Graphic Packaging Holding Co (GPK) 2022 Q3 法說會逐字稿

Good morning. Thank you for attending the Graphic Packaging Third Quarter 2022 Earnings Call. My name is Matt, and I'll be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to our host, Melanie Skijus.

Good morning, and welcome to Graphic Packaging Holding Company's Third Quarter 2022 Earnings Call. Joining us on our call today are Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO. To help you follow along with today's call, we will be referencing our third quarter earnings presentation, which can be accessed through the webcast and also on the Investors section of our website at www.graphicpkg.com.

Before I turn the call over to Mike, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission.

With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning to everyone joining us on the call on this webcast this morning. Let me begin my remarks on Slide 4 of the presentation. We delivered exceptional financial results in the third quarter. Our continued strong performance in net organic sales growth can be attributed to the global business portfolio we have built diversified by both end markets and brands, strategic investments we have made and the robust innovation pipeline we are called [today].

In the third quarter, net organic sales growth picked up sequentially accelerating to 5% year-over-year. This represents another quarter of outperformance versus our long-term net organic sales growth goals. I remain very encouraged by our significant new product development pipeline and consumer demand for highly functional and increasingly more sustainable packaging.

Interest and engagement from existing and new customers remains robust. As demand for fiber-based packaging to replace other packaging alternatives increases, we are capturing new business across our low-cost well-capitalized, highly integrated platform. As such, our integration rate continues to grow with 74% of our paperboard production integrating into our packaging today compared to 72% at this time a year ago.

Vertical integration is a competitive differentiator in today's challenging global supply chain environment. We benefit from the flexibility we have established by producing all 3 paperboard substrates and the assurance of supply we can offer customers. Importantly, our vertically integrated business model provides runway to further enhance operating efficiencies and supports our Vision 2025 margin expansion goals.

Adjusted EBITDA increased by 55% year-over-year to $441 million, resulting in an 18% EBITDA margin. Adjusted earnings per share, excluding amortization, improved 76% to $0.67 per share. Strong performance year-to-date is resulting in an increase to our previous $1.5 billion to $1.6 billion adjusted EBITDA guidance. We now expect adjusted EBITDA for the full year of $1.6 billion at the midpoint reflecting a 52% increase over 2021.

Our financial results are underpinned by a secular demand tailwind for more sustainable consumer packaging solutions globally. Importantly, and specific to Graphic Packaging, our ongoing execution of strategic initiatives and platform investments has strengthened and extended our global fiber-based packaging offering and has positioned us to capture growth and demand.

Price increases required to offset unprecedented commodity input costs inflation continue to be executed globally. As a result, we now expect $425 million to $475 million in positive price cost relationship in 2022. The significant step-up in adjusted EBITDA resulting from the business drivers I've walked through on Slide 4 will drive strong cash flow generation. This year, as committed, we are focused on driving down our leverage ratio and expect to exit the year in the 3.1 to 3.3x range.

Slide 5 provides additional detail on the inflationary environment and pricing outlook. In the quarter, we continue to realize the pricing necessary to offset higher commodity input costs and recover the dislocation from 2021. $334 million of positive price flowed through the business during the quarter, more than offsetting commodity input cost inflation of $162 million. With roughly 2 months left in the fourth quarter, our full year 2022 expectations for commodity input costs have tightened to a range of $575 million to $625 million. Pricing expectations for the full year are approximately $1.05 billion, up $100 million from guidance provided last quarter.

Additional SBS pricing along with other pricing initiatives were realized and implemented during the third quarter. Our 2023 rollover price and commodity input cost ranges mark-to-market as of today, are $375 million to $475 million and $150 million to $250 million, respectively. As we have stated, we believe we will see inflation again next year, particularly in Europe. Similar to last quarter, I want to reiterate the rollover figures on Slide 5 are directional in nature and our point in time estimates, we will provide guidance for our expected price to cost relationship for 2023 when we report fourth quarter and full year 2022 results in late January.

Turning to Slide 6. Let me provide a progress update of our K2 coated recycled board machine production ramp. We are pleased to host many of you in September for a look at 100 years of papermaking technology culminating with our largest capital investment in history, the transformational K2 CRB machine. As analysts and investors were able to clearly see during the tour, the machine truly does transform Kalamazoo into the most advanced manufacturing operations with [easier] technology, automation and advancement and energy efficiencies. It is the largest and lowest cost producer of coated recycled board in North America.

Production on K2 is ramping steadily and is ahead of plan. We have hit our targeted output of 1,500 tons per day on multiple days, averaging over 1,400 tons per day in September. With the new production on K2, we realized $17 million in EBITDA in the third quarter and expect to meet our $50 million target for 2022.

Slide 7 is an example of how our global innovation engine and customer partnerships continue to drive new business and organic sales growth. Established as part of Vision 2025, our partners pillar is focused on growing with the best customers in the best markets. We are excited to be doing just that by working with Unilever on a new product as part of the company's EUR 1 billion Clean Future initiative. Unilever announced its Clean Future strategy in 2020 and its intent to change the way some of the world's best known cleaning and laundry products are created, manufactured and packaged. Where Unilever's largest detergent brand transformed its laundry capsule with new technology to be its most sustainable yet, they wanted to be a new package solution that was both recyclable and plastic-free.

Our packaging developed for Unilever delivered those enhancements and will reduce over 6,000 metric tons of plastic from entering the waste in each year. We are thrilled to have partnered with such a purposeful brand and company on this product launch. The laundry capsules, along with the product's new packaging were launched in July and can be found in various outlets throughout France. Reception has been enthusiastic, and we expect to see new growth opportunities with different brands and in additional countries.

Current design, product protection and credibility of our high-quality fiber-based packaging enhances marketing appeal for customers. The renewable aspect of the paperboard solution and the high collection and recyclability rates of paper provide proof points to our customers and our customers' customers that the sustainability efforts are making a positive impact.

Turning to Slide 8, reflecting on new opportunities we see across our markets for plastic substitution, we have raised the expectation of our total addressable market to $12.5 billion. You can see here many different products and packaging configurations under plastic substitution. This speaks to our diversified portfolio and the variety of packaging solutions we produce for a wide array of global customers and consumers.

I will wrap up my prepared remarks by noting that our overall business remains resilient and we continue to grow with our innovative solutions. We are meeting a need in the marketplace as global communities become increasingly more focused on sustainability. We are very pleased with our results in the quarter, strong outlook for the full year and continued progress towards achieving our enhanced Vision 2025 aspirations.

We are creating value through leadership with Vision 2025. The investments we have made to advance our capabilities and optimize our mill and converting infrastructure differentiate us. Our 24,000 employees are highly engaged and are truly running a different race.

With that, I will now turn the call over to Steve.

Thanks, Mike, and good morning. Turning to Slide 9 and key financial highlights in the third quarter. Net sales increased 38% or $669 million to $2.5 billion. Notably, net organic sales growth accelerated from 3% in the first half of 2022 to 5% during the third quarter.

A positive price/cost relationship and our European acquisition also drove performance. Adjusted EBITDA margin expanded by 210 basis points year-over-year to 18% of sales. Adjusted EBITDA moved higher by $157 million to $441 million, an increase of 55% over the prior year period. Adjusted earnings per share excluding amortization of purchased intangibles, increased 76% from last year to $0.67 a share. Our paperboard integration rate year-to-date improved to 74%, up 200 basis points from 2021.

On Slide 10, 11, please find our sales and adjusted EBITDA waterfalls. Sales increased $669 million year-over-year or 38%, driven by $334 million in pricing and $380 million in volume mix from organic sales and acquisitions. Foreign exchange was a $45 million sales headwind in the quarter.

Adjusted EBITDA increased $157 million or 55% to $441 million in Q3. Drivers of EBITDA growth during the quarter were $334 million in price and $61 million in volume mix. We are earning on our organic sales and acquisitions are meeting expectations. Partially offsetting pricing improvements and volume mix in the quarter were $162 million of commodity input cost inflation, $28 million of labor, benefits and other inflation, $27 million of unfavorable net performance and $21 million of foreign exchange.

Within the net performance category, we recorded $38 million of increased year-over-year incentive accruals in the quarter and incurred some higher costs to meet accelerated organic sales growth. EBITDA from our CRB optimization and K2 machine ramp contributed positively during the quarter, adding $17 million to performance.

As Mike discussed, we are on track to deliver $50 million of EBITDA from this transformational investment during 2022. Momentum and our production ramp will continue as we exit the year delivering and expect an additional $50 million in EBITDA in 2023.

On Slide 12, let me expand on quarterly financials, operating performance and capital allocation. Our food, beverage and consumer businesses grew 20% before acquisitions during the quarter, driven by positive price and organic sales growth. Our foodservice business also achieved strong growth, up 29% from the same quarter 1 year ago.

Turning to paperboard market data. The AF&PA will report industry operating rates for the third quarter on Friday. Q2 industry operating rates remained very strong across substrates with SBS at 94% and CRB at 102%. Our CUK operating rate remains over 95%. Our teams worked tirelessly and were successful in capturing and servicing higher organic sales growth during the quarter. Backlogs remained strong at 8-plus weeks across all substrates.

During the quarter, we returned $23 million to stockholders in dividends and repurchased $15 million in common stock, effectively eliminating shareholder dilution from long-term incentive grants. In September, our Board of Directors approved a quarterly dividend increase of 33%, effective with the dividend payable in January 2023. The increase to our dividend payout is reflective of our balanced approach to capital allocation, the strength of our cash flows and the significant progress we have made toward our Vision 2025 growth goals.

Our net leverage ratio was 3.7x at the end of the third quarter. We have rapidly reduced our net leverage ratio over the past 11 months following the European acquisition. We expect to be roughly 3.2x levered as we exit 2022. Finally, liquidity remains healthy at over $1.4 billion.

On Slide 13, let me provide an update on expectations for the full year. As you saw in the third quarter, strength in organic sales, improved pricing, strong volume mix and the K2 ramp are driving substantial results. We are increasing our adjusted EBITDA guidance at the midpoint by $50 million to $1.6 billion. This reflects growth of 52% over 2021. Expectations for sales for the year are now closer to $9.5 billion.

Turning briefly to cash flow. We expect capital expenditures of $500 million to $525 million as we make investments to capture current and future organic sales growth. Cash interest has moved slightly higher to reflect the current interest rate environment, while our range for cash taxes has declined. Adjusted cash flow is expected to be in the $600 million to $800 million range.

Our guidance update on adjusted EPS, excluding amortization, can be seen on Slide 14. Continued execution of our growth and margin expansion initiatives this year has increased our expectations for adjusted EPS. We now see a range of $2.20 to $2.40 per share, up from the guidance we provided last quarter.

That will conclude our comments this morning. Let me now turn the call over to the operator for questions. Operator?

Before I provide instructions on Q&A, please note that due to global connection issues being experienced this morning, if you experience any difficulties on this call, please contact Melanie Skijus and Investor Relations via e-mail. (Operator Instructions) The first question is from the line of Ghansham Panjabi with Baird.

I guess, first off, Mike, obviously, very strong momentum on the volume side during the third quarter as well. But we are starting to see some sort of concern on the consumer staple side, especially in the beverage side. Can you just give us a sense as to how volumes progressed throughout the quarter? What you're seeing in terms of new product activity maybe across both Europe and the U.S. as well?

Yes. Sounds good. I'll start and then Steve, you can add some color to that. I think we saw a pretty broad-based strength across our overall business in the third quarter. It didn't change much materially from month-to-month. It was strong. Some of that, Ghansham, was a function of the fact that we had Kalamazoo up and running. We are creating more paperboard. We had Middletown running. So it created an opportunity for us to really service our business incredibly well with the fact we had paperboard to meet customer demand.

As you kind of look through the different verticals, we saw food and beverage growth. We saw mobility continue to be strong on the foodservice side of the business here in North America. Europe grew in certain categories. And a couple of them, they were down slightly. But overall, Europe had a positive growth trajectory, which we're pleased with. And as we've kind of rounded out of third quarter and into early fourth quarter, today here, we're seeing our growth at the top end of our kind of long-term target, so 2%, call it, 200 basis points.

And if we finish the year at that kind of level, that will be fantastic because what that will be then is for the third year in a row, we'll be above 3% organic growth. If you do a 3-year stack on that, it's over 10% in terms of organic growth. And as you know, that's a real pivot from the kind of trajectory we had before that time period. So that's kind of how we're thinking about it and what we're seeing. And Steve, I don't know if you have anything else to that.

No, nothing to add, Mike. I think, you described it well. I think the broad-based nature of it was positive for us, both foodservice and kind of core food and beverage. And probably the only thing to add is we can continue to identify a couple of hundred basis points of real new-to-the-market innovation products, primarily plastic replacements that are supporting the net organic sales growth.

Okay. Fantastic. And then just for my second question in terms of how -- what you sort of think about capital allocation in 2023, following, obviously, you're focused on debt paydown this year. And then just related to that, on AR Packaging, can you just touch on some of the opportunities you see to cross leverage some of the innovation that they have, some of which highlighted at Pack Expo earlier this week. Just anything you can share there as it relates to the U.S.

I'll start with that. I mean, I think that's been really one of the positives we've seen on the AR acquisition. We anticipated that we would learn and be able to kind of move trends that we're seeing across the globe much faster. That was part of our investment thesis. And as we talked about when we made the investment, Europe is really ground 0 for sustainability. And we see a lot of those trends come out of Europe, and that's part of what you see on the slide in the deck that showed the expansion of our TAM.

We've got the ability to be able to increase that because we got line of sight into additional plastic replacement opportunities and expanded that now to $12.5 billion. So we're very pleased with what we see there. You saw an example of one of those products when we put in the deck that had detergent in what we did there with paperboard for Unilever. We're really pleased with that one, and we anticipate we'll see continued acceleration of those kind of trends and be able to leverage that really on a global platform. So we're excited there, too.

In regards to capital allocation, this was a year where we told everybody we were going to focus on debt reduction. And that's, in fact, what we've done. As you've heard Steve say in his prepared remarks, we'll finish at the midpoint of our guide around 3.2x. We want to get down in the 2.5 to 3x long-term target, which will be sometime next year, probably early next year. And then as we kind of look at what's due with a strong healthy cash flow generation, what I love is the optionality we've got in the business. We've got the ability to look at game-changing M&A where it makes sense and comes with high returns and synergies that make sense to us.

We can pursue capital project, a large capital project to change our cost structure in our mills or our converting business. And obviously, we've got the ability to return cash to shareholders, too. And you saw our Board here in September, increased our dividend by 33% as an example, and we continue to buy back our dilution. So we've got all of those things available to us, and we'll look at the types of returns we can see for shareholders along those lines. But ultimately, going into an uncertain macro, what I love is that we're going to throw off a lot of cash. And if we actually drive our debt down a little bit, for a period of time here where we're kind of watching the market develop a bit. That's not a bad option for us either.

So I love the optionality that we've got, multiple levers to pull and the team has done a fantastic job this year, positioning the business with the acquisition of AR and the start-up of Kalamazoo to really position us heading into 2023 with a lot of momentum.

The next question is from the line of Mark Wilde with Bank of Montreal.

I wondered just to start off, Mike, can you just give us a little more color on what you're seeing over in Europe right now. It does seem like the economic pressure there is even greater than we're seeing in North America. And I wondered kind of when you talk about Europe, if you can also talk about what you're seeing from your customers in front of the winter season and prospects of energy cuts?

Mark, it's Steve. I'll start and then Mike can add on to it. As Mike mentioned, we saw modest organic sales growth in Europe in the quarter, which was given the macros and the challenging environment there was net favorable to us in terms of the consumer-based food, beverage consumption holding.

We saw a slight weakening on the core beverage business in the quarter as folks actually returned to being out and about a little bit. But as we move around towards the winter, we actually expect that to kind of come back to the positive given the amount of investment that's been made in fiber-based packaging for at-home consumption of beverage.

As Mike mentioned, just adding on to it, AR Packaging, specifically, those economics actually are on our expectations, $118 million of EBITDA year-to-date, we expect to be at the $150 million to $160 million level for the year, even in the face of foreign exchange and the environment that we're in. So really outperformance at the operating level there and as Mike mentioned, the innovation component.

Now certainly, we're turning towards what can be some challenging winter months ahead. We can talk -- Mike can talk briefly about the energy and ability to run basis. But to date, because we're not as energy dependent as some other manufacturing of -- type businesses in the region. We have been operating successfully in meeting customer demand. I don't know if anything to add to that, Mike?

No. I think it does. Maybe just to add, Mark, so we buy 25 million MMBTUs in natural gas as a company, a little less than [1 million] of those is in Europe because it's converting only, as you know, and so our exposure there on the nat gas side isn't real high. We buy a fair amount of paperboard, 1 million tons on a global basis. So we're watching that. And obviously, you've seen the ability for those producers to push those prices along and we've got that reflected in our contracts and really in the mark-to-market that we gave to you here as part of our prepared remarks.

So look, I think all our customers are watching what's going on right now, the weather is good in Europe. It's been very good the last couple of weeks and their injection levels are high, nat gas prices have come down over the last couple of weeks from their all-time highs in June and July, as you well know. But that can change quickly. And so we're monitoring closely. We've got really good communication between that business and Steve and myself and in some cases, it's changing on a daily and weekly basis, and that's part of why you saw in the mark-to-market, we have a range there of $100 million, and it's largely due to the fact that, that inflation in Europe is just a little hard to call right now. And so we'll continue to watch it. We'll be aggressive around our pricing actions and make sure we cover that as we've been. And that's kind of how I think we're thinking about that operating environment.

Okay. That's helpful, Mike. And then just for my follow-on, I wondered if you could just give us an update on a couple of conversion projects that you've talked about. One is using that mechanical pulp mill that you bought down in Augusta that potentially make FBB at Augusta and the other, I think, is the talk we've had about converting from SBS to CUK over at Texarkana. And I guess I'm asking those questions just in the context of all of this particular boxboard capacity. We're seeing the Scandinavians talk about adding.

Sure. Yes. Thanks for that. And it is a very good question. I mean in terms of what we're doing, we continue to run trials on FBB pulp type that we've got in Augusta. As you mentioned, we acquired a thermomechanical pulping operation right adjacent to our property. So we've got some optionality there, and we're continuing to look at that over what the cost would be, what the benefits would be those kind of things.

Same thing with the swing machine in Texarkana that we talked about a couple of years ago. We've still got that optionality to convert one of those machines over. But to be fair, with 8 week backlogs and the strong growth we've seen, we haven't seen the need to really take any action on those.

We're also looking at our CRB platform to be fair. It's -- the start-up of Kalamazoo has been very good. We like what we see so far with the new machine. And so I think as you think about Graphic, we've got a number of levers that we can pull, and we're trying to really make sure we're being smart about what we do, how we allocate capital, and having a medium and long-term perspective in mind relative to what we make and integrate into our own operations as well as what we would buy externally, which is roughly 1 million tons. So that is -- we kind of look at that. We look and study that as a leadership team and talk about it with our Board, and that will be something we continue to do here as we going forward.

The next question is from the line of Mark Weintraub with Seaport Research Partners.

First, kind of a smaller question, but on the incentive accruals, $80 million this year, what would be more typical? And so do we then therefore get some sort of -- assuming it's a lower number next year, do we get a almost like a double catch up next year? Do we get a bump next year on the bridge?

Yes. Mark, it's Steve. As you know, last year, we had significant underperformance on incentives driven by the inflation that rolled through the business this year. I'd characterize this as a return to more normalized incentives, both short and long term as we kind of put the bridge together. Obviously, we'll look to continue to perform at that level. I wouldn't assume a significant snapback in '23 to consider this a little bit more at the more normalized level. There might be a modest one. We'll be able to articulate that with guidance in January, but that's really a return to more normalized compensation.

Got it. And also, when you're doing the mark-to-market, when was the date that was as of? Is that as of kind of very recent? Does that capture what's been some pretty big declines in recovered paper pricing in the recent past?

Yes, Mark, it's Steve. It's mark-to-market as of the moment we're talking as we kind of pull things together as we head into this conversation. So it's very current. So it takes into consideration latest SBS pricing on the pricing front, it takes into consideration what we know. As Mike just mentioned, though, one of the reasons we've got a bit of a range on it on the cost side into '23 is just because of variability in Europe. We're obviously in a day-to-day mode in Europe in terms of knowing even what the mark-to-market is for certain costs that we're managing through. And so we think that overall, the midpoint of the price and cost is very representative of if you truly did mark-to-market, that would be -- those would be the numbers, both price and cost, but the variability is a bit wide right now primarily repeating it just driven by Europe.

The next question is from the line of George Staphos with Bank of America.

First question is on sort of top line and volume growth expectations. And Mike, could you give us a bit of color in terms of how the addressable market grew from $9 billion to $12.5 billion. What were the -- I know it's going to be a lot of things, but if there was 1 or 2 or 3 markets that in particular drove that? And relatedly, how are you seeing the new products that you are bringing into the market, allowing you to generate growth that the consumers are willing to pay for in an environment where we have lots of stress related inflation? And how do you prevent against the demand that you're seeing being just your customers double ordering, double booking because backlogs are at 8 weeks, and we've seen signs of this elsewhere where there's ordering in anticipation as precaution then that ultimately dissipates. And then I had a question on capital allocation.

I'd take that latter part first, George. And as you remember, our growth been kind of in that 3% range. This last quarter was exceptionally strong. Quite frankly, we've been outperforming our medium and long-term goal of 100 to 200 basis points, which we believe over the medium to long term is the right target for our company. So we've outperformed that in the last 3 years. That's how we look at it.

And if you look at kind of what we did, we didn't see growth of 10% or double-digit increases like some other packaging firms and segments saw during the last couple of years. Ours is pretty steady there. As a matter of fact, we were actually, as we disclosed in the first quarter and the second quarter this year, a little behind where we wanted to be in terms of our ability to serve those customers. Our backlogs were up at 10 weeks plus, which is just too long for us to get the customer what they need to run their business. So actually, we're quite pleased with our backlogs now being strong at 8 weeks. That's historically where strong backlogs would be for our industry, and that allows us to service our customers quite well.

So look, we've got limited visibility into our actual customer inventory building process. But in this kind of macro, it's a little hard to see that anybody really wants to build a bunch of working capital. So if it's happened, we don't think it's broad-based. And obviously, we're going to continue to work with our customers to make sure they have what they need. And we're seeing our service levels actually correct themselves our on-time and in full are actually moving back into the 90% range, which is where we'd expect them to be. And it's been probably 6, 9 months since I can actually say that. So we're pleased about that as well.

And in terms of the addressable market going, George, that's really just our innovation and design personnel globally with the enhanced capabilities we acquired with AR Packaging and really sitting down and looking at different segments, different markets and where we can find opportunities for paperboard packaging, consumer-based fiber packaging to win. And that's why every earnings call, we try to profile something different to give you a snapshot on the margin around the types of things that we're seeing. I thought this one was particularly good what Unilever did and getting out of plastic tubs and really going 100% into paperboard and they get it in a way that it was childproof and it's a great looking package. It's an excellent graphics, and it's got a huge sustainability story. And so we're seeing customers continue to do that. So -- and that's part of their mantra. When you look at their ESG requirements and the reporting they're doing publicly, our large customers are all focused on driving that type of improvement.

And we fit right in the center of that, and we provide some really unique options and innovation that will allow them to accomplish those objectives. So it's the team in Europe, the additional resources we have, the work that we've done now to take a look at different segments that we can penetrate and find real meaningful growth and value creation for customers and it's working. And that's what gives us confidence. Steve and I, that our 100 to 200 basis points and the commitments that we've made as part of our Vision 2025, the enhanced goals that we laid out in February are the right ones for our company.

And George, just to add to Mike's point, specifically on the $12.5 billion, it's plastic replacement is the category, so the actual broad-based category and of course, it's consumer based. And so I think it speaks right to the heart of our food, beverage, foodservice, consumer packaging. So consumer and plastic replacement are really the kind of what's been honed in on to allow us to increase that addressable market.

Okay. Just a quickie, and it's not a huge number, but the increase in CapEx, can you talk about what drove that, any key end markets to the extent that you can share on a live call? And good luck in the quarter.

No, thanks, George. And we're pleased to actually take it up a little bit because it's all about organic sales growth, both known projects that we're investing behind at the $2 million to $5 million type of investment out of time. These are typically modest-sized investments that are high return for us to have the capacity, mostly converting capacity in the case to capture the growth. And so think of it as categories like we were just talking about a fiber bowl replacement or that kind of a replacement or a cup replacement into fiber. So these are primarily organic sales growth, capture investments that will give us confidence in the 100 to 200 basis points on a multiyear basis.

The next question is from the line of Kyle White with Deutsche Bank.

I wanted to go back to, I believe, was Ghansham's earlier question. We had a beverage can peer report some weak volumes, especially in September. Curious if you guys saw a noticeable drop off in September on your CUK grade? Or was this being offset elsewhere? Or is it something that maybe you expect to occur in October?

Kyle, it's Mike. We had a little problem there. Can you repeat the question, please?

Yes, apologies about that. Do you hear me better now?

Yes, we got you. Good.

Got you. I wanted to go back to Ghansham's question on -- we had a beverage can peer report some weakness here, especially in September. And I was curious if you guys saw a noticeable drop-off in demand on your CUK grade in September? Or is it something that you expect to occur in October? Or anything you can give us in terms of details that you're seeing on that grade specifically?

Yes. No, we have not seen a meaningful drop-off on our CUK. As a matter of fact, our demand remains strong. But remember, it's much more broad-based than just beverage. Beverage is a big market for us, but we're now in the frozen food market. That's really strong there. There's a lot of strength applications for CUK and we buy a fair amount of it, as you know, Kyle, globally, too. And so every time that we're making out of making in West Monroe, we've got a plan for both in 2022 and 2023.

Got it. And then a lot of the volatility on OCC here recently. Just curious what your near-term outlook is for that and then what you think it will average out for next year. And then more importantly, how should we think about the relationship between OCC costs versus kind of a good recycle board pricing over the long term?

Yes. So why don't I take that, Steve, you can jump on with anything to add. But look, paperboard pricing like all commodities is based on supply and demand. And we just got done talking about the fact that we've got 8 week backlogs on all our materials, and we grew 5% in the quarter, and we're growing here at least month to date in October, we're at the 2% range. So we continue to grow, and that requires paperboard, because every package needs paperboard. That's what we do.

And so if you look at what that means, I saw the -- we got a few on the early write-ups around OCC and how does that square with some of the comments made in one of the trade organization magazines. From our standpoint, I can see why someone who's buying paperboard might want to poke around on that, given OCC has gone down a little bit, but they're probably not on the call with the same responsibilities that Steve and I are here be able to kind of talk about what's actually happening. And if you look at our backlogs here, they're 8 weeks plus. And that's with Kalamazoo accelerating, and we're still running our Middletown mill, and we plan to continue to do that, and we need those tons to run our business.

So look, as Steve mentioned in his prepared comments, the [AF&PA] data will come out here on Friday, so we'll get another look on it. But our -- we're actually about half of that market, as you know. And so we feel like we've got a pretty good beat on it. And relative to OCC pricing to the actual pricing of paperboard, again, it all comes down to supply and demand. And right now, demand is strong.

And Kyle, the only thing I'd add is just specifically for you, is that OCC on a year-over-year basis will turn into a deflationary environment in Q4, but it's been more than offset by the ongoing inflation we're seeing for external paperboard, chemicals, net energy, et cetera. So hence, the continuation of net inflation that we're managing even here in Q4. And then for our mark-to-market, we're just assuming as is.

The next question is from the line of Cleve Rueckert with UBS.

I just wanted to go back to organic growth. And I guess specifically, just sort of looking at Slide 8. In the past, we've said that most of this growth is mainly driven by new products and not necessarily accelerating growth within the existing portfolio. Steve, you touched on it a minute ago in sort of response to George. But I'm just wondering what do you have to do now to access this addressable market? I mean is it mainly that sort of incremental investment in the downstream converting capacity as you sort of explore opportunities in R&D with your customers? Is that what we should expect you to focus on for the next couple of years?

Yes. No, Cleve, I think that's right. I mean the reality is, as you know, innovation in our segments take time. And so the team, as we continue to look at that ongoing 100 to 200 basis points it's multiyear in its orientation. It's what's our line of sight in '23 to give us confidence that there's at least a couple of hundred million dollars there. Do we have line of sight to even conversions in '24, '25 because some of these conversions for our customers are multiyear in their orientation, like you've seen with KeelClip, it takes years for it to totally play out. So that's why that backlog of opportunities is significant. It's -- we're looking out even today probably out to '25 for certain projects that we already -- some of the investments we're talking about making are to support multiyear initiatives. So it is about today, but also, it's multiyear. I don't know, Mike, anything to add.

No. It's well said, Steve. I think the other part of it, Cleve, and Steve mentioned this earlier on the call regarding the increased CapEx is we're investing behind this. And we've got to have the capabilities to drive that level of growth and those kind of innovations and it requires investment on our behalf, but that also makes us quite sticky with that end-use customer. And those are categories we really want to win in because we believe that our fiber-based solution has a unique competitive positioning to be able to do it, in many cases, replacing plastic as we've talked about here.

So it's a combination of really strong innovation and design capabilities that we've invested in heavily over the last 3 or 4 years in terms of human capital and process capabilities as well as the CapEx and the investments that we've made in our converting operations to support that. And you really got to do both. And I think that we're really kind of hitting our stride along those lines and making a pivot away from what historically had been a company that had great operating problems and focused on cost reduction in a flat market, and we did a really good job with that to one where now we truly are driving meaningful top line growth that's been sustained over a number of years, and that's the DNA we're really trying to build and the pivot that we've made as a corporation. Hopefully, that's coming through and you're seeing that.

Yes. I mean low cost, highest quality, well-capitalized tends to win the day over time and our customers recognize that too because they want to invest behind a company that's willing to put the dollars to work.

Yes, that's a great point. Thanks for making that clear. And just one sort of -- I guess, another follow-up on an earlier question, but we get the question all the time. So I want to pose it to you. It sort of relates to paperboard capacity, especially from competitors. I know we've talked sort of extensively about the North American market on these calls before. But I guess just thinking about capacity expansions in Europe and also in China, how does that affect your business? I mean, how should we think about it? And how are you thinking about it and plan changes? And then more so outside the U.S. than inside?

I appreciate the question. It's an important one. And I guess, I parse it apart a little bit. You talked about both China and Europe because they're different in terms of what's going on there. But first, what I'm going to say is we share a common view that the market is going to continue to grow. I think we've demonstrated that over the last 3 years of what we've been able to do. So there's going to be a need for Board here in the future.

The question, of course, on investors' minds is it should be is what do those operating rates look like? Is tons [covered] and kind of what are the implications. As we think about China, and those of you on the call who've kind of followed that market for a long time, I mean, [Ivory] board has been overbuilt in China for the last 2 decades plus and a very modest amount of that actually makes its way to North America. I think last year, it was less than 25,000 tons. And the primary reason for that is the vast majority of the mills in China are nonintegrated in both pulp and energy, which makes them high cost. And so they intend to service that local market quite well. But that stuff just really doesn't export well to different geographies because of the costs associated with it. So it's not to say that it can never show up here, but the cost structure and the cost curve over the medium term, just it's disadvantage. There's no other way to say it, against North American and European consumers. So that's how we think about China.

In terms of Europe and some of the announcements that have been made and to be fair, some of these have been just hypothetical look, I'm looking at potentially doing this. I'll let you know in 2024, what I'm thinking type thing versus a very well-capitalized company last week you announced that they're going to spend EUR 1 billion, which is a lot of money. And by their own estimation, create the Europe's lowest-cost FBB mill. And look, that makes sense to me given what they're spending, given they have an existing mill location to put that money into it.

And what I believe will happen over the next few years is that machine comes online in 2025, that's what they said at least is that, that will put a fair amount of pressure on a lot of nonintegrated small FBB and recycled board manufacturers in Europe, particularly given the energy situation that's playing out there now that I don't anticipate will be materially different over the next 2 to 3 years. So time will tell. We'll have to kind of see how that all plays out. Ultimately, the question for investors as it relates to Graphic Packaging is what the implications are for the imports here into the U.S. as they stated that some of that material could come to the U.S.

I think that's a hard question to answer for me to answer right now for anybody to really know for sure because it comes down to what's FX doing, what are costs doing in 2025, which is a long ways away from now.

So what we know for sure is that Graphic Packaging is going to throw off a lot of operating cash flow over the next few years. I think we've done a very good job of reinvesting it intelligently back into our business to create value for shareholders. And we're going to be a very, very strong company in 2025. And so we'll be ready to respond based on what happens there and how it kind of all plays out. And we'll be very thoughtful in terms of the decisions we make around investments back into mills, how we manage our supply and demand to grow our business. But what we'll continue to do, Cleve, is drive our integration rates up. You saw we had 200 basis points of improvement this year. We'll make progress again next year. And by 2025, that will continue to grow. And so that's how we kind of think about it.

And as I mentioned earlier, when Mark asked the question around kind of what are you thinking in terms of potential investments back into CUK, FBB or CRB, it's through that lens that we study this. We spent a lot of time thinking about those trade flows, where we buy tons, what we make, how we integrate it into our own business and how to create the most value for shareholders over time. So it's a very thoughtful process that we spend a lot of time on as a leadership team and as a board. And you can rest assured that, that will continue to be the case here going forward. So hopefully, that gives you a little bit of color on the topic. And I appreciate you asking the question.

And Cleve, the only thing to add kind of -- to round it out to Mike's point, just in North America, probably as of this morning, any additional investments here in North America are probably out in the 2026 time frame at the earliest based upon at least most recent facts from other competitors.

The next question is from the line of Mike Roxland with Truist Securities.

Congrats on another good quarter. Mike, just wanted to follow up quickly with you on some of the -- you mentioned CRB and the 8 plus weeks you have in backlog. I'm wondering, obviously, there's some noise around some of the trade rags mentioning moderating CRB demand. So I'm wondering if you can just kind of elaborate on really what you're seeing real time in your business with respect to CRB. And whether the backlog moderation really has to do with moderating demand? Or is it more of a function of maybe easing supply chain constraints that allowed you to really clear out the backlogs that have been extended?

Yes. It's hard to know for sure what other people are seeing. So I'll speak to Graphic, Michael, but we have an 8-week backlog on our CRB business today, and that's with a ramp in Kalamazoo that's gone better than planned, and the Middletown mill continues to operate as we said it would into the future here. So those combination 2 factors are really what we're seeing. And so I don't know as I kind of indicated earlier, what someone else is seeing when they say they've got a 4- to 5-week backlog. Again, we don't have clear visibility into all of that. All I can say as a producer of about roughly half of that material, we haven't seen that.

Our demand has remained strong. The center of the store is actually pretty good. I think you've seen some of our customers. They've taken a lot of price, but their volumes are holding in there, maybe down 1%. And I think the other thing to remember, Michael, for us is that over 20% of our actual portfolio business here in North America fits into the store brand or private label sector.

So if a customer is trading down for whatever reason, we tend to participate at an equal level there, if not a little bit more, which is purposeful on our behalf, and we built the company over the last, really, decade to be able to do that as that portion of the business continues to grow. So we might be benefiting more than others. It's hard for me to know. Look, we'll look on Friday and see what the data says. But I think overall, the robustness of our backlogs on all 3 substrates remains very, very good.

And to repeat something Mike said earlier, actually moving from 10 weeks to 8 weeks was actually a benefit for us in terms of our ability to meet customers' expectations, still significant demand but it's actually a healthier customer relationship experience as well for them as in terms of our ability to get them product on time and in full.

Got you. I appreciate the color there. And just one quick follow-up on Kalamazoo. Mike, you mentioned this in your commentary that it's ahead of schedule. And I think you mentioned the same thing on the field trip as well. If the mill is running better than you anticipated, I guess, can you provide some color around why you're reiterating your EBITDA guidance and don't see upside to those numbers that you've laid out there, if it's actually running a lot better than you anticipated.

Well, I think on a day-to-day operating basis, as we mentioned in the prepared remarks, I mean, we're very pleased with the ramp-up into the 1,400-plus tons a day and line of sight to the 1,500. It's a big strong ramp-up with $17 million in Q3, $30 million plus in Q4. So I guess we'd reiterate that we have a lot of confidence in the $50 million and in the next $50 million. And so at this point, just consider that high confidence in the context of our overall guidance, the returns are there.

Yes. I think that's well said, Steve. I mean when you look at '23, Michael, we said there was $50 million there. We feel really confident in that.

Got you. Good luck for the balance of the year.

The final question will be from the line of Gabe Hajde with Wells Fargo.

And I apologize, I joined a little bit late. So -- but I'm a little surprised, I was taken to the last question to try to take a peek around the corner into 2023. And I guess I apologize if I missed it. But if I take the midpoint of the mark-to-market on price cost, seeing to apply to '25, even if I assume kind of flat volumes, we assume that the $50 million from Kalamazoo, plus maybe a little bit more of normal Graphic productivity. It seems to me like inflation, nonmaterial-related or not input costs related might be running maybe [80 to 100] would seem to imply, I don't know, directionally a [18] EBITDA number? And then I guess on the bottom end, if I were to annualize and I appreciate this isn't the best way to do it, but maybe the midpoint of Q4, call it, [405, 410] would it kind of get me to, I don't know, [16 20] number. Are there pieces parts in there that we're missing, and I appreciate that you're trying to forecast in the future, and we don't know the biggest component, which is price cost or swing factor, I should say.

Yes, Dave, it's Steve. I mean, obviously, I think we provide more transparency into '23 than certainly anyone in our respective space, and I know you appreciate that we're not in guidance mode yet. We'll do that at the end of January, and we'll provide it. Something we have talked about in the public a few things. You're correct on all your basic assumptions, the company is going to look like a lot of -- like it looks like in the past in terms of how we'll execute. But next year, obviously, FX headwinds, the potential for not owning the Russian business. And we are likely to have a little more maintenance downtime. And we've talked in other public environments that, that's probably a $50 million type year-over-year headwind. So we'll provide full detailed guidance when we round the corner here, get out of the quarter and move into '23.

There are no additional questions waiting at this time. So I will pass the conference back to Mike Doss for any closing remarks.

I want to thank everybody for participating in the call today. I apologize to anybody we were not able to get to in terms of the queue and for any issues with sound quality that may have been out there given some of the web problems we're experiencing today. I hope you're all able to join us in January for our fourth quarter and full year 2022 results and an update on our continued progress towards achieving the goals established with our enhanced Vision 2025. And with that, I hope you have a great day. Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.