're really unmatched. They're well capitalized. They're geographically positioned in the right spots, and they really provide a tremendous amount of benefit for our customers in the terms of materials that we make for them, the products we make for them as well as excellent customer service, innovation, and kind of an enhanced customer experience. And if you really think about that as society continues to evolve, and you see more of a movement towards sustainability and a circular economy, we're at the intersection where those assets in that operating model really marry up well with what consumers and customers are demanding from packaging companies. And that's really what gives us a lot of confidence in our ability to drive the growth that we're going to talk about today. Finally, on that point, we've built a really powerful cash generating operating engine here at Graphic Packaging. Steve will take you through a lot of what that looks like. And when you combine that with our proven track record of solid capital allocation to create organic growth opportunities as well as enhanced shareholder value over time, we think the runway is multiyear here. And that's really what we want to leave you with today as we wrap up our presentation. I mentioned the circular economy, and I want to spend a few minutes talking about how we think about that. It's kind of on display on this chart here. I like this chart because it kind of breaks it down. If you think about fiber-based packaging in general, whether it's industrial or consumer, it's probably the most sustainably based packaging through the life cycle out there. It all starts with a renewable resource and starts with a tree.

You bet. Thanks, Mike. Good morning, everybody, and thanks for everybody who joined us here live as well as virtually. And let me just take a couple of moments and provide you with an update on our 2021 results and a view into 2022. We were very pleased with our finish. If you kind of stand back from the year, organic sales growth, 2% for the quarter and for the year. Over the last 2 years, organic sales growth to the 3%. If you even go back 3 years, it's at 2%. So now a good, strong track record of organic sales growth, driving basically by the innovation activities that Mike was describing. Our price performance and price execution is in a very good place. We saw record inflation come through the business. We've executed on multiple price initiatives. I'll share with you here in a couple of moments $850 million of price initiatives that we're executing on in '21 and as we look through 2022. And our capital allocation activities were also very, very strong performance in 2021. Obviously, we'll talk more about Kalamazoo, which we are absolutely thrilled is coming to life and is making commercial paperboard as we speak. We'll talk about our visuals into what's possible there. The 2 major acquisitions closed and operating at or above our expectations. The International Paper partnership brought to a conclusion, and we've continued to put significant capital to work back to our stakeholders. Very briefly on the year, just a couple of things of note here on the upper left. Our sales growth across the traditional food, beverage, consumer markets that Mike was just describing, up 21%, obviously, for the quarter, but up 3% organically. And foodservice, the recovery there, as Mike mentioned, very solid, up 16% for the quarter. In the middle bottom, what you can see is the industry operating rates backlogs remain very high and very strong. The overall industry actually grew 2% in total, driven by the fiber-based demand profiles that we've been talking about with you and our specific growth exceeding that. Year-end pro forma leverage, 4.6x. That's just a simple view of kind of where we end when you kind of stand back from where we are with the AR Packaging acquisition, and we'll share with you here in a couple of moments a path to significant reduction. Next couple of slides are just the overview of the quarter and the year, you can see 20% top line growth that's going to continue at that kind of a pace as we look out into next year. And we saw EBITDA improvement driven by significant price starting to be realized. We saw unprecedented inflation in Q4, $140 million. We'll continue to see that. We'll talk about that as we embark on the early stages of 2022. But our price/cost realization is going to turn to positive here in Q1, and I'll talk about that in a couple of minutes.

And really because of that uncertainty, Ghansham, that's why you've seen us so aggressive in terms of our overall pricing. We've continued to push pricing and we've got pricing actions out there on all 3 of our grades right now because we don't know for sure. Our backlogs are strong. Demand is really solid. We're very busy. And so it makes sense for us to continue to push and pursue that given the uncertainty that, quite frankly, the operating environment has been over the last 24 months.

Good morning, everyone, and thank you for attending today. It's a pleasure to be here in person for a change that is great. As you saw, we have established a good track record at growing organically through sustainable innovation, and that's how we want to phrase this. So over the next few minutes, what I'd like to do is to provide you with a point of view of how we are going to increase the bar of how we innovate in order to sustain that growth moving forward, and why we have the right elements to win. We have the right capabilities, the right substrates. We have our development efforts that are aligned with the consumer trends that drive those behaviors. And we are developing a multigenerational portfolio of solutions that we’ll address those changes. But I want to start by saying that the world's largest brands trusted Graphic Packaging to be the main interface between their products and their consumers. And that's a very large responsibility that we take very seriously. So I'm glad to be here today and most importantly proud to be here representing a group that is global of over 120 passionate employees that have the coolest job in the company because we've got the inventive future. We are here to deliver the future of sustainable packaging through innovation. And it's not only simply innovation. It's innovation that is aligned and anticipatory of our customer business needs, the desires and needs of the consumers, but most importantly, that can be delivered at scale. I think one of the slides that Mike presented highlighted the size of the brands we work with. Our goal is to provide solutions that these customers can easily implement across their networks. Achieving this requires strong material science, machine engineering, and unique design capabilities. I believe our design team is a crucial part of our competitive advantage, supported by our integrated business model that allows us to develop new products and solutions from fiber to consumer. This capability has got better. With the integration of AR Packaging, we are now getting complementary and additional capabilities that will enable us to accelerate the rate with which we innovate as well as satisfy our consumers in a better way. And speaking of consumers, I would like to spend a little bit of time talking about what is happening today around the globe. Consumers want to feel good about the choices that they make. And there is increased awareness relative to the social and environmental impact of their choices. Parallel to that, we see the regulatory environment evolving very rapidly. So those 2 components put together are causing the brand owners and retailers to make choices and to make choices very, very quickly. So that creates the pool for more environmentally friendly innovations, and that's where we come into place.

Thank you for that. I'd like to revisit a topic that's particularly important to us. The circular economy is central to our strategy and to our identity, as it involves both virgin and recycled mills. Essentially, all the wood we harvest originates from sustainable forestry tracks, which means there are strict requirements regarding its harvesting and market introduction. And by definition, the tree itself, particularly in the U.S. South, as you see, it grows fast enough, sometimes you can hear it at night growing in the middle of the summer. It renews and adds inches as we see in the industry every year, and these baskets are actually quite healthy. And so what might start as that beverage carton I talked about or that confectionery carton, then we'll go downstream to Kalamazoo or Middletown or East Angus, our recycled mills that will have, kind of, post our new footprint here, and we can recycle that 5 to 7x. So it fits squarely into that. And if anything, the fact we're bringing on more CRB because we're going to run our Middletown mill longer, shows that, that's appreciated by the end-use consumer.

We could see a path of EBITDA from $1.4 billion to $1.6 billion, up into the $1.8 billion, $1.9 billion range, margins approaching the aspirational 20%. Another $1-plus of EPS over that 4-year period of time. And CapEx more likely to be putting money to work thoughtfully with returns in mind, and I'll take you through that here in a moment in that 5% to 7% range. But the middle column ends up in a few years with a business that's levered in the 1.5 to 2x range, which is interesting.

Yes. Look, it's something we have to deal with, but we're going to have a very powerful company that is well positioned to be able to do that. And again, 2025, 2026, that's a long time from now. A lot of things are going to happen between now and then. The most important thing is this market is going to grow. Thank you for that, and if I can go back, one of my favorite topics here. Maybe you can click through the circular economy; it's central to our strategy and who we are, with both virgin and recycled mills. What we do is, as I mentioned, all the wood that we harvest is grown in sustainable forestry tracks.

Okay. Welcome back. For those of you on the webcast this morning, you can go ahead and put a question on the right-hand side of your screen. Please submit your questions and we'll get to you time permitting. We'll start this morning in the room.