Graphic Packaging Holding Company ($GPK)

[Audio Gap] packaging analyst, joined by my colleague, I think, here, Bailey Gordon. Richard is walking around as well. We'd like to welcome today Graphic Packaging and representing the company is CEO, Robbert Rietbroek, and who has just over 5 months, I guess, tenure as company President and CEO; and also attending Charles Lischer, Interim CFO; and Melanie Skijus in the audience with us. GPK, as many of you may or may not know, the world's largest manufacturer of sustainable consumer packaging, primarily made from paperboard. Currently, close to 2/3 of sales are in food and beverage applications, about another 20% coming from food service. So generally speaking, should be pretty resilient. So this is intended to be a fireside chat. To the extent there are questions in the audience, please blur it out, raise your hand, throw something at me. That's fine. And with that introduction there, Robbert, I think you had maybe a couple of opening remarks, and then we can jump into Q&A.

We can go right into Q&A if you want to.

Okay. Fair enough.

So I'm asking all my companies this question. You were at a different seat when all this happened. But how would you compare the current acceleration in input cost inflation, however you kind of want to describe it, and maybe the durability of that? Because I think at least as we're thinking about it, looking out over kind of the next 6 to 12 months, we've learned that inflation is not ideal for the low end of the K for the consumer, which then translates into a more challenging volume environment. So just thinking through that piece of it as you guys are kind of experiencing it real time?

Yes. The question obviously is, is this inflation more permanent in nature? Or is it more inflationary or transitory in nature? And as I think Chuck mentioned in the earnings call, we've -- we are about $65 million more inflation than originally anticipated in the annual operating plan and guidance, which we're trying to work through and offset now. I think part of it is probably going to be there for a while, given the fact that some capacity has been taken out of the market, and there's a time to start that back up. Part of it is transitory. It's not entirely clear yet how much of that, but it's definitely -- some of it will be permanent. And we're doing a lot of work in productivity. So we've announced in the first quarter, we did a -- or actually, in the earnings call for the first quarter, we announced that we executed a reduction in force, where we reduced 500 roles to drive better cost in our SG&A. We are currently working through a number of other initiatives in procurement, for instance, where we're looking at all of the direct and indirect costs to see if there's any immediate savings that we can generate. We have announced the sale of our Croatia facility as part of our footprint optimization effort to really get the right network of production facilities. And Chuck and I are working on a weekly basis to manage our OpEx to really look at costs across the board to drive savings and CapEx as well. So CapEx is obviously related to our free cash flow, but all of the CapEx projects that were in flight were relitigated, if you will, reevaluated and requested for new approvals. So we are treating this inflation like it's permanent in the way that we're reengineering our cost structure. But we are hopeful that part of it is transitory.

Understood. We're going to have a couple of different angles and bites at demand. But just is there anything that you've seen kind of post February 28 from a demand cadence standpoint when you look at the business that would suggest to you customers are either trying to prebuild some inventory ahead of potential price increases, potential shortages, anything like that, that stands out to you all?

Well, we have seen our demand in the market be very resilient. We have not seen spikes in any way that would suggest inventory buildup. We feel that given the fact that we're so diversified across food, beverage, household, we're even outside of the perimeter now in fruits and vegetables. We're in health, we're in beauty, we're in nicotine. We're in Europe, we're in Asia, we're in Africa, we're in North America. That geographic spread, that portfolio diversity -- diversification has created quite a bit of a calm in our top line. So we've had the luxury of not worrying so much about our top line so far and really focused on the cost side of things. That's where all the volatility sits in the business. So you know that our margins are more depressed than they were maybe 2 years ago. So we're laser-focused on productivity and driving our cost structure down to restore EBITDA margins. Part of that obviously is impacted by the fact that we're taking inventory down this year. It's $130 million. But that's the right decision from a free cash flow generating standpoint.

Okay. All right. Back at the ranch. So new CEO, about 5 months. It's been a difficult time to come into the organization as an outsider. And then obviously, you get hit with the conflict. There's some winter storms. It's probably easier to run, I'm going to say, a water cooler business versus running paper machines during winter storms. But just as you kind of -- you're settled down now, what excites you most about what brought you, what drew you into GPK? I know you've been asked on the conference call, but just anything that now comes to mind 5 months in, what gets you excited about working at GPK and the opportunity?

Yes, Gabe, thanks for that question. I was attracted to Graphic because I was excited about the prospect of leveraging my 3 decades almost in consumer packaged goods at Procter & Gamble, Kimberly-Clark and PepsiCo and to serve my previous employers and other players, big players in the CPG industry, be a vendor and work so closely with them, and at the same time, the sustainability aspect of this company. We make fiber-based biodegradable packaging. So all the secular trends are in our favor. In Europe, by 2030, single-use plastics will be largely eliminated from grocery. We anticipate similar trends to come to at least certain states in the U.S. and potentially broader. So I think the long-term prospect of this company. When I look at the last 5 months, as you know, I've told you this, I've traveled a lot. I've been to various markets. In fact, in 1 week, I was in 6 countries. I did 8 flights in a week. This was really eye-opening. I visited 4 of our 5 mills. I visited a number of converting facilities. And what I realized as I was traveling the world is what a big moat we have. We have 5 mills that have a massive replacement value and just under 100 converting facilities. Just the sheer replacement value of those facilities is an enormous competitive advantage. It's really hard to replicate. The second thing is if you look at the demand side, as I said before, it's far more resilient as I've seen it than what you read in the media. And the media, I read the media, I think all of the consumer packaged goods companies are in severe decline. That's a little bit of the headline. We see a far more resilient demand picture where we see all of the turbulences on the cost side, the inflation side, particularly driven by transport, logistics, oil and gas prices and obviously related to the conflict. From a consumer side, there is a challenged consumer. We can talk about it maybe a little later, but there is a value orientation now that we see that can be addressed through price tiers, that can be addressed through pack price architecture and simple promotions, end caps, et cetera. The customers are really engaged with Graphic. So I visited a number of customers in the Northeast, in the Midwest, in the Netherlands, in Switzerland, in France, and I have visited facilities in the U.K. and France as well. And so what we see there is that we are absolutely one of their preferred vendors because of our capabilities. We talk a lot about paperboard pricing, but we are actually a packaging company. So more than $8 billion of our sales is finished products. And so we have 3,100 patents, and we have proprietary products like the fridge pack for beverages is one of our inventions. So really, we got to think less about this constant focus on pricing of paperboard and much more about what we do in the market with our customers, the innovation we drive, the products we launch, the innovation centers we have in places like Colorado, Atlanta, Bristol, U.K., that's where the energy is, and that's where our customers are engaging with us. So the net of it is, I'm incredibly encouraged by the last 5 months. It was difficult walking into this assignment. It was definitely, I'm not going to deny that. But as where I sit now 5 months later, I'm far more optimistic but also realistic about the challenges that we have on the cost side.

So I want to double-click on that a little bit because I think Smucker's was out today talking about their fiscal '27 guide. I think volumes that you pointed to would be down 1% across the organization on a consolidated basis. But just if that's the new normal, and we can kind of tick down the list of is it population trends? Is it GLP-1? Is it health and wellness? I think sometimes there's winners and losers within those buckets, right? And sometimes we make healthier decisions and that means more around the perimeter. But just as you look across the portfolio, as you challenge the teams, what are you seeing in terms of kind of real-time feedback? I'll say, absent the macro in terms of what demand we hear like you said and read in the market, the headlines?

Yes, Gabe, I think what we need to do and what we are doing is expand our portfolio beyond the center of store. So we are more and more active in the perimeter of the store. We've developed a very large fruit trade business in Europe, where products like berries are now marketed not in plastic, but in paper trays, again, towards the 2030 regulatory change in Europe. We have talked about the fact that we have a $15 billion potential addressable market of plastic to paper conversion and foam to paper conversion. So whether you're replacing a styrofoam cup or styrofoam food container that you get maybe when you're going to pick up your food at a restaurant or whether we're looking at expanding beyond center store from the traditional cereals businesses and the cookies businesses where we have such strongholds, that's the focus. So we're trying to grow the category. And there are a lot of plastic-to-paper conversion projects in the pipeline. I can't name any of them because that's obviously proprietary information. But think about replacing a plastic tray in a cookie execution with a paper tray, think about fruit and vegetables, tomatoes, cherry tomatoes, blueberries, things of that nature, there is a tremendous upside. And I just came back from Bristol and Cholet in France, and we're making some of those products there. And I was surprised to see the size of that business. It's actually very meaningful already. And we're now obviously trying to globalize those businesses. So I think rather than only competing where we've historically competed, we are going to start growing the paper convertible packaging category instead. That's much more exciting for the team. It's much more exciting for the industry. And also, we have some excess capacity, as you know, in Waco for recycled board. So we'd like to make sure that we can complete and fill that mill.

Okay. I guess 2 questions off of that. The value orientation that you talked about from the consumer. Your products, when you think about relative cost to whether it's polymer or otherwise, polymer is up right now, and actually, I think polypropylene, polyethylene were down a little bit on a spot basis in May. But just cost competitiveness of your product, are there offsets if it's more expensive, sort of the initial upfront cost, whether it's throughput, whether it's efficiency somewhere else?

I've had this conversation in the boardrooms with my top customers several times in the last couple of months, where we typically look at a certain product category where they're currently in plastic, and then they express a desire to go to paper. And then the question is, is this cheaper or more expensive? I've seen both, all right? So the first is like let's take the styrofoam beverage container. That's much cheaper than a paper beverage container. But a plastic single-use microwavable cup can be more expensive than a paper microwavable cup. So for instance, if you're in the ready-made meals category where you add a little water and you have mac and cheese or something like that or it's rice-based or something like that, pasta-based, you may be better off with a paper cup. Then there's a lot of gray area where we may be a fraction more expensive than plastic. But then that's obviously evolving with the resin prices and coming up in oil and gas prices. So there's a lot of variability. Beyond that, all of these large customers have tremendously high aspirations from a sustainability standpoint in the carbon emission reduction and recyclability. So that's the angle where there's -- it's a multidimensional discussion. It's not only, "Hey, what's the cost, but how can we make the footprint better and how can we drive more recycling?" And you know 70% of our products are made of recycled material, approximately. And I think just in the mid-90s are recyclable. So we really are well positioned in that discussion. So I'm actually engaging in some cases, with the Chief Sustainability Officers of some of these large corporations directly to understand their needs, the process, how they engage with procurement, how they track performance.

Shrinkflation. You sell converted product, surface area. I would assume that goes up on a per-calorie basis or however we want to measure it. Again, are there some analytics behind that, that you all have done internally or a way to think about it, net positive, neutral?

Yes. I think the shrinkflation word, I've seen it, I've read it. We like to call it pack price architecture. So it's a much more friendly word. And we like to call it portion control. And so when you look at the best examples of portion control are, for instance, mini cans of CSDs, which we all love because all of us like -- most of us like the occasional CSD, but we may not be feeling like drinking a full can. Those are all very favorable for Graphic Packaging because that's a lot more packaging material and packaging boxes for us because you sell a lot more of those units. So when we look at downsizing portion control, we are very much in favor of that. When our customers go there, we can support that and make that economically viable. Also, we have such a big global footprint, and we have the lead times that they require for both promotional packaging as well as we can really be agile. We have some customers where we work in a 2.5-week lead time. That's pretty incredible. And we can even move faster in the foodservice side of the business.

We're going to switch gears a little bit. We'll try to maybe talk some dollars and cents in the first half and the second half, and we've got a lot of investor questions about it. You mentioned $130 million of destock on the cash flow side. Our math says roughly maybe $400 a ton of under -- or underabsorbed fixed overhead directionally. I know the math doesn't always work out right. But just Q1 came in, I think, at $234 million. You're guiding $230 million to $250 million for the second quarter. Anything on the production side? Is the destocking tracking with what you were kind of projecting at the beginning of the year? Any color or context around that?

Yes. This is Chuck. I'll take that. So a couple of things. So if you looked at our Q1 inventory decline, Q1, we saw about a $50 million decline in inventory from year-end, whereas in the prior year, it was a $60 million increase. So you're clearly seeing the inventory come out of the business, and that's something that is helping to support our free cash flow. Due to the seasonality of the business, we do generally have more of an inventory build in the first half and then we harvest that more in the second half. And so we did have negative free cash flow in Q1. But even though it was a negative almost $200 million [indiscernible] $250 million positive to where it was last year at the same time. So all that will give us a long way -- take us a long ways to getting to the $700 million to $800 million of free cash flow that we see in 2026 versus the just under $200 million that we saw in 2025.

Okay. And then I think there's a SBS price increase on the table for folding carton as well as cup stock for June implementation. It seems like at least from the feedback that we've been getting, folks are fairly optimistic that, that will be implemented. So I guess maybe a 2-part question. One, to the extent you can comment whether it's contract business versus noncontract business, what you've been doing on the price side to offset some of that $65 million of inflation that you've seen? And by our math, I think even just on the transportation side for paper, there's probably $25 to $30 a ton, excuse me, of inflation flowing through the system. You've got the normal, I call it the inflation treadmill, labor, et cetera. Just how you're tracking? You reiterated the $65 million, so I'm assuming that's still a good number. Anything else you want to call out?

Yes. On the pricing side and all that, as you said, we are out with both cup stock increase on the bleached side and folding carton side and then also out with unbleached price increase as well. So that's all on the paperboard. We will see how that gets recognized, first opportunity in a couple of weeks. We don't speculate on that. But as you pointed out, and as Robbert talked about earlier, there's a tremendous amount of inflation in the business. So that's clearly what's driving the need for the price increase, and that's well chronicled both in our business and in the broader industry. So that is something that certainly shows the need for the price increase. And then the way that will all show up in our individual contracts. Just as a reminder, the way the index works for us, that's really a price change mechanism. So we set the price of a package at the time that we negotiate a contract with a customer. And then the price change mechanism during the contract is partially driven by the paperboard price. There's some other pieces of that price change mechanism as well, a piece tied to CPI and a few other things -- a few other items as well, but that's driving the majority of it. And for us, from a bleach standpoint, there is a greater business that's tied to open market. So we do have a greater percentage of our overall business that is tied to an index in the bleach business than it is in some of the other businesses. So that's on that portion of the price increase. We also talked about on the Q1 call that we were out with $1 billion of packaging price increase. And then we also have contractual pass-through mechanisms to offset some of the inflation that we see. So all of that will help us bridge from the first half to second half guide.

Okay. As it relates to paperboard supply, you talked about we sell packages, and we've heard this for a while. We also sell raw boxboard. There was a tragedy in the Pacific Northwest that took some capacity out. Just to clarify for investors and folks that are asking questions, we continue to get questions about it to this day. Our understanding is that liquid packaging board was the majority of what that mill was making. And it's a little bit different characteristics and capabilities that you need within a mill to make that, lamination and extrusion, et cetera. So just maybe talk about what your capabilities are? Have you heard anything in the marketplace in terms of trying to source alternative supply? Again, our understanding was that the majority of that mill's production was going back to Japan. So just -- I know it's not your asset, but to the extent it affects you?

Yes. We've all heard and read about the extraordinary tragedy that occurred. For those that are unaware, there was a -- there was an accident in the state of Washington at a mill. And our thoughts go out to those affected and the victims. The impact on our market is minimal. And we probably get a couple of orders here and there we can help out, we'll help out. But most of that production was going back to Japan, and that was being used for an integrated fashion. So the closest thing we make to that product is our cup stock paper, bleached paper and texture kind, but we do not believe that there is a major impact on our business from that.

Okay. If you were to kind of put your old consumer hat on, and right now, we've got the World Cup. We've got America 250, which I think most people are pretty excited about. Just maybe things that you would be thinking about from a marketing standpoint, from a commercial standpoint that maybe is an opportunity for Graphic today. And then maybe 1 or 2 key things that you're worried about. We think about -- again, we continue to read the low end of the K is struggling?

So as you know, I worked in CPG for about just under 30 years, and I've not only worked in North America and Europe, but also in some of the emerging markets like Venezuela. And we dealt with a lot of economic volatility in those markets. And the first thing that we would have looked at would have been getting the right price tiers in the market, the right portfolio to serve the high end of the market, the middle end of the market and the lower end of the market to really offset and fight back against the private label growth from a branded standpoint. So having the right portfolio, and that's usually enabled by a formulation, but also by price pack architecture that we talked about earlier to have more accessible variants. Then you look at what channels you want to operate in. So certain channels tend to grow in growth periods and other channels tend to grow in more recessionary or economically challenged periods. So you want to make sure you're in those channels. And then e-com is continuing to go from strength to strength, particularly the younger generation tends to get a lot of home delivery. It's unbelievable how that's taken off and how that continues to grow. And that requires new formats, new pack formats and new product executions. So I would focus there, and then I would try to drive and reignite growth, right? There's a lot of categories that we see that are contracting right now from a consumption standpoint. It is possible to restore growth in those markets. You just have to get very creative and you have to get differentiated. So marketing, brand building, product innovation are really important right now. And we see that, for instance, the protein products, particularly helped by GLP-1s are winning. That's been a trend that's been going on for a while. I remember when gluten-free was the big idea. And then protein came in early beginning of the decade, became really big. I launched a number of protein products myself in oats, for instance and that continues to be very popular. So when we look at our business, and we talked about it in the earnings, some of the protein areas have grown much faster, and we tend to be overrepresented in that space. I would also then really take advantage of the World Cup. We have 24 brands that we serve in our portfolio that are doing World Cup thematic events. And that is a worldwide event with billions of viewers that happens to be in North America this year in Canada, Mexico and the U.S. I'm personally planning to be there this Sunday at the game in Dallas. I can't wait. It's exciting. I hope all of you are going to tune in. And if you see brands that are doing promotions in the World Cup, just buy them, just go all out, just support them because we do want to make sure that we continue to market our brands and that everybody is excited about what's going on in the world. And this is a very positive event where all the nations come together. So yes, I would be focused there. Pack price architecture, product, price tier portfolio, winning in the right channels and specifically in e-commerce, and I would really drive thematic promotions. And the last thing I'll say is value meals are really in demand right now. We obviously have a very big business in foodservice with the biggest companies in the world. There's a lot of activity in thematic value meals, and there's still a lot of room to do exciting marketing promotions there.

Protein forward?

Yes.

And maybe 1 or 2 things that would keep you up at night?

I think the last 5 years have been -- we've seen a lot of inflation. So in the beginning of COVID, there was a lot of demand-driven inflation. Everybody -- remember, everybody is filling their pantries with beans and rice and oats and spaghetti. And there was just a shortage and there was just not enough inventory around. That was then followed by supply-driven inflation when we saw shortages in CHEP pallets and transport issues and stuff like that. Remember, all the containers ship in Los Angeles. So the consumer is fatigued when it comes to inflation. They're sort of tapped out, and that's exacerbated by the fuel prices. And so now you have to make choices every day, consumers -- moms and dads out there have to make choices. So as manufacturers, we have to be empathetic. We have to make sure we provide the right value propositions to enable consumers to buy what they need, and it goes back to the earlier conversation. And then overall, I think the inflation in transport, oil and gas, diesel. Diesel affects everything. It touches all the ag sectors, et cetera. So for that -- if that would come down, it would be very beneficial to everyone.

Got it. Going back to the guidance, like I said, $230 million to $250 million for kind of puts you, let's say, at $470 million for the first half of the year. The midpoint of the guidance is $1,150 million. So again, we talked about being back-end weighted. Non-repeat of weather, we got some pricing that should be coming through. Can you walk us through some of the puts and takes H2 to H1? And if there's any more clarity today than there was maybe at the earnings call in April?

Yes. So I think you touched on several of them, and it's the same items that some of it -- in addition to some of the same pricing that I touched on earlier. So yes, the weather impact in the first half is $25 million. There was additional about $20 million of higher maintenance in the first half than there is in the second half, additional production curtailments, about the same number, about $20 million in the first half versus the second half. And then, of course, then the cost from a -- on the cost side, we committed to the $60 million of cost takeout, and that's a 2026 number, not an annualized number. And we saw about $10 million of that in Q1 and then a little bit more of that in Q2. And so that will accelerate. The pricing that I already talked about earlier on the $1 billion of packaging price and the contractual pass-through mechanisms will all contribute. So as you can tell, there's a long list of things that are going to help us bridge from first half to second half, but a high level of confidence that we can bridge inflation that we see.

Okay. I think the $15 billion of addressable market on conversion opportunities that you talked about, I think, Robbert, you called out some converting capacity that it would be nice to have or maybe that it seems like it's growing pretty quickly. I think you said France on fresh produce. Is that -- I'm assuming the answer is yes, but just maybe lay out for us I'm going to bring up Vision 2030 only because we talked about, I think, 5% of revenue and CapEx. So all within that spend wallet of 5% that we can achieve what you'd like to?

Yes. So the fruit trade business was actually initiated in the U.K. market and is now rolling out in Europe, and we have those capabilities to produce those things in France as well in the Cholet factory where I was recently. When you look at the 5% CapEx, so what we said is 5% or below, which is really a big part of becoming free cash flow generative, and we want to return money to our shareholders, obviously, over the years to come. We are going to pivot a little bit and allocate a little bit more of that to the converting side of the business. So when you are engaging in a project with Graphic, there's 3 ways you can do that. The first way is we sell you or lease to you a piece of CapEx, for instance, for KeelClips for cans or bottles, the clips that used to be plastic, they are now paper, the rings around the cans. It's a great example of such a project. The second type of project, we would put the CapEx in-house, those are low amounts usually with really aggressive returns, very fast paybacks. And the third, and those are things we designed for is that we use existing equipment of manufacturers that are making cookies and they want to tray that looks and gets handled the same way as the plastic current execution. So we will design for that so that it goes through the same machinery or minor adaptations. Those are obviously preferred by our customers. So with regards to the mills, we will continue to invest the necessary maintenance and repair, but there's also regulatory investments. I think water treatment is a big deal. We will -- and we're still working on the cogen facility in Waco. We will complete that cogen facility. We will invest in regulatory requirements. We will invest in repairs, maintenance and make sure that we have the right outages to do the maintenance, which is required on an annualized basis where you go into the equipment and you look for cracks and you do welding and you do inspections to keep it all operating well and safely and at a higher performance level. And then on the converting side, it's really exciting because there are some projects that Chuck and I get on our desks that we look at that have a payback under a year. And you simply go and build the equipment and you launch the product, and it's already contractually agreed, obviously, and then you have that instant payback. That is going to be part of: a, becoming a much more free cash flow generative business over the next years; and b, a higher ROIC. Because as I looked at our ROIC over the last 5 years, I don't think it is where it should be with regards to the industry average and industry standard, but we can get there.

Last one for you. I think we got about a little over a minute left. You talked about some divestitures to maybe accelerate deleveraging or things that I'm going to say noncore, but just as you look across the portfolio, anything that's become more evident to you? Again, I know it's only been 6 weeks or so since we last caught up, but just...

Yes. Yes. So we have announced the divestiture of the Croatia facility. We are always going to look at our footprint globally to understand where there are opportunities to, let's call it, unlock cash that is trapped. This could be consolidating facilities. This could be selling facilities or parts of our business. It could even be a sale of a building and doing a leaseback. So all of the above will be part of our ongoing business process. We did conclude a 90-day review, which resulted in, obviously, not only the sale of Croatia, but also the reduction in force where we reduced 500 roles to drive productivity and our SG&A number down. But yes, this will be an ongoing process.

And Europe was determined to be strategic?

Yes. We have -- we deliberately went out in earnings to say we are very committed to our Europe business. We believe we are a -- our core is North America and Europe. We serve a lot of the same customers in both continents, and we are very happy with our European business.

Excellent. Puts us out of time. Thank you all for your attention. Thank you, Robbert, Chuck.

Thanks, Gabe.

Thank you.