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spk05: 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.
spk01: 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.
spk11: 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.
spk08: Thanks, Mike, and good morning. Moving to slide nine, focused on key financial highlights, Net sales increased 5% or $84 million from the prior year period to $1.8 million. The year-over-year increase in sales was driven by higher pricing flowing through the business and acquisitions. Adjusted EBITDA increased 14% to $284 million, resulting in an improved adjusted EBITDA margin of 15.9%. Adjusted earnings per share increased grew 31% to $0.34 a share. Finally, our integration rate increased to 73% as we continue to internalize our paperboard into our converting operations. On slides 10 and 11, you will see our revenue and EBITDA waterfalls. The drivers of the 5% year-over-year increase in sales were $53 million in pricing, $20 million of higher volume mix, and $11 million of favorable foreign exchange. Adjusted EBITDA increased $34 million, or 14% year-over-year, to $284 million in the third quarter versus the prior year period. The increase is notable given accelerated commodity input cost inflation that materialized in the quarter. Adjusted EBITDA growth was driven by $53 million in price, $3 million in volume mix, and $79 million in improved net productivity. Adjusted EBITDA was unfavorably impacted by $88 million of commodity input cost inflation and $13 million of labor benefits and other inflation. On slide 12, you will find additional financial and market detail. Our food service business continued to recover from last year, growing 11% year-over-year, while food, beverage and consumer sales improved 3%, including acquisitions. Mike pointed to $25 million in delayed sales resulting from supply chain and labor market constraints during the quarter. All the supply chain bottlenecks impacted all areas of our business. Labor availability challenges were more specific to our food service business as we continued to ramp up production from the declines experienced in 2020. Without these delayed sales, net organic sales growth would have been flat for the quarter in line with our expectations. F&PA industry operating rates were strong again in the third quarter. CRB was 95%, while SBS improved sequentially and was 96% at the end of the quarter. Our C-U-K operating rates continued to be well above 95%. These operating rates reflect a strong demand environment for paperboard. AFMPA third quarter data also showed continued declines in industry inventory levels with balances at multi-year lows. Back walls are elevated at eight-plus weeks across the U.K. and C.R.B. and at six-plus weeks in S.B.S. We ended the quarter with net leverage of 3.97 times. I will discuss our cash generation expectations with you shortly. We have clear line of sight to bring leverage down 3.5 times or lower at the end of 2022 after leverage peaks in the fourth quarter due to the financing for our AR packaging acquisition. Global liquidity was $1.8 billion at the end of the third quarter. Importantly, after we fund and complete the AR packaging acquisition, our global liquidity will remain substantial with approximately $1 billion available. Turning now to full-year 2021 guidance on slide 13. We have updated guidance to reflect additional price actions, higher commodity input cost inflation, higher net performance, and the assumption AR packaging is part of our business effective November 1st. 2021 adjusted EBITDA is projected to be in a range of $1.04 to $1.06 billion. The largest component, the EBITDA guidance change is the accelerated commodity input cost inflation occurring in the second half of 2021. As Mike mentioned, we are actively taking the price actions necessary to offset this increased level of inflation. We anticipate cash flow will be in a range of $100 to $150 million for the year. Capital spending has increased modestly driven by insulation across raw materials and the labor required to complete critical strategic projects on time. On slide 15, I will wrap up my prepared remarks with a look into 2022. We continue to be very confident in the guardrails we provided last quarter for adjusted EBITDA in the $1.4 billion plus range. Importantly, on this slide, you can see the components and the walk to the substantial estimated EBITDA growth we will be driving next year. AR packaging and AmeriCraft are expected to contribute $160 million and $30 million before synergies, respectively. For the base business, it is reasonable to assume at least $20 million from our traditional EBITDA drivers of volume mix and net performance, more than offsetting labor, benefits, other inflation, and FX. The first $50 million of incremental EBITDA from our Kalamazoo project and a minimum recovery of $170 million of 2021 price-cost dislocation provides a clear step change higher to adjusted EBITDA of $1.4 billion plus in 2022. The significant expected growth in EBITDA coupled with our commitment to meaningfully lower capital expenditures next year following the large capital project at Kalamazoo, results in significant cash flow generation. The material EBITDA growth and cash flow generation projections give us line of sight to year-end 2022 leverage at 3.5 times or lower. We look forward to providing you with more detailed 2022 guidance when we meet with you in February. Thank you for your time this morning. I'll turn the call back to the operator for questions.
spk05: Thank you. And as a reminder, if you would like to ask a question today, you may do so by pressing star followed by one on your telephone keypad now. In the interest of time, we respectfully ask that you please limit yourselves to one question and one follow-up each. And when preparing to ask your question, please ensure that your phone is unmuted locally. And our first question comes from Mark Wildey of Bank of Montreal. Mark, your line is open now if you would like to proceed with your question. Mark, your line is now open if you'd like to proceed with your question. I'm afraid we appear to be having some connection issues with Mark. I'll move on to our next question, which is from Mark Weintraub from Seaport Research Partners. Mark, your line is now open if you would like to proceed with your question.
spk12: Thank you. Last quarter, I believe you had indicated that the rollover impact from inflation at that point in time to 2022, you would have gauged at roughly 50 to 75 million, if I remember correctly. If you were to update that number today, where would it stand?
spk08: Hey, Mark and Steve, good morning. Yes, we've updated, obviously, for this year, the inflation now midpoint of $310 million and the rollover effect is is in the $100 to $125 million range, assuming everything stays as is. And so the cumulative two-year inflation right now is in the $400 to $425 million range. Obviously, we shared with you today that our cumulative price activity over that same period of time is the $650 million that we shared with you today.
spk12: Okay, great. And so just to make sure I fully understand that, folks, I think you had, just trying to get to the side, here we go. So you talked about $510 million on the pricing side for 2022, recognizing that there certainly can be a lot more inflation or not from where we are today. So if we think about the price cost, if things were to be fixed today, can we take the 510 and subtract the 100 to 125? And that would be
spk08: a starting number for 2022 again recognizing that we can get more inflation from here is that fair or am i missing something well i think the way you want to make sure you think about it mark is we have very clear line of sight to 510 million dollars of pricing next year based upon known and recognized activities it's roughly 250 dollars a ton across the three primary substrates along with our uh cost models And so then if you compare that, of course, to the flow through on inflation, you've got 310 this year, another 100 to 125 million next year leading into the low four. So we need to and what we committed to on the slide with the walk to the 1.4 billion plus. is that we'll first recover the $170 million of dislocation this year, and then whatever inflation comes next year, obviously we have plans in place to recover that as well. The $125 million is what would be known carryover today. Does that give it to you specifically?
spk12: That does. Thank you. Thank you very much. Okay. Great. And just lastly, if I could, level of confidence in getting that $5-10 on pricing, is that pretty contractually established? How much work is needed to achieve bringing those numbers to the bottom line? What level of confidence should investors have about that at this point?
spk11: Yeah, good morning, Mark. It's my division. They have a high level of confidence in this. This is contractually driven. These are multi-year contracts. So it's flowing through, you know, an execution of the contractual terms of those agreements.
spk12: Super. Appreciate it.
spk08: Thank you, Mark.
spk05: Thank you, Mark. And our next question will be coming from Ghanshim Punjabi. Contra, your line is open now if you'd like to proceed with your question.
spk04: Yeah, thank you. Good morning, everybody. Just as a follow up to Mark's question, you know, can you comment on the velocity of inflation that you're seeing at current versus, you know, as you kind of get granular with the various constituents? I know there's a lot going on with OCC, freight, labor and random shocks like the China curtailments that are impacting other industries. But at this point, are you starting to see a plateauing sequentially?
spk08: Yeah, I'll start as Steve and Mike can add on. I think certainly what we saw throughout the quarter was an acceleration of inflation. And as we talked during the quarter on the occasions where we had the opportunity to do so, when we saw more inflation, we took more pricing action. And it kind of flowed through in the incremental $100 million of inflation from the last time that we And it was pretty widespread. I mean, about 100 million, you know, half of it is well chronicled relative to chemicals, energy, resin, all moving up. We also saw OCC move up. That was another significant part of the 100 million. And then, of course, the ongoing challenges on the logistics front, just in terms of rates for truck, rail, as well as ocean. So it kind of all moved through. The $120 million that we're guiding to for Q4 is representative of what we're seeing today. And obviously, we don't try to hypothesize whether they'll move up or down from here. Mike, anything you want to add to that?
spk11: No, I think what you've seen, Gancham, is It went up 11 months in a row in the last couple of months. It's kind of peaked. And so we watch those kind of things. But as Steve said, it's pretty difficult to try to forecast out what inflation is going to do. As you know, it seems like every month there's a new commodity that somehow gets challenged. And so we're dealing with those things. And I think the point that investors should look at here, as Steve has outlined, is we And we're in a really good spot relative to how inflation develops as we go into next year, both in terms of the carryover and additional inflation that we could incur. And as we've demonstrated here since our second quarter call, when we see more inflation, we will take more pricing actions to offset them.
spk04: Okay, that's very helpful. Thank you for that. And then for my second question, every inflation cycle, customers try to mitigate price increases. to consumers by reducing packaging size and also decontenting material to some extent. How do you see that dynamic playing out in the current inflation cycle, which is much more severe in the magnitude? And do you see the lightweighting and packaging size shift as a volume risk for you in 2022? Thanks so much.
spk11: Yeah, thanks for that question. I appreciate it. I think if you look at packaging in general across a wide swath of different packaging mediums, they're all inflating at relatively similar rates. And so the substitution piece of that is going to be pretty minimal based on how we see it. In terms of lightweighting and packaging optimization, those are things that we deal with with our customers all the time. And it actually creates some opportunities for us, particularly entrepreneurs, see that probably as more of an opportunity than a threat going forward.
spk04: Okay, great. Thanks so much.
spk05: Thank you, Ganshin. Our next question comes from George Tapus from Bank of America. George, your line will be open now if you would like to proceed with your question.
spk06: Thanks very much. Hi, guys. Good morning. Thanks for all the details. I wanted to hit two questions, generally one on volume and then the other on Kalamazoo. So in terms of volume, you documented pretty well in terms of what was affecting you in the third quarter, the lost revenue. You know, a lot of that effect hitting you in food service. What comfort do you have that the supply chain issues and labor issues that were affecting you will moderate here such that, you know, volume should be as expected in the fourth quarter? And aside from food service, can you talk a bit about where you're seeing particular strength for your products, especially the new products, Mike? And I ask that partly with some content recently that I've seen where one of the major QSR changes is moving from a poly-coated paper cup back to plastic. So where do you stand with your defense of that with a PLA-coated cup?
spk11: Yeah, so thanks for that, George. I think if you kind of take a step back and we kind of outline this a little bit in our prepared comments, but it's good to spend a little bit of time on it too. You know, year to date through the second quarter, we saw our volumes up, you know, 3% across the board. And as you recall, we reiterated at that point in time that we'd be at the high end of our 100 to 200 basis points. So as Steve mentioned in his comments, you know, we actually saw, you know, a little bit of this coming in Q3 and, you know, anticipated it relative to the guide that we gave on the second quarter. There were really four things that hit us in the quarter relative to organic volumes being down 1%. First, and you've seen this from a number of our customers that have already released, our customers were having some challenges with their supply chains. And obviously, if they don't make a package, we don't sell a box. And so there was some of that going on, some labor availability on the food service. side of, you know, our end use markets as well that's been pretty well chronicled. And in our case, the ramp of food service is just a, you know, we had to add over 200 people back. And if you think about when the pandemic hit, you know, we actually had to right size that business real quick. And we did. But then as the volumes comes back in a strong way, like we saw them happen, you know, here in the second and third quarter, adding that many people in a rapid fire fashion just isn't easy in this environment. So our labor issues are fairly discreet in our food service business. Yes, we see it. in terms of the impact on volumes that would have been in the food service business. So we have the demand. The issue is getting the people there so we can actually execute, and we've made some progress in our third quarter as we go into the fourth quarter. So that's part of the comfort that you hear from me. We also lost a facility for about two months in the northeast as a part of Hurricane Ida. It just got flooded out, and so we had to move all that volume around, and that cost us a a little bit of sales in the quarter. And then lastly, some of the open market paper board that we buy in Europe just became difficult to get in some cases. And so that slowed us down a little bit in the European platform. Again, we have plenty of demand. The issue is getting the materials that we need in order to process them and actually get them out the door. So when you put that all together, we see some of those things abating, as I mentioned, as we're in the fourth quarter here, and we expect to return more towards that higher part of that 100 to 200 basis points to finish the year strong.
spk08: And George, just to add to Mike's point around the momentum on the innovation front, I mean, overall, our momentum for fiber-based whether it's foam cuffs continuing to convert over to fiber-based solutions or keel clip solutions in Europe expanding globally or paper seal solution gaining significant traction around around meats and cheeses and other perimeter of the store activities. Those items, as we've talked quite a bit, you know, give us confidence that the 100 to 200 basis points of organic growth that we've experienced over the last two years will continue as we move into 2022.
spk06: okay i i guess steve i was hoping maybe if you had a quick update on pla uh coated cups if you have one maybe you'll save it for the the analyst presentation in february and then my my second question uh just quickly you know with kalamazoo coming up quickly congratulations on that being uh on track and earlier frankly than your initial um budgeting and guidance There's been some reports about the reaction in the community to the growth of the Kalamazoo project. Can you comment how you're being received in the community? There's also been some discussion about, you know, your tax benefits that you're getting in the facility, anything that we should be aware of in terms of how that project will drive return and growth for graphic going forward. Thank you, guys.
spk11: Yeah, so thanks for the question. I'll deal with the mention of Kalamazoo here in terms of our project. board here in the Q4 towards the end of the quarter. And it's important that we do because we absolutely need that paper board to operate our business. We've got a lot of demand from customers that we actually need that tonnage coming online. Relative to some of the reports and, you know, come out around some of the odor complaints, I think, is what you're referencing. Yeah, I'd care characterize those as kind of normal course. We're dealing with those, you know, through normal channels. And there's really, from a return standpoint on the project, you know, we're investing well over $600 million. As you know, it's a state-of-the-art facility, and it'll have the capability to, you know, be a great citizen in that community and ultimately, you know, drive the jobs and additional production that we committed to when we started.
spk08: And, George, very briefly, OptiCycle, we like the customer trialing that's going on. We've got good momentum that we'll share more with you as we kind of embark around into 2022. I'm sure we'll talk about that specifically when we describe our overall innovation efforts when we're together February 17th.
spk06: Sounds good. Thanks, guys. Good luck in the quarter. Thank you, George.
spk05: Thank you, George. Our next question is from Mark Wildey from Bank of Montreal. Mark, your line is now open.
spk10: Good morning, Mike. Good morning, Steve. Hey, Mark. Mike, I just wanted to start. If you could help us just unpack what's gone on here in the cardboard market over the last three to six months, because it's really been a very sharp turn in the market, just trying to get some sense of of how you understand it, you know, that pickup and domestic demand that perhaps, you know, set against maybe some difficulties bringing imported bleach board or imported kind of CRB into the market.
spk11: Yeah, thanks for that, Mark. I think you've answered part of it. I would also add, as you know, in 2019 and early 2020, there was some capacity taken out of the market. One of our competitors shut an SPS mill down. Another one shut a paper machine down. We obviously shut down a small recycled paper board mill in conjunction with our project in Kalamazoo. And at the same time, you've got strong demand. I mean, take a look at our demand. We're up compound at 3% on volumes. And over that two-year period of time, we've got a high market share, as you know, approaching 40%. And so when you look at some of the dislocations in of the importers have had to deal with, that has created a real desire for domestic production and thus the operating rates being above 95%, in some cases 97%, backlogs at multi-year highs. industry inventories, as Steve mentioned in his prepared comments, really down across all three grades. And so that's really the dynamic that is going on. And again, why our startup of our mill in Kalamazoo is so strategic, the timing of it just couldn't be better relative to the demand that we see out there, because we'll have tons that'll be able to help our customers meet their objectives. And these will be some of the highest quality, lowest cost CRP tons in the world. So we like that project better today than we did when we announced it. We liked it when we announced it. So I think that gives you a little color on what we see here.
spk10: Okay. And then just a couple of questions around Europe. Last year, you had some delayed machine placements. I'm curious about how you sit on that. And then the impact of these European energy price spikes, either on your existing business as well as on the AR business?
spk11: Yeah, thanks for that, Mark. In terms of our machine placements, they're going along well. We're able to get our technicians in now. I think on the Keoklip side, we're up to almost 60 machines that we've placed and are installed and operational. And that's on top of other machines that do wraps and baskets. It's just a general movement there on the beverage. out of plastics and into paperboard. So that's been a real source of growth for us this year. In regards to energy rates in Europe, as you know, we're converting only over there. Even with AR packaging, they're converting only. So the actual impact of NatGas on our direct operations is relatively small. by the paper board and you've seen kind of rapid fire, a bunch of increases in surcharges that have gone up by European producers on that material. And the way that our contracts read, those will be pass-alongs that we tag on to the increases. As we talked about when we announced the deal where they are, those tenders tend to be a shorter duration and have more frequent openers because the vast majority of people who make folding cartons in Europe are not integrated.
spk10: Okay, that's helpful. I'll turn it over. Thanks, Mike.
spk11: Thanks, Mark. Thanks, Mark.
spk05: Thank you very much, Mark. And our next question comes from Gabe Hashtiff from Wells Fargo. Gabe, your line will be open now if you would like to proceed with your question. All right. Good morning, Mike. Thank you.
spk02: I hate to harp on the inflation point here, and to be clear, I guess your and industry efforts to maintain or even enhance margins with price increases is pretty encouraging. If I want to sort of stress test the assumption that you gave us kind of for the fourth quarter in terms of inflation and then heading into 2022, you know, even just in the fourth quarter or the second half, I want to say it's going to be around, you know, $120 million for the fourth quarter, $210 million for the second half, but you're telling us $100 million to $125 million for next year. So I'm curious if there's timing and something related to the cadence of that. that says, okay, maybe things taper off in the back half of 2022. And then on the labor and benefit bucket that is kind of consistently in that $50 million range, could this maybe run a little bit hotter next year? And I appreciate the magnitude. It's not nearly as big as an input cost, but maybe $60 million just given where labor and benefit markets are today.
spk08: Yeah, Gabe, it's Steve. You answered the second question almost as you did. I think we'll likely see our labor and benefits inflation be at the higher end of our range next year, and that's kind of in the guardrails that we provided just given some of the realities that we've been talking about relative to labor availability and some wage inflation. But to your commodity input cost inflation question, as we've talked, we're not forecasting 2022 inflation at this point, but what we are sharing is that if everything kind of stayed as is, and a lot of this acceleration here occurred in So you're right, you've got $200 plus million in the second half of the year. If things stay where they are and you compare that then to the prior year, the rollover is in that $100 to $125 million range, mostly because most of the acceleration, true acceleration, has occurred in the second half of the year. Most of the inflation on the carryover would be occurring in the first half of next year. And, again, that's not a forecast. That's important. But it is the carryover in terms of as you're pressure testing it.
spk02: Okay. And then I guess, again, sticking with inflation, and I apologize, you know, to the extent that, I mean, I'm hearing food and beverage brand owners talk about, you know, potentially 20%, 25% inflation as they roll this inflation through the, you know, the grocery channel, et cetera, and how consumers might respond, you know, when they're spending their dollars on this. You know, what is your experience when you've seen this kind of inflation increase? In terms of, I guess, demand elasticity for the products that you serve, do you see any kind of potential that consumers trade down, and is that a net positive for you or a potential risk as we head into 2022?
spk11: Yeah, Gabe, thanks for the question. It's a great question. I think, look, I can't tell you that we've seen this exact experience relative to the amount of inflation that's flowing through, at least not recently. This is a couple of decades since we've seen this kind of input cost inflation shocks. I mean, I think the thing that I point to for a graphic and what positions us uniquely is food and beverage based. So you're right. There may be some trade downs. Maybe instead of buying branded, I go to store brand. But it's a physiological human need that I have to eat and drink. And we make those kind of packages that go into those kind of products. And we've got a diversified portfolio, as you well know, relative to food service and the at-home consumption. So relative to our revenue makeup, it's a nice balance and really gives us the ability to benefit regardless of how that develops in the environment there. But it's definitely going to be inflationary going forward. There's no doubt about it.
spk08: And, Gabe, just to add on to that, at the occasions where, for whatever reason, the economy comes to a slower position, either due to inflation or other activities, our business has been very defensive in the past, as Mike mentioned. And so, yes, there could be some headwinds. But overall, the trading down actually can be sometimes net favorable, and even if there's large dislocation on true consumption patterns, they tend to be quite modest on a percentage basis.
spk11: That's right. Bottom line is, I guess, to summarize at our confidence level and our vision 2025, the goal of growing 100 to 200 basis points between now and 2025 is high based on the projects we see and what our customers are telling us.
spk02: Thank you, guys. We're just trying to remain vigilant over here.
spk08: Yeah, absolutely. Thanks, Gabe.
spk05: Thank you, Gabe. Our next question comes from Adam Samuelson from Goldman Sachs. Adam, your line will be open now if you'd like to proceed with your question.
spk09: Yes, thank you. Good morning, everyone. Good morning, Adam. So I guess first, I was hoping to get a little bit more color on the performance in the quarter, the net performance line, which was a positive $79 million contribution in the third quarter. That, as far as back as I can see, one of the bigger quarterly results that you guys have posted. Maybe if you could dissect that a little bit, because I think through some of the prepared remarks that you've made earlier, it's talking more about headwinds and challenges around labor. around you had the mill in the Northeast rather than productivity benefits. And so I'm just hoping to get a little bit more color around kind of how you've been able to mitigate kind of some of these cost headwinds operationally.
spk08: yeah adam and steve be glad to most of the headwinds that we've talked about kind of rolled through in terms of the waterfall they impacted volume mixed because of the volume not necessarily being there so that's where those headwinds showed up we were very pleased with our overall productivity uh in the quarter and you're right it was a very substantial number two primary drivers there one just very good core productivity in that 30 40 million dollar range that's kind of at our expectations And then on a year-over-year basis, we had significantly less maintenance downtime year-over-year. We had quite a bit last year, much less this year. And our teams executed against that exceptionally well. So that could be positive for us in the quarter. So those are the two big factors. primary drivers of positive there. You'll see that return back to more normalized in Q4. And as we look out over time, our $50 to $70 million of core productivity is the right kind of range for the business. But, no, it was a very strong performance relative to overall productivity in the quarter.
spk09: Okay. That's really helpful. And there's been a lot of discussion recently on the price cost dynamic on the call but maybe just as we sit here today and we're evaluating kind of the future progression of some of these commodity markets um have you seen anything start to come down particularly from on the chemical side or are you seeing anything more plateau versus where are the specific pockets that are have been much more challenging through the second half of the year
spk11: Yeah, Adam, it's Mike. So I will comment. As I mentioned earlier, we've seen at least the last couple of months that it would appear that secondary fiber has peaked a bit. We're not calling that it won't go up again, but you asked the question. higher for 11 months straight. On some of the polyethylenes, like low-density polyethylene, we've seen them move down, you know, slightly, not materially. They're still elevated, you know, quite high on a year-over-year basis, almost 100% on some of the grades we buy. But they have gone down, they've ticked down just slightly. So, you know, we're watching those things. On the other side of things, we've seen some, you know, wood inflation, you You know, that is growing particularly on hardwood and some of the baskets we're in. But that's all in the guide that Steve gave you, and it's all consistent with the inflationary expectations we outlined for both Q4 and the carryover into 2022. Okay.
spk09: That color is really helpful. I'll pass it on. Thanks.
spk05: Thank you, Adam. Our next question is coming from Michael Roxon from Tourist Bank. Michael, your line will be open now if you would like to proceed with your question.
spk03: Thank you very much. Good morning, Mike, Steve, Melanie. I appreciate you taking my question. Good morning, Michael. Matt. Just quickly on, you know, obviously a lot of discussion on inflation. I want to touch just quickly on labor. And Mike, you mentioned particularly being a headwind in food service. particularly as you had some layoffs and now that the business has recovered, you're trying to build that back up. Can you just talk a little more about what the company is doing to attract labor and have, you know, with the rollout of vaccine mandates, has that impacted the labor supply? I just wanted to try to get a sense of what the company is specifically doing and whether the vaccine mandates have actually impacted the attraction of labor as well.
spk11: Yeah, I appreciate the question, Michael. So we're doing a number of things to attract talent that we need to operate those facilities. than we've done it in the past. We've got some pretty big sign-on bonuses that we put in place for people, employee referral type bonuses that we're offering folks because they given its track record. And those things are actually making a difference. And in some cases, we've had to look at wage rates, particularly for some of our entry-level positions. And we're doing those types of things to continue to take a look at how we are the employer of choice in the communities where we operate. So it'll be a combination of all those things. We're staying very close to it, and I'm confident that over the next quarter or two, we'll be able to get our staffing back to the levels we need it to be. But as an airline, the food service is really the most profound for us, just given the magnitude of the amount of people that we had to hire back after the layoffs that ensued following the pandemic.
spk03: Got it. And then just quickly on sustainable packaging solutions, you know, OptiCycle, PaperSeal, PurchasePack, any other new product. I wonder if you could just talk about commercialization, where those products stand from a commercialization vantage point, maybe incremental revenue, EBITDA. I think that, you know, the more you can share with respect to your focus on sustainable packaging, that certainly would help us and help investors get their appreciation of how you're guiding the business. So I guess any insights on those sustainable packages would be helpful.
spk11: No, again, I appreciate that question, Michael. I think it all comes back to our three big growth platforms that we talked about. cooking solutions and strength packaging. We've got a big addressable market, as we showed you when we were together, kind of pre-AR packaging at $7.5 billion. And we'll update that for you when we're together in February in New York City, kind of giving you an outline on what that looks like. It's going to grow. We've seen more opportunities to actually go faster. And that gives Steve and I a lot of confidence in our 100 to 200 basis points of true organic growth. And to your point, We'll be able to show, you know, additional examples and your products that we've got there when we're together, you know, kind of giving you an update on our enhanced Vision 2025 goals.
spk03: Thanks. Good luck in the quarter.
spk11: Keep at it, Michael. Thank you.
spk05: Thank you, Michael. Our next question comes from Carl White from Deutsche Bank. Carl, your line will be open now if you'd like to proceed.
spk07: Hey, good morning. Thanks for taking my questions. I just wanted to go back to the 2022 bridge and ask, is it possible to break out what you expect from your core productivity in that $20 million grouping that you have? I know you had some weather events this year that you should lap. And then also, how do outages next year compare to this year?
spk08: Yeah, Kyle and Steve, obviously in February we'll provide you with the details. I think what's there, as we talked about in the prepared remarks, we've got a long history of our productivity and the organic sales growth that we were just talking about, that those items will more than offset the labor and benefits inflation that we're experiencing. Obviously, any FX headwinds. And also, there will be synergy capture that will be in there. So current line of sight, $20 million plus feels clear to us. Obviously, we'll provide more details on that in February. I think the intent here is good long history of synergy capture, overall performance, organic sales growth, more than offsetting those other items, and our confidence as we head into 2022 that that will occur is high.
spk07: Got it. And then on the Kalamazoo project, are there any startup costs associated with bringing that up, and should we expect the $50 million benefit to begin rolling through in one queue on kind of a flatline basis, or will it take some time to kind of ramp up?
spk08: There'll be a little bit of ramping, Kyle. I think, you know, modest benefits in Q1, and then we would expect to see more as we kind of roll in. The one-time costs or redundancy costs are relatively modest, and we'll call those out if there are any of any substance. But we're looking forward to starting up. here in Q4 and be making product in Q1. But I think the benefits themselves will be a little more weighted Q2 and beyond as production and high quality production ramps up.
spk07: Appreciate it. I'll turn it over. Thanks, Kyle.
spk05: Thank you, Kyle. Our next question is from Anthony Petinari from Citi. Anthony, your line will be open if you would like to proceed.
spk10: Good morning. On capital allocation, you know, you're closing AR soon, and you have a CapEx cycle that rolls off next year. I'm just wondering if you could talk about, you know, either the appetite or the ability to pursue additional acquisitions as you integrate AR, or is now sort of time for kind of a natural pause? And then just kind of remind us where you'd like to be from a leverage perspective maybe next year.
spk11: Yeah, so I'll take a shot at that and let Steve provide a little color too, Anthony. Thanks for the question. From our standpoint, we love the setup we've got going into 2022. Look at the catalyst we've got in front of us between AR packaging. The timing of that looks excellent with the growth of consumer fiber-based packaging. We've got Kalamazoo starting up. We've got to deliver on the... $100 million of EBITDA growth there, 50 and 50, over the next couple of years. And when you look at all that, leverage is going to be elevated here at year-end because we'll take the debt on for the AR packaging. So I think what you should think about us in 2022, it's a heads-down year for us focused on kind of taking advantage of the investments we've made and delivering on those. We've got clear line of sight in terms of what needs to happen. As Steve mentioned in his prepared comments, we feel confident we'll be at 3.5 times levered at year end on 2022 or lower. And when we did AR, we took told you that by 2023, we want to be at three times. So that's kind of where we're focused on. It's not to say that we wouldn't look at something if it came up, but our capex is going to go back to a more normalized rate. But we've got the projects that I've outlined in front of you that give us good synergy things to work on and value creation for shareholders. And we want to stay focused on that stuff, at least into 2022.
spk10: Okay. Okay. That's helpful. And then just following up on Mark Wilde's question on the global box board market, assuming freight rates or ocean freight rates kind of improve or normalize at some point next year, do you think it's the case that significant import pressure could come back in SPS and maybe CRB, or do you think it's more the case that some of this capacity is
spk11: either no longer running or maybe not in the cost position to impact the U.S. market. And I guess I'm thinking about the Chinese shutting down some capacity and the Europeans dealing with some of these cost issues. Just kind of curious what your take is. Yeah, I guess as I sit here today, you know, first off, I don't see ocean rates coming down materially. You know, so maybe some of the congestion will clean up. But, you know, we expect, you know, freight, as we've told you, you know, for several quarters now to be structural in nature, both in terms of, you know, ship, rail and truck. And that really, you know, in terms to our benefit, you know, given. the wide platform that we operate and how we build the company. So I'd start with that point. And then in terms of what's happening in Europe, as I mentioned, with what we're seeing on the beverage side, there's even more growth of consumer fiber-based packaging in Europe replacing single-use plastics in that market. So those producers over there, particularly with higher freight and dislocation on shipping costs, they're going to want to service that market first. And as you answered part of that question, think about what's happening with GD Board in that market compared to their version of recycled versus some of the virgin grades. You've got natural gas prices approaching $30 an MMBTU. So there's going to be a lot of demand for fiber in that market. And to the degree those producers can move it into that market, I'm sure they want to, just like we would want to do that here domestically. So we're in that market now in a material way. As I mentioned to you, with AR Packaging, we'll be the largest purchaser of paper boards. So we've got good knowledge of what's going on. And that's going to help us drive our agenda going forward here. And we like the positioning that we've established for the company on a combined basis.
spk10: Okay, that's very helpful. I'll turn it over.
spk05: Thank you very much, Anthony. Thank you, Anthony, and that concludes today's Q&A session. I'll hand back to Mike Doss for any closing remarks.
spk11: Thank you for everyone for joining us today. We look forward to seeing many of you on February 17th in New York City, where we will outline our fourth quarter results and four-year results, provide a detailed outlook for 2022, and update you on AR packaging integration and growth opportunities. Finally, we want to be able to spend some time talking about our updated Vision 2025 milestones, incorporating the catalyst that we discussed today. With that, hope you have a great day, and we look forward to talking to you again soon.
spk05: Thank you to everyone who has joined us today. This concludes the call and you may now disconnect your lines.
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