Graphic Packaging Holding Company

Ladies and gentlemen, thank you for standing by and welcome to the Graphic Packaging Holding Company second quarter of 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Melanie Skigis, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.

Good morning and welcome to Graphic Packaging Holding Company's conference call to discuss our second quarter 2020 results. Speaking on the call will be 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 second quarter earnings presentation, which can be accessed on the investor section of our website at www.graphicdkg.com. I would like to remind everyone that statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filing for the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements as such statements only as of the date on which they are made, and the company undertakes no obligation to update such statements except as required by law. Mike, I'll turn it over to you.

Thank you, Melanie. Good morning, and thank you for joining us on the call today. I'm pleased to be with you to discuss our excellent results we delivered in the second quarter of 2020. Before we focus on financial results, I'd like to take a few moments to update you on the initiatives to keep employees and partners safe. while continuing our essential operations supporting the food, beverage, consumer, and food service markets globally. Employees come first at graphic packaging. We continue to invest in added safety protocols, including plexiglass barriers on production lines, face masks for employees, temperature scanners, and enhanced cleaning and sanitation protocols designed specifically to prevent the spread of viruses, including influenza and COVID-19. While we have established and implemented safety protocols for our frontline employees, we have also executed technology solutions to enable our non-production employees to conduct their roles effectively from home. Workforce productivity and collaboration across our organization during these challenging times has exceeded my expectations. We have managed through the COVID-19 environment exceptionally well to date and have remained agile, approaching every day with a can-do attitude. Over the course of the last few months, we have often been recognized by customers for our flexibility, best-in-class service and support through these volatile times. We attribute the exemplary customer service our teams provide directly to the focus we place on the well-being of our employees. Our teams have continued to perform for our customers and have gone above and beyond to provide continuity of supply. I thank everyone at Graphic Packaging for their ongoing and tireless efforts. I would also like to take a moment to discuss a very important topic of graphic packaging, diversity and inclusion. We believe a diverse and inclusive working environment encourages creativity, innovation, and collaboration. It enhances our ability to serve global customers, and it is why it is vital that our global organization reflects the diversity of the communities in which we operate. While diversity and inclusion has been a longstanding practice, It is more important than ever that we listen to our 19,000 employees worldwide and have conversations necessary to ensure all the employees have a sense of place and inclusiveness as members of the graphic packaging team. We benefit as an organization from a truly collective and diverse viewpoint. I commend all our employees around the globe for their teamwork and the care and support everyone continues to provide to one another every day. Our organization is committed to driving positive change for employees, customers, and the communities in which we operate. Meaningful, sustainable change starts with listening, and we are encouraging the voices of many across the company, and specifically with our human resources teams globally, to ensure our words and actions are congruent with the values of the company. Turning now to our financials on slides five and six, I will walk through some of the highlights for the second quarter. Sales increased 4% year over year, while adjusted EBITDA of $260 million declined slightly from Q2 last year. Adjusted EBITDA was impacted by approximately $25 million in incremental planned maintenance downtime we incurred compared to the second quarter of 2019. It was largely offset by positive price, commodity input cost deflation, and strong productivity during the quarter. Overall execution was excellent. Net organic sales growth increased 1.5% compared to the second quarter of 2019. Positive at-home consumption trends and new product development initiatives more than offset the declines in our food service business. Net organic volume, as measured in tons, actually increased more than net organic sales dollars due to the market mix in the quarter that significantly impacted net organic tons sold on a favorable basis. We believe net organic sales growth in dollars is the best indicator of how we are performing versus our vision 2025 goals. Excluding the impact of price and foreign exchange, net organic sales growth for the first half of 2020 was 3% year over year, a strong start to achieving our long-term 100 to 200 basis Our paper board integration rate improved 200 basis points from 68% in 2019 to 70% for the year today. While Steve will talk in greater detail on quarterly financial results and our outlook for the year, I'm pleased to report we are reinstating full-year 2020 guidance today. After evaluating multiple scenarios as it relates to consumer demand and likely spending and consumption patterns in the second half of the year, we are reinstating our full-year adjusted EBITDA guidance in the range of $1.05 to $1.09 billion, representing a 4% growth year-over-year at the midpoint and adjusted cash flow guidance in the range of $200 to $275 million. The operating environment remained relatively healthy in the second quarter, particularly in the food, beverage, and consumer markets we served. Backlogs were five-plus weeks for CUK and CRB and four weeks for SPS. Operating rates for both CRB and SPS, as reported by the AF and PA, were 97%. Our estimated operating rate for our CUK continues to be very strong at 95-plus percent. We continue to closely monitor demand, specifically cup demand, for the food service markets. One of our paper machines in Texas into paper cups. Due to declines in paper cup demand, we have taken 14 days of market downtime so far in July on this paper machine. We intend to extend our planned maintenance downtime on the same line in September, adding 14 days of market downtime to the scheduled maintenance outage we have planned. We will continue to align our SPS supply with our forecasted recovery rate of the food service market. Currently, market downtime in our SPS cup paperboard production is expected to yield a reduction of 20,000 to 30,000 tons in the third quarter. In addition to taking the market downtime where needed, we have successfully transitioned and annualized 100,000 tons of integrated folding cartons from CUK to SPS paperboard. This has the dual benefit of meeting increased demand for our CUK beverage packaging and as well as leveraging our low-cost SPS mill platform. As a producer of all three paperboard substrates, CRB, CUK, and SPS, we are well-positioned to move products among the end-use markets to meet changing volume requirements by market when needed. Moving to slide 7, you can see the progress we made in 2019 and year-to-date in 2020 on the price-to-commodity input cost recovery. We remain committed to price offsetting commodity input costs over time and are pleased that we've been able to fully recover the dislocation that took place from 2016 to 2018. New product development continues with our customers even during these challenging times. PaperSeal Trace Solution is a product we are very excited about, and you'll see the details on slide 8. We began development a few years ago on the hermetically sealed paperboard tray that is well positioned to serve a wide range of food applications including proteins, cheeses, salads, fruits, and frozen foods. We formally introduced PaperSeal in 2019 and are making products for customers in Europe and Australia today. We expect to be commercial with customers in North America early in 2021. We are encouraged about this opportunity to move into new markets, including protein packaging, with our innovative paper-based tray solution. As we discussed in Vision 2025 last September and our Investor Day, we are well-positioned to capture sustainability-supported organic sales growth and to benefit from new product development for years to come. marketplace. While some COVID-related delays have been factored into the near-term outlook, multi-year sustainability-supported sales growth opportunities remain intact, and we continue to see a path to our 100 to 200 basis points net organic sales growth for the next several years. We are executing multiple beverage packaging installations in Europe that will support organic sales growth in 2021 and beyond. Notably, the first Keogh important customer. Our teams are also progressing on alternatives for polyethylene coated containers and cups, and we are confident in the development with customers today for conversions in 2021. Premiumization and custom structural packaging design are additional areas where we're seeing increased interest from customers as they look to differentiate their products in the marketplace with end-use consumer safety in mind. We are working closely with customers and continuously finding opportunities year of change and adaptation. Our teams had to quickly mobilize and operate under the realities of the COVID-19 pandemic. Our production employees were nimble and adjusted quickly to changing demand patterns. Importantly, they maintained our continuity of supply to our vital food, beverage, consumer, and food service markets amid uncertainties with the pandemic, logistics challenges, and an occasional severe weather event. We enter the second half of the year with the result to continue learning and improving from these events of this year and have confidence our teams will successfully manage the business during the current uncertain economic times. Steve, I'll hand the call over to you now for a more detailed discussion of our financial results.