Graphic Packaging Holding Company

Good day and thank you for standing by. Welcome to the Graphic Packaging Holding Company second quarter 2021 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 the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Ms. Melanie Esquijus, VP of Investor Relations. Please go ahead.

Good morning and welcome to Graphic Packaging Holding Company's conference call to discuss our second quarter 2021 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 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 turn it over to you.

Thank you, Melanie. Good morning to everyone joining us on the call and the webcast this morning. I'm excited to discuss quarterly results with you today and the positive developments that we are driving in our pursuit of Vision 2025. We are delivering for customers and providing packaging solutions that are resonating with consumers in the marketplace. New innovative packaging introductions continue as our teams expand the new product pipeline and fuel our organic growth strategies. We are executing strategic M&A with transactions that are strengthening our capabilities, extending our geographic reach, and positioning us in growing markets. And importantly, we are delivering on our commitments to stockholders. Notably, you saw us swiftly address the heightened inflationary environment with multiple price initiatives in the quarter that will play out in the second half of 2021 and 2022 in order to limit the impact Turning to second quarter highlights on slide three, we delivered a meaningful 5% net organic sales growth in the quarter. Across all our markets, we continue to see significant demand for more sustainable packaging solutions. Our focus on innovation and our design for the environmental approach, which is an integral part of our new product development process, are providing continued opportunities to satisfy this demand. We are ahead of our 100 to 200 basis point organic sales growth goal for the first half of 2021 and expect to be at or above the high end of that range for the full year. Adjusted EBITDA in the second quarter was $248 million. Importantly, EBITDA was positively impacted by $15 million of improved volume mix related to net organic sales growth and $36 million of favorable net performance. Our teams did an excellent job of navigating the challenging operating environment to meet customer demand and deliver sales growth. The solid execution was, however, offset by $67 million of accelerated inflation across a broad basket of commodities. We addressed the inflationary environment head-on during the quarter, successfully implementing multiple pricing initiatives. These included paper board price increases across positive modification of other business terms. One example is our move to shift freight recovery and contracts where we are responsible for product delivery costs to four openers per year. A second example is the date-specific implementation of price increases for paperboard purchases in the open market, replacing the linkage of price increases to industry trade publications. We committed to stockholders we would shorten the time period for price to offset commodity input cost inflation, and we demonstrated that commitment in the second quarter. We have changed the pricing dynamics in our business since the last period of dislocation between 2016 and 2018, and this will be on full display as we progress through the second half of 2021. I will talk more about this shortly. While navigating the challenging supply chain environment, our teams work tirelessly to meet strong customer demand. Our food service business increased sales by 22% year-over-year as consumer mobility picked up, while food, beverage, and consumer sales improved to healthy 4% year-over-year. I'm excited to see the growing global interest for fiber-based consumer packaging solutions. Growth in fiber-based packaging is now being realized as we projected at our investor day in of 2019. Since that time, we've continued to position the company to meet increased demand through ongoing investments in our leading paperboard platform, our teams, and through strategic acquisitions. In May, we announced the acquisition of AR Packaging, and more recently, we successfully completed the acquisition of AmeriCraft Carton. These transactions are aligned with our growth ambitions and have us on a path to achieving our Vision 2025 goals. On slide four, let me recap the compelling strategic rationale of the AR packaging combination and provide an update on timing. The transaction brings together two highly innovative workforces serving diverse but complementary customer sets. The acquisition expands our global scale and strengthens our presence in Europe, which is driving the world in a push towards a more circular economy. We see significant opportunities to expand and grow with global customers as the premier fiber-based consumer packaging leader. We are encouraged that the regulatory approval processes are proceeding as expected and anticipate a close by the end of the year. Recognizing the impact to leverage from the announced AR packaging transaction, it is important to reiterate that we are fully committed to utilizing our significant cash flow generation to reduce leverage back to our targeted customers. two and a half to three times range. We intend to be back at targeted levels within 24 months following the close of the acquisition. Turning to slide five, innovation and new product development continue across our three growth platforms as we roll out packaging solutions designed to address retailer and producer calls for fiber-based packaging alternatives. Last quarter, I discussed the rapid acceptance we are seeing for our paper seal line of food tray packaging in Europe and Australia. and the excitement over the new punnet tray line introduced for produce and snack-sized vegetables. Last week, we introduced a new product line, OptiCycle, to grow in our food service markets. Our OptiCycle line includes an innovative non-polyethylene coating alternative to traditional PE and PLA coated products. On slide six, you can see the details of this latest innovation in the food service packaging. OptiCycle uses a water-based coating instead of polyethylene. The food service cups and containers featured here require less coating material versus traditional options and are designed to be more easily recyclable. When repulped, 98% of the fiber can be recovered and used to make other recycled products. We continue to push forward with our sustainability journey, and Opti-Cycle fits squarely with our ESG commitment to decrease our LDPE usage by 40% by 20%. With this non-PE packaging solution, we are providing a new option for customers to evaluate as they pursue their own sustainability goals and meet the needs of today's consumer. We expect the line to be commercialized in North America in the next few months. As we enter the second half of 2021, I'm pleased with the path we are on. Employees have produced exceptional results and demonstrated commitment to we have rolled out new product innovations, provided outstanding customer service, and captured additional demand. In addition, in support of our investments for growth and expansion, we have prudently and effectively raised and deployed capital. If you now turn to slide seven and eight, I will provide thoughts on our positioning within the packaging industry and how we are demonstrating leadership through our initiatives and delivering on our commitments. We continue to differentiate ourselves by the investments On slide 8, you will see details of our transformational Kalamazoo recycled paperboard investment. This project is a pivotal case in point. We expect our new world-class coated recycled board machine to be producing paperboard in a few short months. With it, we will serve existing and new customers, delivering the highest quality product in the marketplace, Furthermore, the investment provides environmental and sustainability benefits through the reduction of greenhouse gases, purchased energy, and water usage in the paperboard production process. We remain confident in the $100 million of incremental EBITDA for this investment once it's fully implemented and expect to capture the first $50 million of additional EBITDA in 2022. Another area where we are redefining leadership in the industry is through our solidarity Both acquisitions we have touched on today extend our capabilities, position us in new, growing markets, and allow us to further integrate our paperboard platform. Vertical integration is a strategic priority, and we expect meaningful increases in our integration rate in the quarters ahead as we grow organically, internalize more paperboard from recent acquisitions, and unwind existing supply agreements. Our vertically integrated model drives increased operating efficiencies that benefit both stakeholders and customers. The final point I will make on slide seven is something I noted earlier and would like to spend a bit more time discussing with you today. Over the past couple of years, we have successfully implemented numerous pricing model revisions that are now flowing through the business during this time of accelerated inflation. Realization of our pricing initiatives will be on full display over the next two quarters and into 2022. This is the primary reason we expect to generate significantly stronger EBITDA in the second half of the year. Moving to slide nine, I will talk through material price in the first half of 2021 and our expectations for inflation during the second half. The right hand of the slide shows pricing that has been successfully implemented and recognized and is flowing through our contracts over the coming six months. We expect approximately $120 million of pricing in the second half of 2021. occurring in just six months clearly demonstrates the more constructive pricing dynamics inherent in our model. Implemented and recognized pricing will yield a cumulative $400 million over the 2021 and 2022 time horizon as we actively address commodity input cost inflation. Overall, we are confident in the actions we are taking to address inflationary headwinds and, more broadly, We remain confident in the fundamental drivers of our business and our ability to capitalize on the opportunities ahead. Simply put, we are running a different race. We are executing for customers, driving our growth strategy forward, and strategically positioning the company to capture global demand opportunities in fiber-based consumer packaging. We are on track to achieve our Vision 2025 growth goals. With that, I will now turn the call over to Steve.