Graphic Packaging Holding Co (GPK) 2024 Q2 法說會逐字稿

Greetings. Welcome to the Graphic Packaging Holding Company's second quarter 2024 earnings call. (Operator instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Melanie Skijus. You may begin.

Good morning, and welcome to Graphic Packaging Holding Company's second quarter 2024 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 report, we will be referencing our second quarter earnings presentation, which can be accessed through the webcast and also in 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, everyone, and thank you for joining us on our call today. Graphic Packaging is a global leader in sustainable consumer packaging. We spent the last eight years, building a stronger, more diverse packaging portfolio, capable of delivering consistent results, solid growth and substantial cash flow across a range of economic conditions.

The benefits of that portfolio transformation and the commitment and talent of the Graphic Packaging team were clearly evident in our second quarter results. In the second quarter, Graphic Packaging sales were $2.2 billion, adjusted EBITDA was $402 million and adjusted EPS was $0.60. Our reported sales were $155 million below year-ago levels.

Excluding the impact of the Augusta divestiture and related bleached paperboard sales. Net sales from our packaging business were down $73 million or about 3%. Overall, volumes were flat in line with our expectation of flat to slightly positive, and both price and mix were small negative, as Steve will discuss shortly.

We ran extremely well and our margins were strong despite the very significant planned maintenance expense we incurred during the quarter. It leaves us well positioned for the second half, innovation sales growth and customer promotional activity are both expected to move higher in the third and fourth quarters.

Turning to slide 3, closed on the sale of the Augusta bleached paperboard manufacturing facility at May first, eliminating most of our open market bleach paperboard sales and today 95% of our sales come from sustainable consumer packaging solutions, excellence in consumer packaging design, innovation and execution is what drives our sales, our consistency and our growth. We do produce our own import or doing so at a price, significantly higher return on invested capital and helps us deliver more consistent results for customers and stockholders.

That was the impetus for the adjusted divestiture and the strategic logic behind our Waco recycled paperboard manufacturing project. Construction progress at Waco has been excellent and recent storm activity in Texas cost very little disruption.

We remain on schedule, and when we began production in late 2025, we will extend our competitive advantage we have in recycled paperboard and both economics and product quality across all North America. The investments were made in our global network and packaging facilities, while smaller in dollar terms are equally important to our strategy and our success.

Last quarter, we highlighted the new beverage packaging facility and innovation center in the UK. And today, I want to highlight two important investments we've made here in North America. Our Heidelberg 3D printing press and the most productive in the world, reach this target productivity at our [Winnipeg] food packaging facility in the second quarter.

This state-of-the-art press replaces two older presses and allows us to offer several callers or finishes rather than six, along with a wider range of print and design options. It also gives us greater flexibility and layoffs and higher speeds with reduced costs and raises productivity. I am very proud of the work our [Waco] team has done bringing this investment to its full potential so quickly.

(inaudible) Georgia, we completed the automation of finished goods handling and one of our largest beverage packaging facilities, product handling and a packaging plant has historically been labor-intensive and it is a point in the manufacturing process where there's greatest risk of product damage. The automation projects help us de-bottleneck reduce labor costs and handling risks and drive improved service levels.

We have a deep pipeline of projects like these, most of which are relatively low capital costs and high return. Turning to our packaging results, while volumes are recovering slowly, overall, I am encouraged by what is happening inside our portfolio. Our foodservice results are outperforming the industry average remained strong and food, our largest market was dramatically better year over year than it was in the first quarter.

As you read in the press, more shoppers are buying groceries at mass retailers and superstores, and that includes both private label and branded products, where certainly participating in that shift, mass retailers and superstores are just as committed as brand owners to giving consumers the sustainable packaging they prefer. The Boardio coffee canister we discussed last quarter with Mother Parker, the biggest US coffee supplier to mass retail and private label is a good example of that commitment.

Innovation sales growth was $51 million in the quarter, and we are on track to deliver $200 million for the full year. I was particularly pleased to see solid contributions from strength packaging, including coffee K-Cup and snack multipacks for club stores. And we again saw encouraging contributions from both food and beverage comp.

Europe is less than a quarter of our overall sales, but contributed roughly half of our innovation sales growth in the quarter. European consumers are amongst the most, and we're conscious in the world and that has made Europe, the epicenter of global packaging innovation. Our investments to build Europe's best innovation platform are delivering results that we are leveraging globally.

Our packaging operations ran well and some modest price and inflation headwinds were fully offset by strong net performance. As a testament to the quality of the Graphic Packaging team and our commitment to delivering consistent results.

Slide 4 is something you're going to see regularly in our presentations because the breadth and depth of our packaging portfolio foundation, Graphic Packaging's consistency in growth, we serve five markets. Food is the largest beverage and foodservice are next, and we see big opportunities to grow the scale of both household products and health and beauty. There's a very good chance that you've held more than one of our products in their hands in the past 24 hours, and we'll do so again in the next 24.

Now let's look at our sales more detail on Slide 5. I think it's fair to say similar such trends you're reading about. We see in our results. Food markets, which represent 40% of our sales, saw a significantly smaller year over year decline with more people back in the office, consumers have less time to cook, and that is driving the better results we are seeing in categories like frozen pizza and frozen [on trades].

But consumers are also trying to cut costs where they do cook, which is driving better demand for pasta, rice, mac and cheese, which have lower price points for the consumer. Dry food is one of the places where private label is gaining share, and that is certainly the case in our portfolio as well.

Beverage continues to show strong performance after more than two years of positive comparisons. Soft drinks growth outpaced peers during the quarter, while sparkling water and juice were both stronger versus a year ago, and foodservice have connect consecutive quarters of 5%-plus year over year growth. We did see very much slowed down, but despite the challenges some of our QSR customers are facing, we actually came pretty close to our 10th consecutive 5%-plus quarter.

That is a function of the strength of our innovation and our continued investment capabilities and execution. And finally, household products and health and beauty are recovering more slowly versus our other markets and household categories like filter frames, food storage and detergents showed improvements. While tissue and cleansers remain relatively weak, several major producers have indicated plans for higher promotional activity in second half. Keep in mind that health and beauty is a small business for us, but it has substantial growth potential in North America over the next several years.

If you'll turn to slide 6, you'll see the seasonality chart on the left that we shared with you last quarter, which describes the typical seasonal patterns for each of our five markets. For the most part, second quarter tends to be pretty average overall, with food normally modestly lower than the other quarters and beverage stronger and no other notable outlier.

These seasonal differences are not large, just a couple of percent of the annual total. They reflects underlying consumer behavior patterns that follow things like summer and winter weather and holiday activities. You will notice that none of our unusually strong or weak months come in the second quarter. But you may recall this past March, which is typically the strongest month of the first quarter was weaker for us because of the timing of Easter. That led to do a catch-up in April. So that was a small timing difference this year versus normal.

Well, overall, consumer packaging volume is flat. We saw volume improvement in Europe and each month of the second quarter. While North America volumes were uneven, you most often hear me talk about benefits, our European business in terms of innovation. But this quarter is a good reminder that Europe made a significant contribution to our ability to deliver consistency as well.

Promotional activity by our big branded customers is ramping up in North America, although that trend not as pronounced in our orders during the second quarter as we expected will be in the second half. I've already mentioned the strength in mass retail superstore channels we are seeing and private label overall is certainly performing very well.

We are managing some pricing headwinds, but the impact on our margins has been quite limited as Steve, will discuss. We are executing price increases across most our North American business, which will address that price pressure, in Europe prices mostly a pass-through and paperboard prices appear to be rising again. Looking ahead, the third quarter brings more hot weather in back-to-school and as you can see on the seasonality chart in a typical year, third quarter tends to be the strongest quarter overall. And July certainly off to an encouraging start across a wide range of products and customers.

Even so consumers have become much more sensitive to price to value and brand owners are responding with plans for higher promotional activity. Meanwhile, value promotions are gaining traction and QSRs, and we are beginning to see that in our order books, mass retail and superstores are benefiting from the search for better value and multi-packs that appeal to consumers seeking to keep per unit cost down.

Back-to-school means the end of vacation season less time spent outdoors and in general for meals prepared at home. So we expect to see a positive impact on categories like prepared foods and snacks at the same time fewer remote jobs piece less time to cook, and that has to drive growth in foodservice, prepared meals, ready-to-eat options. We are seeing that in a meaningful way in our European convenience business today and expect to see it again, strength in North America in the second half.

Slide 7 outlines our five innovation platforms, which we are seeing very strong engagement with customers across all of them. Some of you have asked whether the destocking we saw last year and this led to any delays in product launches. In general, we are seeing that customers do sometimes just timing and pace of their launches in response to market conditions. But we tend to have good visibility to be six to nine months out.

As a reminder, the $15 billion of potential sales we identified here only includes opportunities where we already have a product solution that has been commercialized or will be commercial very soon. So it isn't a tandem and traditional top-down cents. These are figures we built based on specific target markets and specific plans we already have in place.

Most of our large customers have made commitments of sustainability of the packaging in Europe, many tell us they want to meet the new standards earlier than they are required to. Our customers interest in and commitment to packaging is more circular, more functional and more convenient continues to rise. And the investments we have made in the global innovation leaders in consumer packaging are paying off. Last quarter, I highlighted our forte of paperboard canister, which is now helping to reduce plastic consumption in the US coffee market.

Today, I want to highlight another innovation that originated in our European business in PaperSeal on Slide 8. PaperSeal was developed in collaboration with our partner team (inaudible) as a replacement for plastic bowls trays and other difficult to recycled products. PaperSeal started no which pertained to a trace of PaperSeal sheet allows us to offer a much wider range of case sizes, including the eight cited source of buoyancy on the left side of slide.

PaperSeal, can also be configured with multiple departments, the whole goods crackers for example. The PaperSeal product line offers outstanding barrier properties and extended shelf life relative to some plastic alternatives that ultimately reduce both cost and waste. It also offers outstanding printability and makes brand message to really stand out.

Our first paper PaperSeal customer in the United Kingdom is Sainsbury's, one of UK's top food retailers, for their private label breaded chicken bite, we had (inaudible) have been working closely with Sainsbury and [Moy Park], one of Europe's top co-packers. Our trays were designed to run on Moy Park's existing lines, which also handled (inaudible) for other customers.

Our ability to run on existing lines of expensive modifications is an important and often complex aspect of new product commercialization. PaperSeal reduces plastic content tradable by over 70% and little bit in liner, separate easily from the paperboard for recycling, which is especially important for European recycling programs.

This one implementation will reduce plastic consumption by about 300 metric tons per year, making it a win for Sainsbury, a win for UK consumers a win for Graphic Packaging by Danny and Moy Park and importantly, a win for the planet in Brazil, Shape exemplifies our success in creating packaging solutions that are more circular more functional and more convenient. Finally and before I turn it over to Steve, I want to take a moment to remind you that our Vision 2030 is much more than just a set of financial targets.

Slide 9 lays out our four pillars of our strategy, which describe our goals and our aspirations. Innovation is in the heart of what we do, because better more sustainable packaging is what our customers are asking for and what consumers prefer. We have an exceptional team and we are working relentlessly to make it even stronger.

We have clear plans not just targets for reducing our environmental footprint and our packaging innovation to help our customers meet their own sustainability targets. We do want to execute and measure our performance against clear goals and aspirations, we are delivering results.

Now let me turn it over to Steve for a review of our financials and operations, Steve.

Thank you Mike. By turning to Slide 10. In the second quarter, we executed very well generate strong margins and adjusted EBITDA just as we did in the first quarter. While reported sales were down $155 million for the half of that decline represented the impact of the Augusta divestiture and the dramatic reduction in our participation in bleach paperboard sales.

Sales from our packaging business were down approximately $73 million, though volume was flat in-line with the expectations we shared last quarter. Price was a small headwind of about 2%, and there was a minor negative mix impact of about 1% in our European business, as you will recall, for European business has a significant and profitable health and beauty segment. The unit price tends to be quite a bit higher than our average, however, which is also true in parts of our European household products business, both of which were weaker in the second quarter.

As such the decline in high price premium unit sales drove some negative mix. Mix was not a meaningful factor in the first quarter in Europe, and it was not a significant factor in our Americas results in either quarter. Keep in mind that our European business operates mainly on a price pass-through model. So the mix impact we saw in second quarter sales did not have a material impact on EBITDA for margin.

Sales impact from other M&A, excluding Augusta and foreign exchange was basically a wash. Graphic Packaging delivered adjusted EBITDA of $402 million, in line with our guidance, $47 million,$ 51 million decline in reported adjusted EBITDA was due to the Augusta divestiture, the related impact of lower paperboard volumes and price and the incremental planned maintenance expense that we called out last quarter, which together came in broadly as expected.

Excluding those items, an EBITDA headwind from lower sales, which was primarily price and some modest cost inflation was fully offset by solid net performance. In order to deliver consistent results, we need to manage all of our sales and cost headwinds regardless of which bucket they fall into. And in both the first and second quarters, we did just that. EBITDA impact from other M&A, excluding Augusta and foreign exchange was a $4 million headwind.

Turning to our balance sheet and liquidity. As long as our debt levels are reasonable, we compare every potential use of capital against the alternative of share repurchase. On the basis of that analysis, we applied $200 million of the Augusta divestiture proceeds to the repurchase of GPK shares during the quarter. We also address upcoming debt maturities.

We issued $500 million of senior notes at treasuries, plus 188 basis points, our tightest spread to treasuries today. We've also extended our bank debt to 2029 we currently have no significant debt maturities until 2026. We ended the quarter with net leverage of approximately 2.9 times and expect to end the year at approximately 2.7 times. Our average cost of debt is currently running at 4.6%.

Turning to operations and capital investments on slide 11, the Augusta divestiture took place on May first. And by the end of the second quarter, we completed the re-optimization of our Texarkana bleached paperboard manufacturing facility. As you will recall, we sold some open-market business that had been produced at Texarkana and fill that gap with production we use internally, which had been produced at Augusta prior to the sale, the planning and execution of those transitions that's gone smoothly.

Now as of today, Texarkana is running for produces a mix of paperboard that we need serve our customers. As Mike noted, Waco is moving ahead very well. We have nearly 1,000 contractors on site this month. The finished goods warehouse is now substantially complete to pull. Birds are installed and the boiler and drone Pulver for recently delivered and are ready for installation.

We are moving as quickly as we can of Waco and with the project doing very well and accelerated spending on equipment, we now expect total capital spending for 2024 to be approximately $1 billion, up $950 billion. We are on track or recovering more and recovered paper sourcing plans and continue to expect to achieve incremental EBITDA of $80 million in each of 2026 and 2027, a portion of which reflects our plan to shut down two of our older, smaller recycled paperboard manufacturing facilities. After those closures, we will have a total of five before manufacturing facilities in our system, all of which will be modern and well invested.

Mike shared details on the kinds of projects we are doing that our global packaging network and all the investments are delivering the productivity we target. The benefits from each of these projects are different for what they share in common is rapid financial payback and expansion of product capabilities for an increase in productivity, greater reliability and improve customer service.

These types of projects range from a few million dollars to the low tens of millions of dollars and are included in our planned 5% of sales capital spending commitments post Waco. And finally, the bill packaging tuck-under acquisition, which we completed in September of last year is now fully integrated and targeted synergies of approximately $10 million have been achieved. Bell has expanded our food service platform, and there's plenty of room for further volume growth without significant new investment.

On slide 12, summarize our recent dividend and repurchase activity. In the second quarter, we returned approximately $230 million to stockholders through a combination of dividends and share repurchase. We bought back approximately $7.2 million shares or about 2.4% of our shares outstanding for a total consideration of $200 million at an average price of $27.61 per share. For your modeling purposes, we ended the quarter with approximately 300 million common shares outstanding or about 301.2 million shares on a fully diluted basis.

Turning to Slide 13 in the album. As Mike noted earlier, July is off to an encouraging start in both North America and Europe, and customer engagement is high across all of our markets. We continue to expect 3% to 4% volume mix growth in the second half. And excluding the impact of the Augusta divestiture, we continue to expect full year volume mix to be modestly positive, although current price headwinds may offset that positive benefit in 2024.

We currently expect to return the low single-digit sales growth in 2025. We are on track to deliver $200 million of innovation sales growth in 2024. And as we indicated last quarter, we expect full year 2024 adjusted EBITDA margins in the 19% to 20% range and expect to deliver adjusted EBITDA in the range of [$1.7] billion, $1.83 billion.

Our adjusted EPS guidance also remains unchanged. We indicated last quarter that 2024 would feature pronounced first half second half pattern. It is quite unusual progress back after delivering adjusted EBITDA of $845 million in the first half. Our [849, 40] guidance at the midpoint becomes $935 million of adjusted EBITDA for the second half of the year.

That translates to a $90 million increase in the second half or the first half. Keep in mind that approximately $50 million of that improvement will come from less planned payments expect. The rest we expect to come from the 3% to 4% volume mix growth I referenced a moment ago and a continuation of the very strong execution and performance we've delivered in the first half.

Slide 14 summarizes our Vision 2030 financial metrics and our capital allocation priorities, which we presented at the Investor Day in February. Low single digit top line growth driven by innovation and execution, mid-single digit adjusted EBITDA growth, reflecting the leverage in our financial model as well as the returns we expect from the investment in Waco and the ongoing productivity projects we have in our pipeline.

High-single digit EPS growth through the combination of higher pretax earnings, lower leverage over time and a reduced share count. Whilst the Wako recycled paperboard manufacturing investment is complete in late 2025, we will hold capital spending of 5% of sales to support growth in drive net performance. We expect to generate cash flow well in excess of our needs over the next seven years. And our priorities for deploying cash were clear.

Once we complete the Waco investment, our capital priorities will focus first on maintaining and strengthening our leadership position in sustainable consumer packaging. After reinvestment, our next highest priority is returning capital to stockholders through a growing dividend and share repurchase. Every potential use of cash is measured against share repurchase, which is good basic financial discipline.

We do plan to reduce leverage over time. But as we have indicated previously, we are comfortable with our current debt levels and satisfied with our maturity schedule and overall cost of debt. We expect leverage to fall over the next couple of years, and we'll pursue an investment grade debt rating at the appropriate time. We have the assets, the capabilities and the team we need to deliver on our Vision 2030 goals.

We will, of course, continue to evaluate tuck-under acquisitions where they can accelerate our growth for driving even higher returns, last year bell acquisition was a good example of that. Slide 15 is from our Investor Day presentation. Over the next several years, we expect to generate roughly $5 billion of cash flow with 2024 being our peak CapEx year.

In 2025, we expect CapEx to be at least $200 million lower than in 2024. And at 2026 and 2027, we expect to see the healthy returns from the Waco investment and generate substantially higher cash flow, which we will deploy to drive further value creation. On slide 17, you will find some supplemental information that may be useful for modeling purposes.

That concludes our prepared remarks this morning. We will now turn the call back to the operator to begin Q&A. Operator?

(Operator instructions)

George Staphos, Bank of America.

Hi, everyone. Good morning. Thanks for the detail. My two questions. First one will be on volume and the second one's on margin. In terms of volume gentlemen, can you talk a bit about what you're seeing? You said July is off to encouraging start.

What are you seeing early in the quarter and which end markets are giving you the most confidence in terms of that 3% to 4% adjusted growth rate for the second half of the year. Relatedly, how much is the trend towards more promotion changed commercial strategies, et cetera, from your customers driving and that. And I had a margin question?

George, thanks for that. Look July is kind of come in and we've seen continued strength in our European business for sure. As we talked about in our prepared comments, we saw that every month in the second quarter, and that's carried over into Q3. We also seeing encouraging signs in the Americas business, specifically on the food business, which, as you know is our largest, I'd caution you it's early.

We're one month ending (inaudible) but we'd like to see so far, I think you coupled that with a number of our large customers who in the last few weeks have reported results and they've talked about their desire to increase promotional activity, and we're starting to see some of that activity as well.

Beverage and foodservice were very strong for us in the second quarter. And you saw yesterday with McDonald's released, you're going to extend the value meal. So we expect all of that to kind of inform the overall results that we're seeing. And I think the piece that Steve, talked about in his prepared comments.

Again, just to reiterate that you look at our back half of the year and compare it against '23, '23 was down anywhere between 5% and 6%, as you know, in Q3 and Q4. And so what we're saying is we're going to come back 3% to 4% this year. And if you put our innovation on top of that, it's roughly 2%. So our confidence level in that 3%, 4% is quite high given the factors I just outlined.

Thanks, Steve. Thanks Mike, the second question I had on margin again, kind of similar. What gives you the confidence at this juncture that you can get to 19% to 20% for the year, Mike, given that you're under 19% in the first half, I recognize maintenance was part of that. So you're going to get a sequential pickup there.

But what else is driving that that you can call out relatedly, on mix, usually foodservice is pretty strong for mix from what I remember. And so I was just curious, along with Europe, if there's anything else in terms of why mix was negative in the first half and why that dissipate in the second half towards your margin goal? Thank you and good luck in the quarter?

Yeah, I think, George, it's Steve. Just in terms of the kind of first half second half as we shared in the comments and just provide a little bit of color here for you in our $45 million of EBITDA in the first half, 19% margins midpoint of our guide, $935 million in the second half. So plus $90 million, first half to second half of $50 million of that is math we will take $50 million less in planned maintenance expense.

The second quarter was very heavy for us as we articulated. So $50 million of the 90 comes through just less planned maintenance expense of the remaining $40 million of improvement. Really two things one, as Mike just mentioned, a return to modest growth, 3% to 4% in the second half compared to the first half, we'll earn on that appropriately.

And then overall, we expect the net performance to continue to be very strong. We're running our overall system both at the packaging level as well as the paperboard manufacturing level quite full here in the second half of the year last year, as you know, we were taking quite a bit of market-related downtime to manage supply and demand.

And so really those three things, the $50 million from reduced plant maintenance expense. And then the next $40 million from earning on the growth and the ongoing strong performance gives us confidence that we'll operate in the 20% range in the second half and then obviously, right in that 19% to 20% range for the full year.

Okay. I'll turn it over. Thank you.

Thanks, George.

Lewis Merrick, BNP Paribas.

Morning, Mike. Morning, Steve, and thanks for taking my questions. Two, if I may, good to hear the really strong performance in Europe and the innovation sales. I was hoping you could share a bit more detail into how your European operations are performing and how the market is playing out there relative to the US and also maybe bigger picture, how does that business fit in with the overall portfolio? Any color you could shut down? Those two points would be appreciated. And then I've got one follow-up?

Yeah. Thank you, Lewis. I appreciate the question. Look, we were really pleased to see that, as you heard Steve talk about over half of our innovation sales were in Europe this year. We've talked a lot in the past around the European consumer being the most sustainably conscious in the world as you prove you live in that market so you know exactly what I'm talking about. From that standpoint, it really shows why the acquisition of A&R and subsequent scaling out of our innovation activities in Europe.

So important to our business because we get those trends, we see them early, we capitalize on them. And ultimately, we're able to move around the globe to other areas where we have operations, including our largest market North America. So that was great. I would tell you our European business is outperforming the broader market in Europe simply because of all the innovation activities we've got in place our team is doing a really nice job finding these opportunities.

We profile the Sainsbury opportunity this earnings call with a procedural shape. We've talked a lot about audio in the past. And they also have a very big business on your trading containers that's continuing to grow. So we like our pipeline there and expect to continue to see it grow.

I think the other point and I used to call this out again during his comments is that, Europe is not our biggest business, but it was a real important part of our ability to deliver consistency in results every month. In the second quarter, we saw month-on-month gains. And so we like seeing that we're a part of our own portfolio and you're going to see us continue to invest there.

Thank you. And maybe building just on George's question. Can you maybe give us some color on what sort of exit rate for volumes were in June and has there been any acceleration throughout the quarter?

Yeah Louis, it's Steve. I think as we are articulating as the quarter played out, we kind of saw a flat to modest growth, we ended up at flat and so May June played out roughly as expected. I think importantly, as Mike mentioned in his commentary and it might as well. July has come in consistent with our guide.

So we're pleased with what we're seeing in July, consistent with that 3% to 4%, second half volume growth and so July is meeting those expectations and obviously gives us support for those expectations existing for the second half of the year.

Hey thanks.

Thank you.

Ghansham Panjabi, Baird.

Yeah, hey, guys. Good morning. On slide 5 where you have all the end markets nicely broken out, food, beverage, et cetera. What drove the outperformance in beverage that you called out as something that was stood out for 2Q. And then as you kind of think about the back half of the year, how do you think those arrows trend, at least some color of 3Q, 4Q your crisis and markets?

I'll take the first part and let Steve, handle the second Ghansham. In our case, you beverage again, there's a big part of innovation there that we were able to drive new sales and some of the opportunities that were in front of us. And look, it doesn't hurt that the market was hot North America. So demand was solid and we saw good pull through there.

Yeah, I got, I think as you look out and take the 3% to 4% volume growth. We're articulating obviously, that chart includes price as well. So it's a sales view, so we've got a little bit of headwind on the sales side, the 2% that we've articulated. So it's our expectation that the kind of the bottom right arrows, if you will, turn more green kind of in that sideways zone zero plus two and obviously, it could even be a little bit higher than that.

But keep in mind, it's a sale slide. And so we would expect that those arrows to kind of move nicely. certainly foodservice beverage, we would expect to continue to see positive, as we mentioned, food got materially better, but still down in the second quarter.

So that inflection more towards neutral will be important and then obviously a household goods and health and beauty side, we would expect to see some reasonable inflection. So not everything will move perfectly up at the same time. But I think if you look across the portfolio, we'd expect the arrows to be moving in a positive direction as we kind of embark on Q3 to Q4.

Okay. Great, thanks for that. And then if you can compare and contrast 2023 versus 2024. 2023, obviously was impacted by aggressive inventory destocking and a your unfolded, consumer affordability issues, et cetera. Is the reason you're not seeing a more pronounced increase in volumes in context of the inventory destock comp?

Is it just because consumer affordability and weakness has just gotten worse. And so customers are still running at very low inventory levels. Are you thinking about those dynamics?

I think you've answered it pretty well. I mean, look the consumers definitely you're changing some of their buying habits in terms of in response to some of the pricing they're seeing in the marketplace. Having said that, I think the thing that, we continue to make point of here's just our broad-based portfolio has really big reach into a number of different verticals outside of the center of the store.

Now we've purposely built that out over the last 10 years. I mean, as a general statement, if you're seeing movement in Nielsen, we're participating in that. We're seeing that in our backlog so that's really the company, we've worked hard to build some.

We're almost agnostic around how that kind of shifts and where it goes. And ultimately, we're seeing that play out, I would agree with your statement that our customers have been pretty cautious around building any inventories, so that's been a part of it.

But overall, we see our backlogs continuing to grow on the paperboard side based on the orders got a packaging. So our confidence is pretty solid here in this 3% to 4% inflection on the back half of the year as a result.

Thanks so much.

Lars Kjellberg, Stifel.

Thank you for taking my question. I just wanted to get some incremental clarity on the volume component that you're talking about in H2. Clearly you have an easy comparable, as you pointed out. So how should we think about that in sequential terms and also coming back to that, if you're talking about a low single-digit growth in '25, how does that fit in with a potential continuation of a, call it $200 million on innovation growth in '25? And any color on that? And then I have a follow-up.

Yeah, I'll start and then Mike can add anything in addition. I think you touched on it obviously, we were down 5%, 6% last year, so a positive 3%to 4% this year, really we view that as an appropriate assumption just as Mike said, the consumer is under reasonable pressure. So it's not really a substantial volume assumption. That's a true consumer level. We expect some modest return to promotional activities by our customers.

And then importantly, in the second half, our innovation engine and your part of your question for '24 and '25 will be at over $100 million of innovation growth in the second half. That alone is a little over 2% growth. That's a real stabilizer for that 3% to 4% assumption in the second half.

Importantly, given the model out in '25. Our pipeline of innovation based projects remains to be very good fundamentally sound. It's diverse across our portfolio of products and markets. And so we'll continue to see out into '25 and beyond that, a couple of hundred basis points of growth coming from the innovation engine, which is important for us, just given that that's a real enabler for that low single digit top line growth.

Got it, and the follow-up is more so on the upstream business, of course, has been talks very important duration for a very long period of time.

And we're now seeing, of course, your competitors, mainly in Europe, seeing surging wood costs, et cetera. Are you seeing any change in their behavior in terms of trying to win business in the US and generally, how do you see more potential within a more increasingly domestic market in terms of the paperboard developing for your total business in North America that potential risk for important duration as I produced or how to do that?

Yeah, thank you Lars, I appreciate the question. We've talked in the past that there's been imports into the US market of various different grades for some time. We historically and certainly true for 2024 just did not see much in the markets that we participated. It's just not a big factor for us. But having said that, it has received a fair amount of press.

And, I think maybe it's worthwhile to take a little bit of a step back and talk about how where that is really coming from. I mean, in our case in North America, the predominant place where we would see any imports from would be in the Scandinavian countries, not Asia, as an example or Latin America, it's really a pretty limited to Scandinavian countries. And if you really look at the overall cost structure, there has shifted dramatically in the last couple of years with the of the Russian sanctions that have been put in place by the EU, roughly 10% of the wood that used to be assumed in Scandinavia.

Now is a longer available because it can be imported. On top of that in Scandinavian countries, almost another 10% has gone into pellets as opposed to [Paul], I share that with you just by way of background. So if you think about it owns 20% of the wood that was there a couple of years ago, there have (inaudible) purpose. As a result, your Scandinavian producers are well chronicled.

This they've seen their costs go up 40% to 50% over that 24 month period of time on their primary input costs, which is wood. On top of that, you see container costs continue to escalate, you put that altogether, you're putting a product on the water contained shipping into a market that's already well supplied probably isn't a great medium to long term strategy.

Maybe in the short term, it worked for a little bit. But overall, I'd say that those dynamics probably work against them along those lines. One of the trade publications talked about it in addition to being a source to for SPS, could it also replaced coating on bleached paperboard which were big producer and that didn't make a lot of sense to me, to be honest with you, given predominantly when you use that credit facility around tear and strength characteristics and I asked our packaging engineering team as we've seen any of that application and anything that we do and they can think of it.

So it's certainly on our list of things we're watching on, but it's not very high up on the list of things that we're concerned about nine sales pressure on imports today from a cost standpoint. And certainly six months ago now and expect that to be the case. So it's very manageable from our point of view.

That makes sense. Thank you.

Mike Roxland, Truist Securities Group.

Thank you, Mike, Steve and Melanie, for taking my questions and congrats on a good quarter from. Just wanted to start with your foodservice I'm just wondering if you could help me reconcile the foodservice growth that you're showing in the chart of 2% to 5% versus recent industry shift stats for 2Q, which show the mid-single digit decline, your outperformance versus those that maybe the innovation customer mix?

Just trying to help reconcile what the stats showing versus what you're showing in that client computer or book of business?

Yeah, Mike, I appreciate the question. It's really two things. It's the innovation that we've been driving, as well as our Bell acquisition that contributed to that. So you put those two together. And that's really what's driving our outperformance in the marketplace, and we'd expect that to continue along those lines.

Got it. And then just on cupstock. I believe that Suzano buying from US assets that produce cupstock, I believe that talks about that looking combined is currently a small part of what that could ultimately do but it seems to be a focus area could be a focus area with them buying those assets. Any concerns there -- any concerns over the Chick-fil-A business or any future potential business given this new entrants?

I'm aware of purchase the announced purchase, I believe you're talking about Suzano's purchase of the Pine Bluff mill from active evergreen. I'm not knowledgeable of course, what their long-term plans are for that facility. For the most part, that facility has been focused on liquid packaging board, which really tends to be more mill current stock.

Having said that, if you think about the implications for Graphic Packaging, as you heard Steve talk about in our prepared comments, really with the Augusta sale and the consolidation of our business into our Texarkana mill. We'll, we're making the grades of paper that we need there, including coke and our bleached paperboard material.

So our strategy is working exactly as we expected would driving high levels of utilization and volume, good ROIC, where for our investors based on the grades of paper that we want to make. So again, that all the cupstock that we make goes into our own facility.

So it's in addition to even if you decide you're going to make grade of paper, you got to have an outlook like where you're going to sell that stuff too. And we've got five very well-capitalized facilities that are integrated well into our Texarkana paperboard manufacturing facility. So our strategy is very different.

Got it. Thank you.

Matt Roberts, Raymond James.

Mike, Steve, Melanie, good morning. Steve, I apologize if I missed this in your response earlier, but the 3% to 4% second half growth. Is that purely a volume number with mix neutral? And in second half, what are you embedding in price following the recently announced increase? And on that price increase? Is there anything different in the environment now versus February when you took the price increase?

Thanks for that, Matt. I'll start and Mike can add to it here as well. That 3% to 4% is a volume assumption. Mix is neutral. We expect mix to be as it's really been pretty modest to neutral, overall right now we've got a little bit of the pricing headwinds as we talked.

That's kind of running in the in the 2% range. So a modest offset to the 3% to 4% that volume mix assumption, which cumulatively would make all of that modestly positive. And as you referenced, we are executing on price increase moves in the marketplace that we're executing on currently.

Okay, great. Thank you. Thanks for the clarification there. And then one more clarification from me. On the innovation sales target for second half, how much of that is incremental that is dependent on volumes from newly introduced products versus new products coming to market?

And on the latter point, are there any delays or anything that you could foresee there push any timing into 2025? Or is it $200 million in 2024 they can pretty solid?

Yeah, Matt, at this point in time. It's really solid basically if it's in motion, it's a part of the 200. I'd say there's very little that would be what we'd characterize as something that's not commercial today, it may be on the verge of commercial and it's in our outlook into the second half of the year, but that $200 million, we obviously track it every month is rock solid for the year.

Importantly, as we talked earlier, the pipeline to support the next $200 million into 2025 remains robust. No major moves from across the portfolio of projects that we're working on. And I think we remain very positive on how diverse that portfolio of projects remains, both in terms of markets as well as the product portfolio that we're executing on.

Very good. Thank you again for the color.

Thanks, Matt.

Mark Weintraub, Seaport Research Partners.

Thank you. So just on this second half sales volume increase, I should say I'm sorry. So I think if we look at your organic sales from last year, they were about 1.5% lower in the second half than the first half. And so since you noted that you were about 2% lower in the first half year over year.

I assume it's fair to say that the sequential improvement, 1Q, what first half to second half is pretty similar to the year-over-year, maybe it would be slightly more. Is that a fair assumption?

It would be better mark, by following your logic. I think as we mentioned earlier, year over year, plus three to four came off of last year's second half, which is kind of minus five six. So it's not even a full recovery of the destocking and the headwinds that we experienced last year.

From a first half to the second half level. It is an acceleration in terms of volumetrically will have sequentially first half to second half higher sales across the packaging platform that will support. So I think to your question is a positive first half, second half, three to four is obviously year over year coming off of last year's comparison of minus 5, 6 right.

So just to go. And I think given the information you provided to us, we can calculate that is roughly to be more exact, that 3.5% to 4.5% increase. Second half versus first half. Is that in the ballpark?

That's directionally correct.

Yeah. Okay. And then in that, given that you are this is sort of a recovery mode, how should we think about incremental margins on the sales increase. So I'm sure it's better than your underlying normal EBITDA margin. How should we think about that?

It is higher market higher than our 19%, 20%, obviously, because you get good strong absorption across the totality of the platform. So yeah, I think if you're doing the math -- you're doing is you're putting value on that 3.5% to 4%. If you're in that 25%, 30% range, you're getting to the back half that we're talking about early on with the incremental $40 million of EBITDA first half second half. That's supported by the 3% to 4%. And the ongoing performance that and including full absorption of our assets. It's a good question, Mark.

I think the other thing you saw in the data that was released by the key here on Friday, a seed in the coated recycled in the uncoated paperboard coated on unbleached, I should say. Around 400 basis points of sequentially, second quarter, first quarter backlogs are growing and inventories are down on those grades, paper.

And really that's a function of these orders starting to flow back through. And so if you think about second half, we had last year, we took a fair amount of market related downtime. It was mostly on the bleached paperboard side, but it also affected these other grades to some degree. And so as Steve said, you run steady, you don't incur those costs so that's got a big positive margin impact.

Great. And one last one, hopefully not bearing myself to deep in the weeds here, so also you don't have a dust in the second half, and I think you'd originally talked about it being $30 million to $35 million. And so is that is that productivity gains that sort of is going to get us that last part to get us to the midpoint potentially? Or is there some other potential lever to be thinking about?

No, it really is, Mark, because if you think about it here in the second half, Texarkana is running absolutely full will earn very well there. And last year we are taking an extraordinary amount of downtime across the two facilities. So actually, our earnings power on the bleached platform in the second half of the year will look a lot like last year's cumulative second half where we had two paperboard manufacturing facilities, and that's also one of the big enablers for the $50 million of reduced maintenance expense. A lot of that was taken at Texarkana.

So the bleached capabilities, the earnings profile of the business is supported by less maintenance expense, running full at Texarkana of busy cup business and obviously supportive of what we're seeing on the recycled paperboard down bleach side. So that overall volume, allowing our system as we've now defined it to be running quite full here in the second half of the year, hence generating significant net performance.

Super, thank you.

So the operator will go another 10 minutes or so at it if there's some additional questions out there. So go ahead and proceed, please.

Certainly. Anthony Pettinari, Citi.

Good morning. Can you talk about kind of the level of inflation you're currently seeing across your major cost categories. And I guess directionally, what level of inflation you're kind of assuming for the second half?

And I would say that as we've talked kind of cumulatively, we have a relatively modest amount of inflation running through the business. We've got areas where we've got costs moving down like wood and energy and chemicals and the external paperboards. If we acquire to support our business. For example, in Europe, we've got inflation in areas like resin and OCC logistics and labor and benefits.

So it's remained reasonably benign, we're not making any assumptions for large movement in those costs in the second half of the year. So it kind of is up steady as you go. Obviously, if we see movement up or down, we'll take that into consideration we talked about the business.

But broadly speaking, if you're talking in historical terms, the little bit of modest price headwinds as well as a little bit of inflation that's coming through the business is being offset by -- and even labor benefits inflation is being offset by the good, strong performance. We were just chatting about a couple of minutes ago.

Got it. Got it. And then just following up on the price hikes in the North American business, I guess to the extent you can -- can you talk about how those are sort of being accepted? And is it fair to say that the benefit would show up for you more in 2025? Or are any thoughts on kind of potential lag there?

Yeah. So I will confirm that we're actively implementing price increases on a number of the substrates that we manufacture. I'm not going to talk about forward looking comments in terms of how those will go other than to tell you that we're working hard to recover those implementing those increases as we do with, as Steve said, we do have inflation coming into the business it's benign now.

But ultimately, we could see things like OCC, that's at an elevated level. We need to recover those costs and be in a position in 2025 as you said, and you know how this works, I mean, we're basically a six month delay offset or lag, if you will. And so ultimately, the vast majority of the pricing that would be recognized would ultimately show up in 2025 to you alluded to.

Okay, that's helpful. I'll turn it over.

Arun Viswanathan, RBC Capital Markets.

Great. Thanks for taking my question. I guess I just wanted to review how you're thinking about Q4. Last year you had some accelerated or elevated downtime levels, but this year, it seems like you will be exiting maybe in the $450 million to $460 million EBITDA range. From there, do you see the likelihood of strong growth. Maybe you talked about 1% to 2%, our low single digit volume growth for next year.

Would you be able to leverage that maybe to mid-single digits? Is that how we should be thinking about how your EBITDA potentially grow next year.

So I'm going to parse that out into two responses a room. Thanks for the question. If you really look at the second half of this year. As I've commented on, we expect our paperboard manufacturing facilities to run your fault. We've taken the vast majority of our planned maintenance. As you heard Steve talk about that was $50 million or from a cost standpoint in the first half than it will be in the second half.

And we ultimately need to run those paperboard manufacturing facilities and in Q3 and Q4 to make sure that we've got the paperboard, we need to continue to service our costs. It is way too early to prognosticate about 2025. We're what we are committed to is our Vision 2030 that we've rolled out there. You heard Steve talk about low single digits is kind of our focus for 2025? Could it be more? Sure. Could it be less?

I mean, there's a lot of macro factors out there that ultimately impact that, as you know, but I think we've got pretty good visibility, six, nine months out in our business given its consumer index as opposed to Industrial Index high. And as a result of that and your confidence level in our three four right now going into the second half of the year is high. You know that in Q1 of this year we were down a little bit versus the prior year. So you got to factor that into how we'll head into 2025 to in terms of how you look at your modeling.

But that's how we're thinking about it. And of course, we're quite aggressive on trying to make sure that we're capturing all those innovation opportunities that we see out there and continuing to stay. We're very focused on our ability to do so.

Thanks for that, Mike. And then just a quick follow-up. So just wondering how you guys are thinking about cash flow from here. It sounds like again, you pointed out an $800 million to $1 billion level, maybe in '26 and CapEx should be coming down next year. What kind of magnitude of reduction in CapEx are you expecting from that $1 billion this year?

And then are you seeing any opportunities where you could deploy that cash flow may be, could something come out of recent transactions or is it mainly a buyback focused? Thanks.

Yeah, I'll start and Mike can add on. Yes, we expect cash flow to improve in 2025 because CapEx will step down at least $200 million year over year. So really the vision that we laid out for improving cash flow and then obviously '26 to '27, we see all the benefits of the Waco investment driving towards the kind of very substantial cash flow that we expect to generate over those couple of years.

So really no change at all in kind of the direction of Vision 2030 from a cash flow generation that might you might take that.

I think look, um, if you look at Vision 2030 from room we really talked about CapEx as a percentage of sales. Once we got past, we've gone into 2020 set, let's just call it as a baseline year. You're being you're at 5% or below in terms of CapEx as a percentage of sales in post Medco?

In Steve's prepared comments, he made the statement if we end up closing the two smaller coated recycled paperboard mills that we've targeted to do as part of that project, we have five very well-invested mills and our ongoing CapEx requirements for maintenance is around 2%.

And I want to repeat that about 2%. And so ultimately, we've got a fair amount of money there to drive the decarbonization that we've outlined as part of our Vision 2030 initiatives as well as to continue to pursue some of the smaller CapEx projects, which we've profiled a couple of them in our prepared remarks, replacing presses two for one.

That's a nice trade. Looking at automation, our activities in our warehousing, upper operations that ultimately reduce the amount of warehouse at warehousing we need and the labor associated with that you're going to see us work on those kind of things. So we've really love the positioning we've got.

And your comment on weight goals, both in terms of where power and paperboard manufacturing facilities will be positioned as well as the ongoing cash flow that we'll have to invest in smart projects in the business because our maintenance requirements will be pretty off there.

Great. Thank you.

I think we have time for one more question.

Your final question for today is from Phil Ng, Jefferies.

Good morning, Mike. Steve, this is John on for Phil. Thank you for all the details and squeezing me in here. I just wanted to start off. The price in the quarter was a little bit more negative than I was expecting is that all and from the index moves that are just flowing through? Is there anything else that's in there?

And then, also we were pretty impressed with the productivity that was able to offset that negative price plus and the cost inflation in the quarter. Some obviously you're talking about having less economic downtime in the back half and some of the throughput and efficiencies from converting projects in investments that you've made.

So I would think that the and productivity line to be price stepping up a bit and should be more than enough to offset negative price of about 2% that you noted and maybe some of that ongoing inflation. Is that appropriate? Or is there any way to help us quantify, how we should think about the net productivity in the back half?

Let me take the price piece. If I could touch on the performance piece, which we are very pleased with, obviously in terms of how we have up-to-date across the platform.

The only thing I'd probably note for you on the pricing, the minus 2%. Keep in mind that 1% of that is really a price pass-through of reduced paperboard costs in Europe. And so that for us is really about pass through. That's half of it. The other half, the 1% is a little more related to the whole portfolio of prices that we have across the Americas, models that are out there, et cetera.

So that would be the only nuance for you because that pass through is relevant because it's really margin neutral for us and it's half of that price reduction by Q1 talk performance?

Look, John, you mentioned it. I'm really proud of the efforts that our team volume put forth in the first half of this year in terms of overall execution. As I mentioned, we took a lot of our planned downtime and uses a lot of things we had to move around on to your support our paperboard manufacturing facilities in that process of the second half with us running full, and your volumes stepping up a little bit. Like I said, we're going to continue to drive good productivity during the second half of the year.

That's great. And if I could just add on one quick clarification, because I appreciate that you're calling out the ending share count after reducing the year shares by about 2.4%. Are you done with deploying those proceeds from the Augusta mill sale? Or are you still looking to buy back more shares here in the second half?

Yes, we don't we don't really forecast or embed share repurchase into our guidance or into the go forward. So we'll continue to be appropriate and measuring everything that we do against share repurchase. But there's not an incremental share repurchase assumed in our embedded in our forward statements.

That's helpful. Thank you very much.

Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to Mike Doss for closing remarks.

Thank you, operator. Thank you everyone for joining us on our call today. I'm proud of the results our team is delivering excited about our innovation pipeline and optimistic about our growth outlook. Graphic Packaging is leading the way in sustainable consumer packaging. Vision 2030 is about execution and delivering results across a wide range of economic conditions. And we are demonstrating that we can do that exactly. Thank you and good day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.