Graphic Packaging Holding Company (GPK) Earnings Call Transcript & Summary

Okay. So we're about to start with Graphic Packaging and Mark Connelly, Senior Vice President of Investor Strategy and Development at Graphic Packaging, we don't exactly know what that means, but I'm sure Mark will tell us that. He's also the architect behind Vision 2030, which, of course, is now what's going to be driving value going forward. Mark has been an analyst for a long time on the sell side, actually a former colleague of mine. He had a very highly appreciated product called the Holy Grail, were disseminated and essentially criticized very openly, about capital allocation. And of course, what is going on in Graphic Packaging is the opposite at this moment. So it's going to be quite interesting to see what the -- what that can deliver with Graphic Packaging. So with that said, I'll leave it to you, Mark, to do a quick introduction of Graphic Packaging.

Thank you, Lars. So Graphic Packaging is a global leader in sustainable consumer packaging. And to give you a sense of what that means, if I click a little faster, there we go. $9.5 billion of sales, a little under $2 billion of EBITDA. Forget that pie chart for a second, we'll come back to it, roughly 3/4 of our business based out of North America, the rest out of Europe, which is a critically important piece of our business. So there's a very good chance that you used one of our packages in the last 48 hours. We are literally packaging just about every kind of food product, food service product and household product that you can think of. And this chart gives you a little bit of a sense of what that portfolio looks like, but here's where it came from. In 2017, when we were embarking on Vision 2025, we were basically selling cartons for beer and soft drinks and dry food packaging. So we were right in the middle of the supermarket, reasonably decent stuff, high volume, but not super high profitability. By 2023, we had doubled the size of the company and dramatically shifted what that portfolio looked like. And we had moved into Europe. So again, just to reinforce this point, this is what our portfolio looked like in 2017. And this is what our portfolio looks like today. We are in every aisle of the store. We are in the QSR, quick service restaurants. We are in the club channels, and we are in e-commerce. Growth is coming from innovation. We are not a commodity seller. We don't sell paperboard. We sell packaging. We have identified 5 verticals for where our growth is going to come from. A big chunk of this is plastic substitution and PPWR happening here right now is a very important piece of our growth. You see these 5 platforms, trays and bowls, cups and containers, multipacks, paperboard canisters and strength packaging, $15 billion of opportunity. Don't think of this as a TAM. If it were a TAM, the number would be $30 billion. These are markets where we already have a product that can service that market as a plastic substitute, and we have that product, we've already innovated it right now. It's now up to us to go get it. And I keep hesitating. I don't know what my hesitation is about today, maybe it's the time zone. Okay, I skipped one, there we go. Okay. We are sustainable packaging, our basic packaging material. Our starting basic -- starting material is paperboard, recycled, unbleached or bleached. And as you can imagine, we've got a fairly robust sustainability story. Now by European standards, we're an American company. So you'll have to cut us a little bit of slack. But we do have some very clear plans and our Scope 1 and Scope 2 plans for greenhouse gas have been approved by the Science Based Targets Group. So we have a very clear plan. A lot of companies will tell you they have targets. Our plan is pretty well laid out and clear. And then it translates down to this base financial model. And again, once again, it's simple, low-digit sales growth, mid-digit EBITDA growth, high-digit EPS growth, and we're going to do that after 2025 with CapEx at 5% of sales. To put that in perspective, right now, we're in the middle of a very big project, and we are going to be over 10% CapEx to sales this year. That's going to generate a lot of cash when we move from 10% to 5%. And our capital allocation priorities are laid out here at the bottom, and they're pretty clear. We don't have big expansionary programs anymore that we need to get done. The last big one is Waco, which is a $1 billion recycled paperboard facility that we're constructing right now. When that's done, we will be the lowest cost producer of recycled paperboard in North America, on the East Coast, and on the West Coast we will have the highest value and the best economics in that business. So we are also now looking to further integrate our business. We've got a great European business. We're very happy to be buying paperboard here rather than producing our own. So the capital allocation priorities become relatively simple. We're always going to reinvest in the business to stay on top. After that, we're going to have a growing dividend because consumer packaging companies that are growing should have a growing dividend, in our opinion. We're going to be repurchasing shares opportunistically, and we've got a very good track record of doing that historically. And we will become investment grade. But from a personal perspective, I would tell you that I don't think it makes a whole lot of sense to delever too aggressively when you think your stock is reasonably attractive. But certainly, by Vision 2030, the end of 2030, we will be an investment-grade player. And of course, tuck-in M&A, I want to talk about, we don't have great M&A aspirations, but tuck-in is important. We think of M&A as an alternative to CapEx. If we can acquire an asset and get there and deliver value to customers faster, we'll look at the economics of doing that, and we've done that very successfully with a couple of recent acquisitions, including something called Bell that we did in the U.S. that we talked about on our last earnings call, and I'd invite you to go back to that. And I'm just hesitating again. I don't know where all this hesitation is coming from. In any case, we're going to generate a lot of cash over the next couple of years. 2024 is our peak CapEx year. By the end of next year, Waco will be finished. That's a $1 billion investment. So CapEx will be coming down next year by 2026 and 2027, Waco will be generating substantial EBITDA growth of its own in addition to the other projects we're doing. And we've said $80 million of CapEx -- of EBITDA benefit in both of those years. And by 2027, 2028, we believe we'll be doing $1 billion of free cash flow a year. And we already gave you our free cash priorities. Done.

Very good. If you can dive back to 2017, in 2018, you acquired the consumer board business of IP, then you had another meaningful transformational acquisition of AR Packaging. Could you just share with us the merits and what really helped shape the current GPK? And what they added to your business?

Yes. I mean it's a fantastic question because when you look at where Graphic Packaging was on that first slide in 2017 when we were $4.5 billion in sales, we were not a major player in this business. We were significant in recycled. We were significant in unbleached, but we weren't a top-tier player. The biggest players in the market back then were International Paper in a company called Westvaco, which became part of WestRock. The opportunity to acquire International Paper's Consumer Packaging business came to us. International Paper came to us and said, "would you be interested?" Well, what that business brought us was not only a large position in bleached paperboard, but it brought us into food service. And food service was critically important because every time consumers had more money in the pocket, they stopped buying as much in the grocery store, and our business would go down. So we get walloped because consumers were consuming differently. So when we got the opportunity to buy the IP business, it not only brought us into a part of the market that used to hurt us, but it gave us scale and size to start really thinking about being an industry leader. And so we changed the way we were doing business as a result of that. And it was one of several things we did, but it was one of the most critical to the transition of the old second-tier company to a global leader. The AR Packaging acquisition was something that we went looking for. We came to the conclusion that sustainable packaging had a very bright long-term future. And the way to capture it was to capture the innovation. So paper companies, as you know, are not known for their innovation, but packaging companies typically are. So we went shopping, looking for a global sustainable packaging leader. And the most likely place you were going to find that in 2021 was in Europe because the push, the urgency for sustainable packaging, as you know, was much greater here and the commitment of the CPGs was much greater here. So we looked around and we found a company that had been formerly owned by Tetra Pak, and we bought it. And I don't have the slide in this deck, but we do have it in the deck on the website. It fit hand in glove because we had a strong position in food and beverage. They had a strong position in food service, household products, health and beauty. So they really beautifully diversified our portfolio. Geographically, they were in almost every place we weren't. So that really put us from, we already believe we were one of the top innovators in paperboard, but now we became an even better innovator and one of Europe's best innovators, which we were global, but Europe was really the place it was happening. And that acquisition has just been an absolute home run for us. And PPWR coming earlier this year, really just sort of puts a fine point on why that acquisition was so strategically valuable to us.

And in terms of the innovation platform, [ plan ] originates in Europe. Is that something you can scale up? Is there interest for this in the U.S.?

Yes. It's a really good question because many Europeans assume that the U.S. isn't really that committed to sustainability. So if you do it over here, is it really going to flow over there? Well, the truth is consumer packaging is an innovation business. Consumer companies are constantly looking for new and better and different. And we've had a good innovation platform and a good track record of innovation in the U.S. So there's always been a demand, but the demand for more sustainable packaging comes from the consumers. And when you think about the CPGs, who are our big customers, 5 of the top 10 CPGs are based in Europe. And 5 of the top 10 CPGs are based in the United States. And they're both global. So if they want to be global, they're going to have to embrace the European standard, and they have. And so U.S. consumers and U.S. regulations may not look as sustainability focused as the Europeans are. But when you talk to a U.S. consumer, they want more sustainable package. They see all the stuff they're throwing out. And then they see it again on the side of the road or in those pictures of the Pacific Ocean littered with plastic. So the interest in consumer packaging, sustainable consumer packaging in the U.S. is actually high. It just doesn't happen as fast. So we're in a really nice position where many of the European innovations KeelClip for putting the 4 packs of Coke and Pepsi together, that's replacing the shrink wrap, which by the way, that's the one place where the U.S. was way ahead of Europe. Shrink wrap and those ring carriers that kill the turtles. We got rid of ring carriers a long time ago. So the KeelClip is expanding here. It was designed here. But now it's coming to the U.S. because the U.S. companies are saying, hey, we like that carrier too, especially craft beer, things like that because craft beer tends to come in those 4 packs with these ugly horrible plastic rings on top, thick ones, not the ones that are turtle killing. So we have seen some of Europe's big innovations start to move to the U.S., in one of our slide decks you can see that. But I want to highlight one in particular. We have a product called Boardio. It started out as a paperboard canister with an attached lid for infant formula in France. We then showed that to a company called Perfetti in Italy. And they took it to their Mentos gum, which used to come in a little blow-molded plastic container. And now that's being sold globally in our container. And we just announced over the last 6 months, that a company in the U.S., a co-packer called Mother Parker, which is the largest co-packer for private label coffee is now going to be using the Boardio container to package coffee in the United States. So that came out of France, went to Italy, and now we're leveraging it across a very large market in the U.S. So now some of the U.S. stuff comes here, too. I don't want to make it sound like a one-way street. But as you understand, the urgency for sustainable packaging, thanks to PPWR and other regulation is really helping move things. So we get about 25% of our revenues in Europe. But in this past quarter, we measure something called innovation sales growth. Almost 50% of the innovation sales growth came from Europe. So this is a really nice boost for us.

Got you. Vision 2030. You essentially, as you said it yourself, you realigned the company's capital allocation priorities public disclosure, which we're going to talk about, financial targets and to match what you can deliver. So the question is in the Vision '25, which you repeated in September '23, you actually had numerical targets, margin targets, absolute EBITDA targets, now you don't.

Right.

So the question is, what was wrong with the prior targets? And why move to something that is low single-digit top line, mid-single digit EBITDA, high single-digit EPS growth. How is that -- clarity and a better understanding from the investment community...

We also got rid of the return on invested capital target.

You did?

You missed one. Yes.

Bloody important target, right?

It's a bloody important thing to use a British expression. But as far as targets, what we've done is we've tried to simplify our targets and not create any sort of noise around them. So innovation is where the growth in our business is coming from. Paperboard sellers, and we don't sell paperboard. But paperboard sellers, that is not a growth business. There hasn't been any growth in that business, okay? But innovation and plastic substitution is creating growth in our business. So it's very important to us to have a top line growth target. And low single digits is the kind of top line growth that successful global consumer packaging companies achieve. If you look at the major European global -- major European consumer packaging companies or the major U.S. over a long period of time, low single-digit growth is sort of what they do, and that's what we're planning to deliver. When it comes to EBITDA, yes, we used to have a specific margin target. Now we have a dollar target -- a dollar growth target. We want to grow EBITDA. Nobody pays a multiple on a multiple on a margin. They put a multiple on the EBITDA. And rather than say, well, our margin is going to be this and our EBITDA is going to be that, we're just simplifying it. Now we can't hit large, we can't hit that mid-single digit if we don't have relatively consistent margins. And you will hear us say on the call that in the second half of the year, we think we're going to get back to our 19% to 21%. That's not an official target because if one of our lower-value products really takes off and generates a lot of EBITDA, we're good with that. So there is some variability there. When it comes to high single-digit EPS, there's a lot of different ways to get to EPS growth, and one of them is buying back stock, which you saw us buyback 2.4% of the company last quarter. We're not going to do that every quarter, although, I'd like to. But our leverage was in a good place to do it. We got rid of the return on invested capital target because return on invested capital targets start to tie you into specific behaviors. You want to jack your return on invested capital, buy back stock, that might or might not be the best thing to do at any given time. But it will jack your return on invested capital. So we decided to simplify our targets and not tie ourselves in. If we don't generate the top line growth, we're not going to get the EBITDA growth. And if we don't get the EBITDA growth, we're not going to get the bottom line growth. But the simplification of those targets was designed to give you something very clear and measurable that didn't skew our behavior to one place or another.

Okay. So if I'm listening to you now, you're basically saying EBITDA growth is what you really need to drive your business performance. And then the EPS, we can sort of add to by buying back stock.

Or delevering or figuring out the way...

Why don't we actually just put an EBITDA target, if that is indeed what you aspire to? I wouldn't be saying $2.4 billion. That's what we aspire to get in whatever year.

Well, I mean, you can do the math and you can get to that number because we did give you the base years, but these are annual targets. And as you'll see, this year, we're not going to hit these targets. Nobody is going to accuse us of picking an easy year to achieve these targets. But we wanted an annual target that looked, sounded and felt like a consumer packaging company. And broadly speaking, those are the kind of targets you set. And we wanted to keep the targets broad so that it wasn't pointing us or steering us to one behavior or another. But you can do the math, and we can -- you can get to the numbers. But we're going to miss them this year if we haven't made that clear.

So capital allocation, one important aspect of having a return on target, I guess, is putting hurdle rates. So when you deploy capital, let's say, Waco, which is now a sizable investment. What sort of return targets would you have to that as an hurdle rate? And what do you expect it to generate?

So we don't talk specifically about the returns on those targets on capital on individual targets. But you did see in Vision 2025 that we had return on capital targets. And we've been delivering in that 10% to 12% range. And if we continue to deliver, you can do the math a little bit. But again, you can you can play with that. We just jacked our return on capital by buying back 2.4% of the company, right? So again, I, as an analyst, I was always a little bit suspicious. Now as a commodity analyst, you're desperately looking at those numbers because nobody ever hits their return on capital, but the way we think about Waco is, Waco has a competitive advantage and it extends the competitive advantage that we got at Kalamazoo. It's something that...

Can we dive back a bit, just to say exactly, starting with what did you do with Kalamazoo? How did that add value? Just to put that into perspective, what you're now doing in the Waco, right?

It's probably a good idea to step back, Lars. Thank you because I don't think Graphic Packaging quite explained the value proposition of Kalamazoo as well as we should have, when we did it. Instead, we just surprised everybody with a $600 million investment that no one was expecting and that wasn't as well received as maybe it could have been. So we had a unique situation in our recycle paperboard business. We had 5 recycled paperboard manufacturing facilities located within 150 miles of each other. They were old, they were high cost, but so what, everybody in this industry's assets were old and high cost. But we had 5 in close proximity, and nobody else had even 3 in close proximity. So we looked and said, what if we plunk down $600 million at one of these facilities and without adding any capacity shut down the other 4. So this was not an expansion project. It was, hey we can do something nobody else can do. And we made a lot of money doing that, and we took our average cost of production down by over $100 a ton in one shot. Now the return on that has been great. Some people will look and say, well, COVID has made it a little harder to see the return. It's not hard to see internally. It was a great deal. But the piece that we underappreciated when we made that investment is really what's driving the Waco investment. So again, thank you for making me go back. We can produce a quality of recycled paperboard at Kalamazoo that no one else in North America can produce. And that's not because other people aren't as good as us. It's a technical issue. The quality of the paperboard you produce is based on the fiber preparation, not the machine. Well, modern fiber preparation requires large centrifuges, large filtration. Nobody is selling small modern filtration equipment. So if you want to put in this large modern filtration and centrifuge system, you're going to produce a heck of a lot of fiber, and it's too big for a small facility to operate. So you've got to have a modern machine. We have -- the only 3 machines in North America that were built after 1985. So we have all 3 of the largest machines once Waco is built on County Waco, okay? So we are producing a quality of sheet on our, K2 machine that no one can match. Now they can go out and spend $1 billion and they can replicate it, but that's going to take 5 years. So we've got at least 5 years runway. The implication of that sheet is, it is so clean and so nice that we can actually substitute it for bleached paperboard which, as you know, sells at a much higher price and is not 100% recycled. And we can sell it at a lower price point than a health and beauty customer is currently buying their bleach paperboard. So we've got a unique value proposition. And when we saw how good this product was, we said, hey, wait a minute. We now have a crown jewel on the East Coast or on the eastern half of the United States, let's go do the same thing in the Western United States. And so now we will produce the best paperboard in America and be able to service all of North America with it, including Canada and Mexico.

So in relation to the cost benefit, including logistics and geographical fit. Do you expect a replication of that $100 per ton relative to what you're now shutting down in the sort of Northeast?

The machine that we are building is actually identical. We did that to avoid engineering costs. So we didn't have any machine engineering costs. We ordered the same machine we ordered last time from the same supplier, the same cleaning equipment, the same control room. So we're going to save a bunch of money that way, and still $1 billion is still a lot of money, right? But we've saved a bunch of money being able to do that. Now somebody else can do what we did, but they're going to start from scratch, and they're going to start today. For 5 years, we're going to be doing this before they get there.

Says the next question, we got dinner last night, so we have had a bit of a chat. But we talk about, you had an integration target. Now you're really saying integration doesn't necessarily mean a great deal. But arguably, you wouldn't have built the machine in way, had you not had converting assets to send that product into.

That's right. I mean we -- I suppose we could sell the entire tonnage in the open market because it's so low cost, but that's not the business we're in. We're not a paperboard seller. We don't sell a paperboard. We sell packaging. So yes, having that advantage from my perspective, it's very nice to have incredibly attractive economics, but it is absolutely essential to have that quality advantage. And that's really, when you look at where we produce paperboard, we produce paperboard where we have a competitive advantage. And you saw us in February sell our Augusta bleached paperboard mill. Great asset. We bought it from International Paper as part of that transaction. It's an outstanding asset, but it's just a paperboard asset. And we didn't have any particular competitive advantage. So we don't -- we're not in the business of producing paperboard. So we sold it and use that capital to buyback some debt and 2.4% of the stock.

If you go back to your business, and on the converting side, carton side, I mean your back-end upstream paperboard assets has a competitive advantage, I would assume, relative to unintegrated peers? Or do you not take that on board as a meaningful advantage?

Let me answer it this way. We integrate where we see a competitive advantage and we believe we can service the customer better. So if you look at our strength packaging business, our beverage carrier business, the 12 and 24 packs, that Americans buy Coke and Pepsi and 36-pack sometimes. We produce and design the machine that takes our package, opens it up, shoves the cans inside and glues it shut. Now we then sell that whole system to the large beverage companies, whether it's beer or soft drinks. And we -- because we control every part of the process, including making the paperboard, we say to them, when you take this machine and literally bolt it to your floor, we will guarantee that machine will be running at full tilt 97% of the time. If we didn't control every part of the process, we couldn't make that guarantee. So we've created some -- a little bit of a competitive moat around that business. You can enter the business, but you're going to have to compete on the terms that are pretty tough to compete in. In recycled, our competitive advantage is that we have a quality standard that other people can't match. In our cup business, we have proprietary cup technology, and we supply the Board there ourselves, and we can deliver a cup with consistency that is greater than if we're buying our board someplace else. In the Augusta business, it was just cartons, and we just didn't have any competitive advantage. Now in our European business, which is a fantastic business, we don't produce any board in Europe. There are a lot of really good board companies in Europe that sell their products to us. And we're very happy with that, and we don't see a competitive advantage to producing our own. So that's kind of the way we think about it is, if we can service the customer better and have some sort of a competitive advantage, then yes, then we'll dump a whole bunch of capital into machinery. But if we don't have to, we're not in the business of making paperboard. We're in the business of selling packages.

Got you. Okay. So coming back to Vision '25 numerical targets. You also had a lot of disclosures. And I guess from an investment community perspective, having more information, what's really going on, what people think are the moving bits and pieces, including volume, you can calculate the price per ton or whatever metric you want to do. That's a way to evaluate and try to build a model, right. And how you've taken that away. So the question is, how would you like to guide people who's building a model, how should people understand what you're trying to achieve when they don't have anything to hang their hat on. They can't evaluate in a particular quarter. They see a revenue number that could be boosted by cost because you need to raise prices because of cost, but we don't really know what's really happening to driving those numbers, right? So how do you -- how would you address that question?

So as a former analyst, I was looking at a model this morning, and I was looking at it saying, how is this analyst, how are they modeling us, because they're modeling things that we don't talk about. What we've done is we've tried to change our disclosure so that it's more consistent with the way the business actually works. So you can go to our Ks and Qs and get the segment breakout of Europe versus the U.S. But a better way to understand what's happening with our revenue is look at what the CPGs are telling you, right? You've heard our CEO say that if you're hearing it from a CPG, we're feeling it in our portfolio. And what are you hearing from the CPGs? It's all over the map, right? And that's what's happening in our portfolio. Now the price of paperboard hasn't moved a lot lately. Our portfolio is churning with all of that change. So the price of paperboard is not really telling you much. Our margins haven't moved very much, except for the one thing that we called out because since we do have these big assets, every once in a while, we spend a bunch of money, shut one down and do some work on it. We called that out in advance. So last quarter, that's the reason the margin was down. But the price of inputs isn't really going to help you get? I mean you saw our margins were pretty darn good. If you ex out those onetime items, they're about 19%, 20%. And that isn't what you're hearing from the average paperboard company. So what we would say is that the models analysts have been using for the last several years have not really corresponded with how our business works, and that's kind of why they haven't been very accurate. So what we're hoping people will do is think about the low mid and high and are 5% of CapEx and then start looking at things like the Nielsen data or what the new Starbucks CEO is saying. And you think about where food price inflation is going to impact and where consumers are going next because that's what we're doing. And we're making sure that our portfolio is where the consumer is going next. And that's how we're generating the consistency. So the old metrics, we're going to point to a lot more volatility than we're actually showing in our portfolio, and they're just not how we run the business anymore. So a lot of our long-only shareholders will say to you, I love your new arrow chart because you're breaking out your 5 markets, food, beverage, food service, household and other, and you're telling us what's happening in each one. And we can look and see whether you're tracking or you're outperforming or you're underperforming, what the companies in the industry. In food service, we've been outperforming. Our innovation; has really helped us in the food service business and some acquisitions have really helped us in that business. So we think if you change your mindset and think about packaging and not paperboard, it's actually a lot easier to understand how our business works this way. But we do appreciate that if you have a model that works that way and you're in love with it, what we've done isn't making that easy.

You spoke to sustainable packaging as an incremental growth driver in innovation as an incremental driver. Then I'm looking at your low single-digit target, which is going to be below this year. For obvious reasons, the volumes aren't -- or demand isn't great. Nielsen data would suggest it's not a good year. But you're also saying that consumer packaging company have been growing 1% to 2%. If indeed sustainable packaging is replacing another substrate, why wouldn't that number be higher?

We hope you're right. And then it will be...

You're betting on it in one respect because you're calling out sustainable packaging has growth.

Yes. No, look, we think we're in a great place. But as I think you know, consumer packaging companies don't change their packaging quickly or easily. It's a big decision because we are literally carrying the brand's message with our package. And so you don't change your packaging quickly in the United States because the government doesn't force you to. Europe is going to change some packaging very quickly because regulation is forcing you to. But you don't make those decisions quickly or in a cavalier way. We're going to win some business and lose some business, and you're going to see some people switch to a new product and then not like it and switch back because the customer didn't like it, right, that's the nature of consumer packaging. We think we've got a tailwind, and we would love to be at the high end of low single digit. But if you look historically at the best-performing packaging companies, even when they had wind at their back low single digits is kind of how it tends to play out. And if we can outperform that, great, but we don't think there's anything easy about low single digit. And remember, the underlying demand growth of food is barely moving, right? It moves with population. So we need to capture something on top of that. So if you take low single digits and say, well, let's just call it, let's just pick 3%. We're saying 2% of that's going to come from our innovation. And then we've got to get more on top of that, which means we're taking it from somebody else. We've got some pretty big, tough competitors and I haven't seen any plastic companies that look like pushovers to me. They're fighting back, you're hearing the plastic companies talk about how sustainable they are. You'll make your own decision about, and consumers will make their own decision, but this is not a quick thing. We do think it's got a lot of longevity. It happens more quickly in Europe because of regulation, and we think it's going to have a much longer tail in the United States. And for us, that's actually good. We think it's inevitable because consumers want it. And ultimately, the consumer products companies want it too because nobody likes it when there's a picture of a garbage slick in the Pacific Ocean and the photographer has zeroed in on one of the big brand labels that's very clearly showing up in that slick, right? So it's going to happen. It's going to take some time. And for us, we think low single digit is a pretty good target, and boy, it would be great if we could beat it.

Coming back to your margin growth of mid-single digit which would, of course, imply a consistent margin expansion over the next 7, 8 years. Can you give us any sense and what is driving that margin expansion? Are there any step changes if Waco could be...

Yes, it's a good question. And We want to generate consistent growth, consistent margin growth. I'm pretty sure we're not going to promise because that stuff, as you can imagine, can be lumpy. You've seen our margins improve over the last couple of years. And you've seen this year with absolutely no help from volumes. Our margins are pretty darn good. And we've done that with productivity, and you saw the press release last night, we lost a little bit of productivity with some of the weather that just happened. Nothing too big, nothing too unusual, but -- and no harm done but a little bit disappointing because we were doing so well on productivity this year, and then we had to give a little bit of it back. So think about it this way. The growth that we're going to generate on EBITDA is going to start with the top line growth. Maybe some of that will help our margins. Some of it might actually hurt our margin. It depends, we do see some mix effects so hard to say what impact that's having on margins. Big projects like Kalamazoo had a big impact on margins, and that was a more or less onetime impact. And Waco will have, we promised $80 million of EBITDA gain in 2026 and another $80 million in 2027. So that's a big chunk. There's other projects that are going to impact our margins that we don't talk about as much, but we're trying to talk about them a little more often. When you have 100 locations, the individual projects that you do at those locations tend not to be that big. But if you do enough of them, they add up. So we highlighted 2 projects last quarter, one of the largest printing presses in the world went into one of our facilities in Winnipeg, Canada. That's driving productivity and the margins at that facility, we think are going to be nicely impacted. We put in some automation at a large, Winnipeg is not that big. But it's a great facility. And you know how it works. You put more capital with your winners, not your losers, right? Well, I take that back. Some companies do the opposite, but that's not what we do. We put some automation into one of our larger beverage packaging manufactured facilities. With beverage packaging, you're putting a lot of volume out, a lot of flat Coca-Cola containers and then you ship them flat to be -- for the Coke to go in. The most damage tends to happen after that package has been made, and you're handling it and putting it into the warehouse or bringing it onto the truck. So we put in some automation to eliminate the handling of those facilities -- of those packages. And that's going to help reduce waste, reduce damage, and it reduces people costs, which people are very hard to find right now in some of these locations. So where we're having labor issues, we're putting in automation, that's going to drive margin. So they're small individually, but we're doing quite a lot of them. And so that would be another piece of it. And there's a lot of levers you can pull. There's a lot of work being done on our supply chain generally. As you can imagine, truck versus rail, a lot has changed with truck versus rail over the last 10 years, pre-COVID and with COVID. So there's a lot of different levers we're pulling. And yes, we would like to see our margins continue to move higher, but as I said earlier, we have to have relatively consistent margins to hit these targets. And if we can capture some discrete margin gains over time, that would get us to those targets even faster.

Sure. So if you're looking at high single-digit CapEx to revenues at this moment, right, or maybe low double digit 5% [ towards ] '26, I guess, that is, onwards. Will that be sufficient to continue to drive productivity, which you need to do to offset underlying cost inflation, to develop the business and facilitate growth.

So there's a lot of projects, a lot of projects in that 5%. We've said that we need 2 for sustaining capital. Remember, we don't have a lot of paperboard manufacturing facilities. When we're done with Waco, we will shut down another 2, and we will have a total of 5, and they will be very well invested, very modern and the more modern they are, the less sustaining capital they need. You've seen some other companies try to do that. The fewer facilities you have, the better off you are when it comes to sustaining capital. And ours are relatively new. And only 3 of them are wood-based. The other 2 are recycled, which means their sustaining capital needs are even lower. So we're in a really nice position there. So 2% of the 5% is going to go to sustaining capital. The other 3% has to cover all of our sustainability initiatives and all of our reinvestment opportunities. We've laid out and I showed you for about 30 seconds, our sustainability plan. There's a couple of very large projects in there. We're fortunate that we've only got 5 facilities. So we can do 2 large projects that will take, that's a big chunk of the way to that greenhouse gas target. And because they're concentrated at 2 facilities, they actually have pretty good return on capital. Not great, but a return on capital on sustainability projects is not something everybody can deliver, and we've got 2 that we believe will deliver a pretty nice return. So they're in there. And then the rest is all of these little projects. And the cost of an individual project is somewhere between maybe 2 in 10. Maybe there's a few that will go over 10. But it's more of the volume of these projects that we can do. And so you have a lot of flexibility when they're small, discrete projects. And that's the nature of a portfolio where you have 100 package manufacturing facilities. There's a lot of places to do things. That one press that we put in Winnipeg, one of the largest -- it's the largest press of its kind in the world. It replaced 2 presses. Well, there's a lot, as you can imagine, there's a lot of operational things that change. It's not just 1 press versus 2. It's one big press that can do a lot more things and you can do a lot more things at one time, which means your productivity per unit is going up. So there's a lot.

Final topic then, capital returns. You mentioned dividend has got to be sustainable and I assume steady and growing. What is your thinking there? And then when you talk about opportunistic, what is the sort of measurement point in being opportunistic in share repurchases?

Okay. So thank you for asking because if you look at our Investor Day presentation, you'll see that we rank ordered our capital allocation priorities slightly differently than I did in today's presentation. And it's not that we changed our mind. It's that if you're thinking between now and 2030, the priorities are a little bit different than they are right now, reaching investment grade. We're going to do that by 2030. Are we going to do that now when we think our stock is cheap? Not if I have anything to do with it, and I don't have that much to do with it. But the bottom line is we're very comfortable with our debt levels right now. And we've done the math, and we think that acquiring stock was cheaper when we had the money from Waco, so we did the math, and we decided to buyback stock and not pay down as much debt. We left our debt levels flat. Our average cost of debt right now is 4.5%. Our incremental cost of debt is 6-point less than 5, I think, right about 6.5. We borrowed it just recently at treasuries plus 188. I don't know you'd want to be investment grade, if you can borrow it T plus 188. You're going to get a couple of extra basis points. That's about it. So thinking about that, you say, well, over time, we're certainly going to delever further. But now it's probably not the right time to do that. But what about the dividend? A bunch of people have said to us, come on, dividends don't matter. Well, you know if there's a whole category of investors who say they do matter, and we want those investors, and we know we can afford it. We're not looking at having a big dividend. We're looking at steady dividend growth consistent with the growth in the business. So we want to be a dividend growth company. We're going to be opportunistic about when we buyback the stock. Every capital allocation decision we make with the exception of sustaining capital is measured against buying back stock. And so tuck-in acquisitions have to be more valuable. It's a good -- it's just a good simple way of thinking about allocated capital. And we don't have these big lumpy projects. There's no more Kalamazoo, there's no more Wacos. We saw a competitive advantage opportunity in North America. We grabbed it in the Eastern United States, and by the end of next year, we will have grabbed it in the Western United States. Those are the only 2 sides there are. We don't see a competitive advantage to spending a boatload of money in Europe. What we're going to spend in Europe, and we're going to continue to spend here is on innovation capabilities, execution capabilities, printing presses to go to 7 colors instead of 4. We're going to build up and be the most attractive packaging company Europe has ever seen. So it's not that we're not going to spend money here, but it's not going to be $1 billion at a time.

That's a good way to end right there. Thank you, Mark.

Thank you. Appreciate it being here.