Graphic Packaging Holding Company

Ladies and gentlemen, thank you for standing by, and welcome to Graphics Packaging's third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I'd now like to hand the conference over to your speaker today, Nellie Skijas, Vice President, Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our third 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 third quarter earnings presentation, which can be accessed through the webcast via self-directed slides and also on the investor section of our website at www.graphicpkg.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 filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements as such statements speak 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 now turn it over to you.

Thank you, Melanie. Good morning, and thank you for joining us on the call today. We continue to successfully meet growing customer demand in 2020. The third quarter was a continuation of solid financial performance driven by over 4% organic sales growth, exceptional customer service, and strong operational execution. We remain on track to meet or exceed our organic sales growth projections for the full year. As an essential business, our teams continue to adapt to changing consumer demand patterns while providing continuity in the supply chain during these tumultuous times. We are doing this while focusing on the safety, health, and well-being of our employees. I'm very proud of our people and the service levels we continue to provide our customers. Our execution on behalf of customers and focus on innovation is reflected in the strong results year-to-date in a robust new business pipeline. The pandemic has brought many changes to our daily lives, including the necessity to do more from the protected environment of our homes. whether that be working or conducting meetings remotely, helping children with virtual learning, or hosting smaller get-togethers to stay connected with family and friends. Increased time spent in our homes has elevated demand for food and beverage packaging since the end of the first quarter. While we do anticipate an eventual return to more normal activities outside of the home, modest long-term behavior changes in both how and where we consume food and beverages is very supportive of our organic sales growth goals. Importantly, interest from customers for more sustainable fiber-based packaging solutions remains very robust. Our planning with customers on their packaging conversion programs, including machinery installations for our beverage customers, is proceeding nicely with numerous strategic projects in motion over the next 18 months. Our product development team is meeting customer demand for innovation in packaging solutions that offer greater recyclability and enhanced safety and hygienic advantages, along with premiumization opportunities to stand out in the marketplace. We see strong demand for our packaging solutions across existing customers, as well as prospective customers in new end markets, including protein packaging and e-commerce. Our teams are operating very effectively, and I'm very pleased with what has been accomplished here today. We completed a number of strategic initiatives in the quarter, on time and on budget, including the installation of a curtain coder at our West Monroe Mill and a new head box at our Texarkana Mill. In addition, the integration of the converting volume of the two right facilities closed in the third quarter is largely complete. Another 100,000 tons of CRB paperboard integration will take place over the next couple of years as the supply agreement right unwinds. This will further benefit integration in our CRB business and drive our rates higher for the company. During the quarter, we also executed decisions to match our paperboard supply with demand. This included the continued substitution of an annualized 100,000 tons of CUK-based packaging to SBS folding carton grates in order to meet increased CUK demand. We also made the decision to take 30,000 tons of market downtime on our uncoated SBS cup stock paper machine at our Texarkana mill to align the production with lower cup demand. As a reminder, our uncoated SBS paper machine in Texarkana is highly integrated with over 85% of the cup stock produced, converted by us for customers in our five cup converting facilities. Turning to paperboard backlogs, operating rates, and inventory levels. Our backlogs either held steady or increased during the quarter. In fact, backlogs for all three substrates, SPS, CRB, and CUK, are currently at five-plus weeks. As reported by the A&PA, SPS industry operating rates were 85% during the quarter, maintenance and market downtimes. Industry inventory levels in SBS dropped by 86,000 tons during the quarter. In CRB, industry operating rates consistently improved each month during the quarter and were at 96.5% in September. Industry inventory levels in CRB dropped 21,000 tons during the quarter. Our estimated operating rate for CUK continues to be very strong, above 95%, and our CUK inventory levels also declined during the quarter. Driving our integration rate higher over time remains a strategic priority, and we are delivering. Our year-to-date integration rate is 70% across all three substrates we produced, up 200 basis points from 68% last year. Focusing now on the financial performance of the quarter, you can see the details on slides 4 and 5. Our sales grew 7% year-over-year, driven primarily by impressive organic growth sales of over 4%. This is the fourth consecutive quarter of organic sales growth. Confidence in our ability to profitably capture growth opportunities continues to increase given the traction we are seeing in plastic substitution, cooking solutions, and straight packaging solutions we are bringing to the market. It is good to see our customers remain resolute in meeting their own sustainability goals while converting to packaging that is preferred by the consumers. Adjusted EBITDA in the third quarter of $250 million improved $6 million. We delivered EBITDA growth by positive volume and improvements in productivity. Steve will go into more detail during his discussion, but productivity improvements were partially offset by the previously mentioned $12 million unfavorable impact from market downtime in our SPS stock line. Before turning the call to Steve, I'll spend a few minutes highlighting the expanding addressable markets we see for our fiber-based packaging solutions. Our three growth platforms outlined on slide six, plastic substitution, cooking solutions, and string packaging, provide significant runway to capture ongoing organic sales growth. We've talked to you a great deal over the last several quarters about conversions from plastic packaging to our paperboard solutions. While this remains a competitive market, our solutions are winning, as evidenced by the momentum we are experiencing. In beverage packaging, we are rapidly expanding our proprietary technology with customers through installations of our high-speed and efficient machinery solutions around the world. Our planned beverage machinery placements are up close to 40% versus a normal baseline here. Our Keoklips solution, which debuted this year, offers compelling sustainability advantages and merchandising benefits compared to other packaging options. ABI InBev, Coca-Cola, and other large global beverage companies are converting to Keoklips given the consumer appeal of our new solution. We're seeing growing recognition from industry innovation to support sustainability efforts and improve the consumer experience. Last week, Graphic Packaging's Q-Clip was the winner of the top two accolades at the Paperboard Packaging Council's 2020 Carton Competition, Paperboard Package of the Year, and the Innovation Award. I am proud of our teams that work diligently to commercialize the Q-Clip for our customers. Paper seal products was also acknowledged at the competition, taking home the Paperboard Packaging Council Sustainability Award. Notably, paper seal is now commercial in Europe and Australia with many new trials underway globally. Our paper seal tray for chilled protein, produce, and fruit uses significantly less plastic resin than traditional foam and is being well received in the marketplace. Finally, within the food service market, we see ongoing conversions to paper-based cups and bowl solutions. We continue to actively work with customers to commercialize a polyethylene-free cup solution. In cooking solutions, we are benefiting from the enhanced microwave technology and superior packaging functionality. Frozen foods represent an attractive and expanded market opportunity for consumers' growing desire for ease and speed, along with the availability of more gourmet and organic frozen meal options creates a compelling market dynamic. We offer an improved sustainability profile and competitive economics versus the current plastic tray options. Finally, in strength packaging, we are working on new opportunities in e-commerce and with club stores and mass retail channels. We are winning business on this platform as we expand strength packaging solutions for different distribution channels. We are introducing solutions that can reduce excess packaging requirements while maintaining packaging integrity. To wrap up, I'm pleased with our financial performance and agility demonstrated year to date. I look forward to talking to you again in February when we provide full year results and the outlook for the new year. Consistent with our Vision 2025 goals, we expect to achieve both organic sales and EBITDA growth again in 2021. Steve, over to you.