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

Hi, guys. We're going to keep things off here. I'm Jefferies Paper and Packaging analyst. I'm Phil Ng. We're delighted to have the Graphic Packaging team here. Robert CEO, Chuck, the CFO. Robert, I think you're going to kick things off of some insights what you're seeing out there.

Yes. Well, good morning, everyone, and thank you to Jefferies for organizing this great conference. And thanks, Phil, for hosting us and inviting us. Before we get started with the fireside chat, I'd just like to say a couple of things about Graphic Packaging. We are one of the leading fiber-based packaging companies in the world. We create graphic packaging with designs. You may be interacting with us 10 times a day without knowing it in when you open your toothpaste box when you're opening your favorite cereal brand, when you're getting your favorite value meal at the leading quick service restaurant. Our brands are pretty much everywhere. We have a global operation, and we're a leader in sustainable consumer packaging. We have 5 mills, very large milling operations, Kalamazoo, Michigan, Waco, Texas, Macon, Georgia, West Monroe, Louisia, and Texo Canada and Texas. So we have 2 mills in Texas and pretty much 1 in the Midwest and then a couple in the South. We have about 100 packaging converting facilities, and we have operations in 26 countries. We are actually not a commodity seller. We sell a very premium product in a very close partnership, and we have over 3,000 patents. Some of our most famous patents are the fridge vendor which is the fridge pack that you can get with people maybe a Pepsi or Coke or Dr. Pepper. So think about the fridge pack, -- we have KeelClip, which is a very innovative replacement of plastic for cans, a paper cover, gives you new real estate to print graphics on. Bordio is a great technology we sell -- and we have very strong relationships with the leading consumer packaged goods companies in the world. We're very diversified. We have businesses in the food industry, foodservice, pet food, beverages, household care, health care, wellness and beauty. And we're basically in multiple corners of the store, and we're in quick service restaurants. We are very well invested as a company. We have very competitively advantage packaging with a very deep base of talent. So great operations organization, great operators across 26 countries. Now why are we a very good company to invest in. We've been at a very heavy investment cycle. So we've invested heavily in our infrastructure -- most recently, we built the Waco recycled board mill in Texas, and we're very proud of that asset, and that's going to be a long-term durable competitive advantage in our recycled platform. We are now focused on generating cash. So the investment cycle is behind us. We're going to be a free cash flow generative business with years to come. And we're strengthening our commercial approach, really focused on revenue management. So revenue growth management and driving [Audio Gap] that's hitting all of us in this industry and in consumer packaged goods. We're implementing best practices as well, and we're streamlining our processes. A big part of the work we're doing is portfolio and footprint optimization. So you've probably heard that this quarter, we're closing 2 facilities and redividing the volume across our existing facilities really driving cost transformation. And most recently, we've launched -- we -- I should say, we've relaunched into uncoated recycled board URB. We used to sell URB from Middletown, Ohio. We just got back in that business, and it's going ahead of schedule. And it's really helping us with filling the Waco asset and also driving cost absorption. So again, we're very pleased to be here, Phil. Thank you for inviting us, and I suggest we're get into the Q&A for the fireside so.

Great. Maybe this is a silly question because you've guaranteed number of things, but you've been in this well for 8 months now, Robert. You come from a CPG background, which is exciting, you kind of tease out revenue management. But now that you've been in your role for some time now, what are a few big opportunities to really unlock value -- should that be helpful?

Thanks for your question. Yes. So I've been here 8 months after about 30 years in consumer packaged goods. So I started in 1996 in Procter & Gamble, worked in Europe, worked in South America, and Karakasworked in Cincinnati 3 times based in Geneva, work to Central East Europe, Middle East, Africa, then went to Kimberly Clark, where I spent a number of years in the U.S. and in Australia, then joined PepsiCo, Australia, New Zealand and then ran Quaker Oats in Chicago. So I was the President of Quaker Food North America. And after that, I was the CEO of Primo Water and created Primo brands, which is a big merger between 2 beverage companies. So 30 years in -- and I find myself moving in to the packaging industry as a former customer with all the insights that I had around the challenges ahead with the consumer. The first thing I would have said, Phil, is -- the business is very resilient. So our volume is on track, right? Also for the quarter, we are surprisingly resilient and part of that is really how diversified we are as I said, across food, beverage, foodservice, 26 markets around the world. The second one is that we have a really strong foundation, especially after billing Waco. Waco was overspent, but now that we are beyond that, we actually are really enjoying the benefits of this incredible recycled platform that we have. We have a long track record of serving global customers, very strong relationships with those customers and we can help them win. And that's really what we're focused on right now through surety of supply through our capabilities our innovation, our speed to market, our lead times and our well-distributed manufacturing network, converting network across the U.S., Europe and international markets. So the other observation I had was we have a very deep talent bench. We truly are a world-class packaging company, and we are the go-to company for a lot of the largest CPG companies that want to work with the best. We are focused right now on restoring growth, which is why when we gave an update to our guidance, we said we would end up in the high end of our guidance in sales. Second, we're enhancing our profitability. They're really important, a lot of inflation this year, and we are now really driving productivity across the board to address that inflation, but also to get ahead of it. we want to future-proof the company and have the right cost structure to be competitive and drive the right value for our customers. The third is when we look at our global operations, we can optimize. We are looking at our footprint. We're looking at where we should be investing where we have the right to win, where we need to be geographically located to win with our customers and where we can close facilities and optimize. The same applies to our portfolio. We continue to look at our portfolio of business around the world and geographies, and it's an ongoing effort to see where we can further optimize. Now the other real new focus for us is free cash flow. We believe cash is king. And after the heavy investment cycle, we've committed to reduce our CapEx to below $450 million, that's really new thinking, new direction. I've actually stopped certain projects like our automated roll warehouses, which are really in place to continue to manage our inventory but we don't need them because we're going to be reducing our inventory, various other key projects that we believe were not the right payback. That allowed us to get well below $450 million, which is below 5% of our $8.6 billion in revenue and really focus on free cash flow. We have updated our guidance to $600 million to $700 million this year. That's a significant step up versus where we were last year, the year before and the year before that. With that, we're going to be deploying that free cash flow and pay down our debt. We are fully aware that our net leverage ratio is too high. And everybody I've talked to all the investors, our Board are aware that paying down our debt, getting our leverage ratio down is one of my top priorities for the next 24 to 36 months. Now it also comes with a bunch of opportunities. If you think about where we have the right to win, we can improve our commercial excellence Phil, Revenue management is going to be key terms and conditions. Think about pricing, think about inventory holding, payment terms, minimum order quantity and order lead times, really zooming in on that, working with the world's best practices and the best outside consultants to get a revenue management really as a driver of growth and EBITDA. Number 2 is we can get better in demand and supply planning. Historically, we have been a substrate forward business, where the mills, we play in bleached to unbleached and recycled. We are pushing out their mill, their roll paper to the converting facilities. We are redesigning that to really think about demand signals and get the demand signals from our key customers and back that into our production planning, not only in the converting facilities but at the mills. So that's a huge piece of work we're doing to get our OTF up, our on-time in full delivery. And thirdly, procurement. So -- we have a very large addressable spend. Procurement should be a core competency of our company, whether we're buying wood fiber, whether we're buying airline tickets or whether we're buying OCC, whatever it is we're buying, we should make that strategic. So we are actually working with the world's best consulting people in that space very accomplished former CPO and her team to really set that up, hire a CPO and make that the best practice and competency for the company. Then we're driving productivity just in general by a reduction in force and cost reduction, really disciplined approach with Chuck around cost management, and we can talk about that in a second, but also with AI, so we are digitizing the company rapidly. We're bringing AI into all of our processes and will continue to do so over the next 3 years. And finally, talent. We are hiring talent. You've probably seen the announcement of our new General Counsel; Daniel Fishbein, who came in from CorPey. And most recently, we've announced a new CHRO for Multi-Color Corporation, TajanaBirdinelli, who's joined us this week, and we're very excited to have her coming in from the packaging industry with a lot of experience in developing commercial organizations and a very strong understanding of the talent in the market. So because of that, I'm very optimistic about our value creation runway. We have a lot of opportunities to enhance and grow our market share. We can leverage the competitive advantaged footprint that we have. We have a world-class paperboard manufacturing network, as I said, with recycled bleached and unbleached. We have great packaging operations and people that run those. We have design innovation capabilities, both at our headquarters in Atlanta, where we have the PDC, we have our own test production facility downstairs. We can run all of our new products. We have an industrial design team, a graphic design team, and we're going to leverage those as value add for our key customers. and we have best in industry operators and employees. So Phil, that's the first observation.

Yes, lot to unpack there. The revenue management part was the most vast thing once again, just because your volume and just the broader industry volumes have been flat to down the last few years. And then just a function of the consumer dealing with a lot of inflation. You talked about terms and condition, inventory holding, in order quantities and all that great stuff. How quickly can you implement that? Because most of your business is contractually locked in, right, and you got multiyear contracts. So how receptive are your customers? What does that entail? Do you invest more in ERPs just ongoing negotiations. So just kind of help us think through this revenue management dynamic, how quick of an uplift could we see?

We have -- we are a contractual business. So we are a very predictable business in general. We renew a good percentage of our contracts on an annualized basis. We also win new contracts, and we participate in RFPs. And as we do that, we build contracts and the majority of our customers want the RISI index in the contract. Historically, we would adjust our pricing once every 6 months. But with the dynamic and very volatile external environment, we're going to accelerate that to quarterly. Then we have the non-paper-based inflation that we also have to address, includes everything from labor to energy to transport to oil and gas, resins which are going to be implemented in a more rapid way than historically as our pass-through clauses were historically restrictive. We are trying to accelerate those into the market given the fact that we need to ensure surety supply and the right level of profitability. Revenue growth management is going to be a core capability of our commercial excellence initiative. And we will work with the world's best outside partners to help develop talent, help set terms and conditions, help develop the right contracts. But we also want to do that to help our customers because our customers are more and more focused on the best in industry and reliable partners to help them win in the market with a very strong focus on surety of supply. With all of these volatile dynamics in the market, surety of supply becomes more important. If you have a natural event tornado or a hurricane, you want to make sure you have multiple production facilities where you can source from. So you need multiple plates across multiple sites. There's only very few manufacturers in packaging that have those capabilities, and we're definitely on the leading edge of that. Also sustainability -- the regulations are changing rapidly. We are the sustainable alternative to plastic. So plastic to paper is a secular trend that is a tailwind that's going to be here for years to come. Europe is slightly ahead of the U.S. We have a very big footprint in Europe. And as a result, we can innovate faster in Europe with our customers. the way we innovate is we get involved with the customer supply chain. We have to understand their price architecture, their business objectives and their tiering strategy across their brands. When we do that, we can come in and offer solutions that run on their existing manufacturing network. So they don't have to recapitalize. That is a specialty of Graphic Packaging. That's why we are a preferred partner for most and get nominated for a supplier of the year very frequently. So that is the underpinning of the quality and the service that we offer that then allows us to drive revenue growth management and order quantity and order lead time, they're all dynamic things where we can charge a little bit more for our products if the lead time is shorter, if the order quality is less.

Okay. That's great color. Maybe, Chuck, you jump into pretty dynamic macro backdrop here, just given consumer concerns on consumer sentiment, oil prices, diesel prices have continued to take off? Any insights you're comfortable sharing in terms of July, August order trends? And then how inflation is kind of shaping up relative to your expectations?

Yes, I'll take that one. So just specifically around July and August, trending broadly as we guided and expected for the quarter. We guided the volume would be between plus 1, minus 1 for the quarter. and seeing trends that would reinforce that. So core is on track from a volume standpoint. From an inflation standpoint, that's, of course, a very dynamic environment that changes every day. But indeed, with oil at $100 a barrel and OCC being recognized at 2 increases this quarter, we are clearly seeing inflation at the higher end of our expectations for the quarter. So think that, that would impact the quarter in the range of $5 million to $10 million for the quarter, full year be in the range of $10 million to $20 million but we're not standing still. What we're doing about that is going and looking for other costs to reduce other pricing that we can take to offset that. So we still see a path to the low end of our guidance. And at this point, I don't see any reason to change our guidance for either Q3 or full year.

Okay. So the big swing factor is really diesel and energy relative...

Those are the 2. And then resin usually follows at a lag, but diesel and energy are the 2 that we're seeing or diesel and OCC energy is pretty well hedged for the rest of the year. So it's really diesel, OCC and then resin usually follows with somewhat of a lag. .

Got you. Helpful. From a supply-demand standpoint, actually coming into the year, SBS, CRB felt really at an imbalance. It's actually in a pretty good spot right now. Obviously, some work you guys have done the pivot to ERP, some SBS capacity has come out and CRP as well. But -- perhaps give us some perspective, what you are seeing in terms of supply/demand for the various grades? And how is there any more noise around substitution between SBI CRB and what that positions you. Certainly, you and the industry at large are trying to implement in the round price increases?

Yes, you take that Yes. So in general, what we're seeing is that we are in a situation where we're much tighter than we were earlier in the year. And I think you're hearing that from other participants in the industry. We've seen capacity come out and bleached seeing capacity come out and recycled. And so that has certainly had a positive impact more broadly on the supply demand environment. And then also now the -- the new tariffs with Canada, there's about 200,000 tons of paperboard that's being brought in from Canada and that's primarily FPB and recycled. And then imports from Europe are also down as well. So all that's kind of worked to tighten the industry. You're seeing all that. We were very pleased to see the recognition of the $60 a ton in both cup stock and in bleach folding carton. And we are, of course, out with additional price increases and unbleached bleached and recycled. So broadly, we continue to be tight and full and expect to be able to continue to operate in that environment. .

Any color how extended your backlogs are for the -- your main grades, whether it's CRB.

Yes. We don't give specific numbers on backlogs, but I'll just tell you that we're tight and have been -- and I mean the 1 grade where we, of course, have capacity is in recycled since Waco has come up and -- but we're the ones that control the excess capacity and recycled run our suptech our demand that, of course, part of the reason why we're getting into URB I'm very excited about that to help absorb that excess capacity within our recycled system. And -- but clearly, from a bleach perspective and an unbleached perspective, very tight.

Got you. Okay. Helpful. On your earnings call, at least you guys painted a path for perhaps EBITDA growth in 2027 inflation certainly heavier than you thought is the bigger challenge this year. What are the key drivers that we should be mindful of that's going to help drive EBITDA growth. Certainly, pricing will be helpful, inflations out of your control. But any GPK initiatives in play that gives investors in this room confidence that you're back to growing EBITDA as EBITDA has been in decline for the last few years.

Yes. So for 2027, we talked about a few items on the call. I'll run through some of those and then and to give you any updates on where we are with them. But I would, of course, encourage you to think about it is more how some items are impacting 2026. I mean in 2027 that are occurring now, versus a full year bridge or a full guide to 2027, and so these items totaled to about $175 million that should show up favorably in 2027 versus '26. So if you start with pricing, we said the pricing initiatives that we have in the marketplace, including what's been recognized is about $145 million that we said $60 million of that would impact 2026. So the carryover of that is about $85 million. And then since we went out with our Q2 earnings call, the third-party index did recognize an additional in bleach folding carton. So think about that as another $5 million tailwind for that in 2027. So that's from a pricing standpoint, from a cost standpoint, we've talked about the structural cost improvements that we're making in the business called that at about $85 million for 2026. And on an annualized basis, to be about $100 million. And so that's a carryover about $15 million and then we have about $150 million of onetime items that are impacting 2026, and that's made up of the $90 million that we're taking to reduce inventory levels from additional downtime. It's the $40 million from the weather impact -- the weather event in Q1, plus the impact of the Mexico disturbance and some other onetime items that we've seen, and then about $20 million, we talked about the inefficiencies that we've experienced in unbleached this year. And so that all totals to around that $175 million once you back out the carryover of inflation. We called that out in Q2 at around $75 million, but now think of that more as around $80 million. The one item that I'll add to that that's, of course, all before volume growth. And so as Robert talked about the initiatives that we have in place for store volume growth and then specifically URB, we only launched URB halfway through the year. So we'll have a full year of RB next year, so that will add to the growth as well. And then the other pricing that hasn't been recognized. As I mentioned on the last call, we have about $200 million of pricing that has been recognized out in the marketplace. So if any of that gets recognized, that would be a carryover and would positively impact 2027 as well.