Graphic Packaging Holding Company

Hello everyone and welcome to the graphic packaging third quarter 2021 earnings call. My name is Harry and I'll be your operator today. If you'd like to ask a question during the Q&A session, you may do so by pressing star followed by one on your telephone keypad. We respectfully ask that you please limit yourselves to one question and one follow up as time is pressing. I'll now hand the call over to your host, Vice President of Investor Relations, Melanie Skigis. Melanie, please go ahead.

Good morning and welcome to Graphic Packaging Holding Company's third quarter 2021 earnings call. Joining us on our call today are Mike Doss, the company's president and CEO, and Steve Scherger, executive vice president and CFO. To help you follow along with today's call, we will be referencing our third quarter earnings presentation, which can be accessed through the webcast via self-directed slides, and also on the investor 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 filing for the Securities and Exchange Commission. Now, let me turn the call over to Mike.

Thank you, Melanie. Good morning to everyone joining us on the call and webcast this morning. Our performance in the quarter was strong. We successfully navigated a complex supply chain and labor environment. We raised prices where necessary to offset accelerated commodity input cost inflation, We received the required regulatory approvals for our AR packaging acquisition and made significant strides towards completion of our transformational CRB platform optimization project. All of these accomplishments are aligned with the goals we established with Vision 2025 and have us on track to meet or exceed our long-term aspirations for the business. Demand for more sustainable and circular packaging options continues to accelerate globally. The ongoing evolution to practice and promote more environmentally responsible behaviors is evidenced by the increasing number of new pledges made by global corporations to eliminate waste and increase the focus on recyclability, all supportive of commitments to lowering carbon footprints. Examples include proactive announcements by retailers around the world moving to minimize the impact that packaging has on our planet. Consumers are making their preferences known, and companies that are serving them are responding. The fiber-based packaging solutions we are developing and the role we play in providing consumers with packaging choices to promote a more sustainable and circular economy provide our employees with an immense sense of pride. This shows through our continued innovation and new product development initiatives, along with service levels we provide our customers in today's very challenging supply and labor environment. We established Vision 2025 in September of 2019 and have demonstrated a very real pivot to organic growth since that time. While Q3 organic sales declined slightly, we still expect to deliver organic sales growth in 2021 at the high end of our 100 to 200 basis points annual target, on top of the 4% organic growth we generated in 2020. On slide three, let me cover additional highlights from the third quarter. We have been successful in positioning the company to capture growth opportunities in this very strong demand environment. We are growing with existing customers while ramping up with new ones in new markets. Momentum for fiber-based consumer packaging solutions is materializing at a time when we are experiencing unprecedented inflation, supply chain bottlenecks, and labor market challenges. We estimate that the constraints in supply and labor markets resulted in approximately $25 million in delayed sales in the third quarter. We delivered strong adjusted EBITDA growth of $284 million, up 14% year-over-year. EBITDA growth was driven by positive price realization of $53 million and favorable net performance of $79 million, which offset unprecedented commodity input cost inflation of $88 million experienced in the quarter. The current environment, with all its twists and turns, is not deterring us from the focus on meeting or exceeding our Vision 2025 goals and capturing global demand for sustainable packaging solutions. Our dedicated teams are working tirelessly to keep customers in supply while backlogs remain elevated across all our paperboard substrates. As a result of the continued inflation in commodity input costs, we have taken swift pricing actions experiencing this year. We committed to you that price would offset commodity input costs over time and that any dislocation would be short-lived. We are delivering on that promise. As we have discussed with you over the past several quarters, we have implemented a number of initiatives to reduce pricing recovery lags with customers and have been negotiating positive modifications of other business terms. While the inflation we are experiencing this year is one for the history books, we are doing what we said we would do. Approximately $650 million in pricing initiatives have been implemented and will be recognized over the 2021 and 2022 time horizon. We recently published our latest comprehensive ESG report. In it, we outlined the many initiatives underway to further drive sustainability across operations and innovation and product development with the end customer in mind. We intend to continue to invest in innovation and promote progress and sustainability to support the migration to a more circular economy. As noted earlier, we have been pursuing the required regulatory approvals for the AR packaging acquisition we announced in May of this year. I'm pleased to report that we have received the final necessarily regulatory approvals this month, and we are working towards a November 1st close. In addition, our CRB platform optimization project remains on track for a startup of coated recycled paperboard production on our K2 machine in the fourth quarter. Turning down to slide four, you will see the innovation powerhouse that the combination of AR packaging will create. The large distributed footprint of AR packaging is 25 converting facilities across Eastern and Western Europe at significant scale and cost efficiency benefits. The completion of this transformational acquisition extends our global reach, expands our service offerings, and advances our commitment to sustainable packaging solutions for customers around the world. We intend to share our growth plans and milestones for the integration of AR packaging, along with an update on Vision 2025 when we report our fourth quarter and full year 2021 results. We will do this at an investor meeting on February 17th in New York City, where we look forward to hosting many of you in person, but also providing a webcast for those of you who will need to attend remotely. Turning to slide five and a second extremely impactful and well-timed strategic initiative, you can see the picture of our new state-of-the-art K2 CRB machine. Our team is executing a significant investment in our paperboard capabilities. The build-out and start-up of the K2 machine in Kalamazoo, Michigan is the largest component of our CRB platform optimization project, and we are on track for paperboard production to begin in the fourth quarter. We are well into the operational readiness phase, We have our teams in place, and we are completing the most extensive training effort in our company's history. We look forward to bringing this world-class, lower-cost, higher-quality CRB platform investment to life over the coming quarters, working with our customers to grow their commitment to the recycled fiber-based solutions while generating the returns we are committed to achieving. Turning to slide six, I will provide a few additional remarks on the current environment for pricing and the positive momentum we have to offset historically high commodity input cost inflation. We have executed $63 million of positive price that has flowed through the business over the first nine months of 2021. And we expect to realize approximately $77 million of positive pricing during the fourth quarter. We're currently targeting $510 million of pricing in 2022 based on implemented and recognized pricing initiatives. The price actions are intended to fully offset the inflation we are experiencing across a wide array of commodity input costs. In total, at this point, we expect to execute approximately $650 million in price actions over the 2021 and 2022 time horizons. As I've shared today, global demand for fiber-based packaging solutions continues to grow. On slide 7, let me touch on the steady and consistent nature of the value paperboard substrates have earned over time. Over the 15-year period captured here, you can see the steady but increasing pricing for our paperboard substrates. This can be attributed to a healthy underlying demand for paperboard solutions Supply levels required to meet customer demand and the introduction of new packaging solutions driving growth and existing and new addressable markets. Before I turn the call over to Steve for a more in-depth discussion of our financials and guidance, I'd like to take a minute on slide eight to reflect on the organic growth we've generated since 2019. We surpassed our net organic sales growth goal in 2020, delivering 4% growth, and we expect to deliver at the high end of our targeted 100 to 200 basis points goal this year. Notably, this year's expected net organic growth of approximately 200 basis points reflects growth on top of the very strong growth we drove in 2020. The year-to-date picture on the slide tells the same story. Net organic sales have experienced growth of 2% compared to the same period in 2020, and the two-year compounded annual growth rate for organic sales since 2019 is 3%. This trajectory is consistent with our organic growth expectations for the business as we continue to see conversions to fiber-based packaging solutions. We have positioned the company to capture growth opportunities in the years ahead, and we have accomplished a great deal so far this year. We look forward to closing the acquisition of AR packaging in the next week and the startup of our K2 machine in the fourth quarter. Simply put, we're running a different race. The strategic priorities we are focused on and executing are redefining our leadership in the industry. With that, I will now turn the call over to Steve.