Graphic Packaging Holding Co Q4 FY2023 Earnings Call

Good morning, everyone. It's wonderful to see all of you here at the New York Stock Exchange. Alongside those present, we have a significant number of investors joining us virtually, currently numbering around 150 and increasing. Thank you to everyone on the webcast. My name is Melanie Skijus, and I am the Vice President of Investor Relations. Before we begin, I'd like to point out two stairwells for safety in case of an emergency; one is directly behind me down the hallway and the other is near the elevator bay. I also want to highlight the presentation materials at your desk, which we encourage you to review with us today. On the webcast, these materials will be visible as well as a PDF available on our Investor Relations website. Please note that the presentations this morning are being recorded, and will be available for replay later today. We have an exciting agenda lined up, starting with two presentations, followed by a 10-minute break. After the break, there will be three more presentations and a Q&A session. I urge everyone to review the forward-looking statements mentioned today, as they are subject to various risks and uncertainties that may impact their realization. You can find a detailed list of these risks in our filings with the SEC. Now, I will hand it over to our first speaker, Mike Doss, our President and CEO, who many of you are likely familiar with. Mike has been part of the company since 1990 and has held the CEO position since 2016. Now, I will turn it over to Mike.

Great. Thank you, Melanie, and I also want to thank Alexandria, who's over in the corner here. As all of you know, it takes a lot of work to pull together one of these Investor Days. They've been working really hard to pull everything together that you see today, and we're going to cover. So thank you guys for all that. I also want to acknowledge Mike Ryan, one of our senior designers who drove all the way down from Philadelphia. A lot of the samples you see here today are out in the lobby. So Mike, I don't know where you are; wave your hand. Thank you very much for doing that. Much appreciated. I'm going to start with a few comments around a few announcements we made last night, and then I'll jump right into the presentation, and then I'm going to introduce our speakers that you'll see today. So as Melanie said, we'll go through that cadence, and we'll ultimately have a few breaks in there. I'm sure there will be a very robust Q&A session, which we're really looking forward to. Let's start by talking a little bit around the first announcement that went out last night: the sale of the Augusta mill to Clearwater Paper Company. What you need to know is that over time, Arsen Kitch and I have had numerous conversations around the overall fit of some of the mills that we've got. For them, in their vision for the future, it became clear that the Augusta mill, which is an outstanding mill with excellent people and good infrastructure, is a better fit for them than it is for Graphic Packaging. As we had those dialogues, we worked through a deal. You saw it announced last night. We're happy to go into whatever level of detail you'd like to talk about during Q&A. The reality is that for Graphic Packaging, the Augusta manufacturing facility didn't offer the same strategic benefits over the long term as some of our other wood fiber manufacturing facilities or our recycled manufacturing facility. So it's the right thing to do for our shareholders to monetize that, which we will do. Again, we'll talk in more detail about what that means during Q&A. The second thing I want to touch on, real quickly, is a few questions I got in the lobby here about the pricing declarations from RISI over the weekend. Many of you know I've expressed a fair amount of frustration over time in terms of how they do it. I can absolutely tell you that, on cupstock, they got it wrong. We're in that market every single day. It's one of our strongest markets. If you look over the last three years, our Foodservice business has grown every quarter, and it's growing here in Q1. So that made no sense to us; it's 180 degrees out from what we're currently experiencing. And really, as you've heard Steve and I talk about this, it just strengthens our resolve to continue to move away from third-party indices that lack any level of accuracy and transparency. Over time, third-party indices that aren't accurate or transparent hurt packaging companies and ultimately hurt the customers as well. We are going to strengthen our resolve to continue to march away. We've been doing it for a number of years. It's one of the reasons why several of the analysts in the room have had difficulty trying to track our pricing. We've been moving to a more value-added pricing model, which we'll get into a lot of detail about today. This is going to continue to be the case. Therefore, third-party indices will be an increasingly smaller part of our business going forward; our resolve is very high to make that happen. With that backdrop, I'm going to pivot now and talk a little more about our overall results which also were released last night. By any measure, if you're a consumer goods company last year, food, beverage, or actual goods, it was a challenging year as consumers pivoted in terms of their preferences. Our customers had to adapt to that on a real-time basis. It resulted in significant inventory destocking, as you're all aware. Against that backdrop, Graphic Packaging held up very well. Our results show that; a few highlights are our sales were flat year-over-year, with $200 million of innovation sales in that number, and our value-added pricing actually more than offset the volumetric decline of about 4%. In the third and fourth quarters, the decline was most pronounced. In Q1, I can say that we're encouraged. To date through today, our volumes are flat year-over-year, which is good. As you recall last year in the first quarter, we were up. So we've seen some stabilization. The fourth quarter was most affected in the last three weeks of December, where we saw a substantial drop. It bounced back well to start the year, which gives us confidence in 2024. What I'd like to say is our confidence is in what we do control versus what we don't. If you think about Graphic Packaging, we're very different than we were just a few years ago. Our innovation is wide and deep, and our customer relationships are growing stronger. We're getting paid for the value we bring. With that backdrop, I'm really pleased with the results we've generated. Our EBITDA was up almost 20% year-over-year. Our adjusted EPS approaches $3, compared to under $1 in 2019, so we've seen dramatic progress. Graphic Packaging is a leader in sustainable consumer packaging. You all know that, and you touch our products every day. Think about the coffee cup you have in the morning or the cereal box that your cereal comes in. All of those things we do, and you really touch our products every day. It's rare for a U.S. consumer not to use something we produce within a 24 to 48-hour period. We package life's everyday moments for a renewable future. Thematically, you will hear us talk a lot about that. We have a lot of confidence in the company we've built and will build over the next seven years as we roll out Vision 2030. You see our 100 facilities around the globe there. In order to package, we have to have scale and make investments. Those investments consist of physical assets, but a lot of those were made as part of our Vision 2025, Waco and Kalamazoo being the largest. Investment in people and capabilities is harder to see, but they're real and very important. You'll see our speakers bring those to life today with their comments. That's an impressive customer portfolio. The depth and breadth of that is unmatched in the paper packaging world. Look at the different segments we're in. Our customers are as diverse as our innovation portfolio. It's a point we must make. And it wasn't that way just a few years ago. We've got a strong presence in the at-home market. It's improved in recent years. See a reminder here, food, beverage, household products, and health and beauty are strong businesses for us. Strongly growing in the foodservice portion of the market is our key theme today. If I do my job right, I'll probably hit on that five times, just how our portfolio moves with the consumer. That's a big part of what we built over the last seven years.

Good morning, everyone. I'm excited to be here today to share with you information about the innovation capability at Graphic Packaging. As Mike just mentioned, innovation is a core component of our Vision 2030. After my discussion today, I hope you have three key takeaways. The first is, the demand from consumers for more sustainable packaging is accelerating. Secondly, our global innovation capability is competitively advantaged and ready to meet that opportunity. Lastly, we see a $15 billion sales opportunity for paperboard packaging, which gives us confidence in our path to a 2% growth in innovation to achieve our vision. Our products are in the hands of millions of customers multiple times per day. Over the last several years, we've made many investments to dramatically expand our global product and customer portfolio. We work with leading companies and brands worldwide, meeting consumers in many of life's everyday moments. We have a responsibility because our consumer packages are at the interface between our customers' products and the consumer. We have to deliver a product that meets those consumer needs while delivering value to the brand owner. Our packaging meets consumers whenever and wherever they consume, providing convenience, freshness, safety, and functionality. We understand there are many trends driving consumer decisions today, health and wellness, convenience, experience, but most importantly, consumers are increasingly concerned about the impact their decisions have on the environment. A recent First Insight survey shared that an astounding 73% of Gen Z shoppers are willing to pay more for sustainable products. Consequently, we're seeing other stakeholders driving actions, retailers and brand owners developing their sustainability strategies to meet consumer expectations while also navigating a changing regulatory environment, especially in regions like Canada and coastal areas of the U.S. Leading the way is Europe, where demand is rising. The core of every package we design starts with what the consumer wants while remaining focused on our direct customers and their needs, all while keeping the environment in mind. We strive for every new package introduced to have a smaller environmental impact than what came before, whether it's ours or another package. I'll explain how Graphic Packaging manages its innovation capability; we align our people, structure, and process. Since our acquisition of AR Packaging, we have become more global but maintained central organization. Understanding different consumer insights and regulatory environments allows us to focus on regional trends while being globally connected. Today, we have eight innovation hubs, 120 fully dedicated innovation employees, and nearly 8,000 active patents that leverage these investments, and we continue to accelerate the launch of new unique solutions. Over the past seven years, we've made significant investments in key areas, and we're delivering more value for our customers than we have in the past. Starting with market insights, we've invested in consumer insights capability along with marketing. They've made talent acquisitions from CPG companies like Coca-Cola and PepsiCo, leading to faster consumer insights and creating stronger relationships with our direct customers and retailers. One of the most impressive things I found at Graphic Packaging was our deep talent and capabilities within R&D and the creative design group. Our strength enables us to drive innovation across our entire value chain. When designing a new package, we create it with the end in mind, adjusting to ensure a seamless transition into our manufacturing supply chain. This process drives cost efficiency and speed. We also have fun tools like 3D visualization and augmented reality to develop designs faster. We are leaders in packaging machinery design, which helps us roll out our new ideas. Our number one goal is to create packaging that can work on existing machinery for customers, providing cost effectiveness and speed to market. Our hybridization stage requires close collaboration with our customers to execute pilots and experiments, aided by our unmatched scale with over 100 manufacturing facilities. No one else can flout our scale. We even help small-medium brands that often adopt our innovations first. This is a non-linear journey with valuable investments, and our collaborative process drives exciting solutions. Let me highlight our unmatched portfolio of five global innovation platforms, representing a $15 billion paper packaging opportunity. In 2019, we identified a $5 billion opportunity, but we've tripled it due to our recent investments. These platforms offer a value proposition beyond sustainability, with discrete value propositions delivering functionality and convenience, leverageable across our geographies. We've optimized our portfolio with products like PaceSetter Rainier, replacing bleached board's advantages with the qualities bleached board offers. This sheet will allow us to access new markets in the Americas. We can serve markets like oral and personal care or healthcare with strong customer relationships stemming from our acquisition of AR Packaging. To summarize, our innovation platforms enable paperboard packaging to reach new areas, and I look forward to the collaboration required to achieve these goals. Thank you, and I look forward to the fireside chat.

Good morning, everyone. I'm Mark Connelly. I'm with Jean-Francois Roche, who is our Head of International Sales at Graphic Packaging. Jean-Francois spent most of his career at AR Packaging or Graphic Packaging. He's also, as Mike said, the Chairman of the European Carton Manufacturers Association. So welcome, Jean-Francois.

Thank you, Mark. Good morning to everyone. In Europe, we're roughly a $2.2 billion market in the paperboard market, which is in the range of $15 billion for the total consumer packaging market. We operate in 18 different countries, including Indonesia, Australia, and New Zealand, where market patterns and customer bases overlap. We operate across six segments; food, healthcare, beauty, beverage, foodservice, and household. This diversity provides us with benefits as we face some volatility and seasonality in those segments, helping us balance market fluctuations.

Comparing the U.S. business and Europe's, we know we have a well-established healthcare and beauty business in Europe with relationships with major pharmaceutical companies there; our foodservice component is much smaller than in the U.S. Can you tell us about the recent performance in Europe?

Yes. Let's step back a bit and look at the market before COVID-19 happened, it was pretty straightforward. For Western Europe, it was essentially clocked within GDP growth. In the developing countries in Eastern Europe, due to the market's nature, we were looking at double the GDP growth in market development. Then COVID impacted us and very unusual behaviors led to shifts in demand. In early 2023, we achieved resilience, but that unwound inventory, leading to market performance around minus 7% to minus 8%. However, we believe there are strong trends still in innovation and language that will drive a 3% to 4% growth.

You've worked closely with AR Packaging before it was acquired, what have the innovations done to enhance your business?

Before the AR Packaging acquisition, we were the third operator in the market, operating through 14 different converting facilities, along with success in the beverage sector. AR Packaging then provided 30 new facilities, expanding our market presence, adding capabilities across food, healthcare, beauty, and household markets without overlapping customer bases, transforming us into the number one player in Europe.

What evidence do you see of changing customer relationships post-acquisition with AR Packaging?

Absolutely. Post-acquisition, we made significant changes. I remember when I first met large healthcare customers; they'd be skeptical of why I cared about their needs and expectations. Now, we are building long-term partnerships seeing us as future partners. For instance, we were selected by Danone as one of their five suppliers worldwide for significant transitions in their packaging strategy, illustrating confidence in our capabilities.

In terms of European regulations, what should investors be aware of?

The European Green Deal aims for carbon neutrality by 2050. There are 11 initiatives and six that will notably impact our industry, especially the packaging waste regulation. Currently in discussions to finalize the text which we expect to be voted on. It could result in modest tailwinds for the paperboard industry due to the inherent benefits of fiber-based packaging over plastic. We believe this will drive demand for paper products, including ours.

With the progress you're making, do you feel it's slowing down record innovation cycles?

No; it reflects innovation cycles. We saw strong performance in our early launches like KeelClip and PaperSeal, and it's an exciting time for us as consumers and brands seek sustainable solutions.

Good morning. I'm excited to discuss our sustainability strategy and goals through to 2030. We recognize global trends, including population growth which may reach over 9.8 billion by 2050. This increase will drive demand for packaging solutions. Our promise is to improve packaging's sustainability, with efforts focused on creating better packaging, protecting people through safe workplaces, and realizing a significant better future. We're committed to transparency and accountability in our practices across all sustainability initiatives.

Thank you, Michelle. We covered a lot of topics today. Let me clarify that the projected EBITDA for 2024 reflects several factors. While there may be a short-term impact from raw material price fluctuations, the overall model remains focused on organic sales growth, productivity improvements, and maintaining solid margins across our portfolio.

As we built our business, we focused on packaging solutions. With products increasingly focused on value-based pricing and customer needs, we expect our growth trajectory will reflect that change. Our models indicate growth within direct relationships, innovation, and sustainable practices will lead to long-term shareholder value.

Can you clarify the EBITDA guidance expectations and the potential dissynergies from Augusta's sale?

We don't see dissynergies from Augusta’s sale; there's a small transition as we migrate operations. Augusta's sale is very clean, and we're confident that it won’t create significant liabilities impacting the business.

It’s important to highlight our focus remains on enhancing relationship management with our customers. We continue to foster deeper connections by listening to their needs while maintaining steady growth for values around sustainability and innovation. That's at the core of our strategy heading into 2030.