Graphic Packaging Holding Company

good morning thank you for attending the graphic packaging third quarter 2022 earnings call my name is matt and i will be your moderator for today's call all lines will be muted during the presentation portion of the call open opportunity for questions and answers at the end if you would like to ask a question please press star followed by one on your telephone keypad i would now like to pass the conference over to our host melanie ski just

Good morning and welcome to Graphics Packaging Holding Company's third quarter 2022 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, 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 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 filings with the Securities and Exchange Commission. With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning to everyone joining us on the call and this webcast this morning. Let me begin my remarks on slide four of the presentation. We delivered exceptional financial results in the third quarter. Our continuous strong performance and net organic sales growth can be attributed to the global business portfolio we have built diversified by both end markets and brands, strategic investments we have made, and the robust innovation pipeline we are cultivating. In the third quarter, net organic sales growth picked up sequentially, accelerating 5% year over year. This represents another quarter of outperformance versus organic sales growth goals, I remain very encouraged by our significant new product development pipeline and consumer demand for highly functional and increasingly more sustainable packaging. Interest and engagement from existing and new customers remains robust. As demand for fiber-based packaging to replace other packaging alternatives increases, we are capturing new business across our low cost, well capitalized, highly percent at this time a year ago. Vertical integration is a competitive differentiator in today's challenging global supply chain environment. We benefit from the flexibility we have established by producing all three paid-for substrates and the assurances supply we can offer customers. Importantly, our vertically integrated business model provides runway to further enhance operating efficiencies and supports our Vision 2025 margin expansion goals. Adjusted EBITDA increased by 55% year-over-year to $441 million, resulting in an 18% EBITDA margin. Adjusted earnings per share, excluding amortization, improved 76% to 67 cents per share. Strong performance year-to-date is resulting in an increase to our previous $1.5 to $1.6 billion adjusted EBITDA guidance. We now expect adjusted EBITDA for the full year of $1.6 billion at the midpoint increase over 2021. Our financial results are underpinned by a secular demand tailwind for more sustainable consumer packaging solutions globally. Importantly, and specific to graphic packaging, our ongoing execution of strategic initiatives and platform investments has strengthened and extended our global fiber-based packaging offering and has positioned us to capture growth in demand. cost inflation continue to be executed globally. As a result, we now expect $425 to $475 million in positive price-cost relationship in 2022. The significant step-up in adjusted EBITDA resulting from the business drivers I've walked through on slide four will drive strong cash flow generation. This year, as committed, we are focused on driving the year in the 3.1 to 3.3 times range. Slide 5 provides additional detail on the inflationary environment and pricing outlook. In the quarter, we continue to realize the pricing necessary to offset higher commodity input costs and recover the dislocation from 2021. $334 million of positive price flowed through the business during the quarter, more than offsetting commodity Pricing expectations for the full year are approximately $1.05 billion, up $100 million from guidance provided last quarter. Additional SPS pricing along with other pricing initiatives were realized and implemented during the third quarter. Our 2023 rollover price and commodity input cost ranges, mark to market as of today, are are $375 to $475 million and $150 to $250 million, respectively. As we have stated, we believe we will see inflation again next year, particularly in Europe. Similar to last quarter, I want to reiterate the rollover figures on slide five are directional in nature and our point-in-time estimates will provide guidance. Let me provide a progress update of our K2 coated recycled board machine production ramp. We were pleased to host many of you in September for a look at 100 years of paper-making technology culminating with our largest capital investment in history, the transformational K2 CRB machine. As analysts and investors were able to clearly see during the tour, the machine truly does transform Kalamazoo into the most advanced manufacturing operation with day-to-day technology automation and advancement in energy efficiencies. It is the largest and lowest cost producer of coated recycled ore in North America. Production on K2 is ramping steadily and is ahead of plan. We have hit our targeted output of 1,500 tons per day on multiple days, averaging over 1,400 tons per day in September. With the new production on K2, we realized $17 million in EBITDA in the third quarter and expect to meet our $50 million target Slide seven is an example of how our global innovation engine and customer partnerships continue to drive new business and organic sales growth. Established as part of Vision 2025, our partners pillar is focused on growing with the best customers in the best markets. We're excited to be doing just that by working with Unilever on a new product as part of the company's 1 billion euro Clean Future initiative. Unilever announced its Clean Future strategy in 2020 and its intent to change the way some of the world's best-known cleaning and laundry products are created, manufactured, and packaged. When Unilever's largest detergent brand transformed its laundry capsule with new technology to be its most sustainable yet, they wanted a new package solution that was both recyclable and plastic-free. Our packaging developed for Unilever delivered those enhancements and will reduce over 6,000 metric tons of plastic from entering the waste stream each year. We are thrilled to have partnered with such a purposeful brand and company on this product launch. The laundry capsules along with the product's new packaging were launched in July and can be found in various outlets throughout France. Reception has been enthusiastic and we expect to see new growth opportunities with different brands and in additional countries. Current design product protection and printability of our high-quality fiber-based packaging enhances marketing appeal for customers. The renewable aspect of the paperboard solution and the high collection and recyclability rates of paper provide proof points to our customers and our customers' customers that the sustainability efforts are making a positive impact. Turning to slide eight and reflecting on new opportunities we see across our markets for plastic substitution, we have raised the expectation of our total addressable market to $12.5 billion. You can see here many different products and packaging configurations under plastic substitution. This speaks to our diversified portfolio and the variety of packaging solutions we produce for a wide array of global customers and consumers. I will wrap up my prepared remarks by noting that our overall business remains resilient and we continue to grow with our innovative solutions. We are meeting a need in the marketplace as local communities become increasingly more focused on sustainability. We are very pleased with our results in the quarter, strong outlook for the full year, and continued progress towards achieving our enhanced Vision 2025 aspirations. We are creating value through leadership with Vision 2025. The investments we have made to advance our capabilities and optimize our mill and converting infrastructure differentiate us. Our 24,000 employees are highly engaged and are truly running a different race. With that, I will now turn the call over to Steve.

Thanks, Mike, and good morning. Turning to slide nine and key financial highlights in the third quarter, net sales increased 38%, or $659 million, to $2.5 billion. Notably, Mediterranean sales growth accelerated from 3% in the first half of 2022 to 5% during the third quarter. A positive price-cost relationship and our European acquisition also drove performance. Adjusted EBITDA margin expanded by 210 basis points year-over-year to 18% of sales. Adjusted EBITDA moved higher by $157 million to $441 million, an increase of 55% over the prior year period. Adjusted earnings per share, excluding amortization of purchased intangibles, increased 76% from last year to 67 cents a share. Our paperboard integration rate year-to-date improved to 74%, up 200 basis points from 2021. On slides 10 and 11, please find our sales and adjusted EBITDA waterfalls. Sales increased $669 million year-over-year for 38%, driven by $334 million in pricing and $380 million in volume mix from organic sales and acquisitions. Foreign exchange was a $45 million sales headwind in the quarter. Adjusted EBITDA increased $157 million, or 55%, to $441 million in Q3. Drivers of EBITDA growth during the quarter were $334 million in price and $61 million in volume mix. We are earning on our organic sales, and acquisitions are meeting expectations. Partially offsetting pricing improvements and volume mix in the quarter, were $162 million of commodity input cost inflation, $28 million of labor, benefits, and other inflation, $27 million of unfavorable net performance, and $21 million of foreign exchange. Within the net performance category, we recorded $38 million of increased year-over-year incentive accruals in the quarter and incurred some higher costs to meet accelerated organic sales growth. EBITDA from our CRB optimization and K2 machine ramp contributed positively during quarter, adding $17 million to performance. As Mike discussed, we are on track to deliver $50 million of EBITDA from this transformational investment during 2022. Momentum in our production ramp will continue as we exit the year, delivering an expected additional $50 million in EBITDA in 2023. On slide 12, let me expand on quarterly financials, operating performance, and capital allocation. Our food, beverage, and consumer businesses grew 20% for acquisitions during the quarter, driven by positive price and organic sales growth. Our food service business also achieved strong growth, up 29% from the same quarter one year ago. Turning to paper board market data, the SMPA will report industry operating rates for the third quarter on Friday. Q2 industry operating rates remained very strong across substrates, with SBS at 94% and CRB at 102%. Our C-U-K operating rate remains over 95%. Our teams worked tirelessly and were successful in capturing and servicing higher organic sales growth during the quarter. Backloads remained strong at eight-plus weeks across all substrates. During the quarter, we returned $23 million to stockholders in dividends and repurchased $15 million in common stock, effectively eliminating shareholder dilution from long-term incentive grants. In September, our board of directors approved a quarterly dividend increase of 33%. effective with the dividend payable in January 2023. The increase to our dividend payout is reflective of our balanced approach to capital allocations, the strength of our cash flows, and the significant progress we've made toward our vision 2025 growth goals. Our net leverage ratio is 3.7 times at the end of the third quarter. We have rapidly reduced our net leverage ratio over the past 11 months following the European acquisition. We expect to be roughly 3.2 times levered as we exit 2022. Finally, liquidity remains healthy at over $1.4 billion. On slide 13, let me provide an update on expectations for the full year. As you saw in the third quarter, strength in organic sales, improved pricing, strong volume mix and the K2 ramp are driving substantial results. We are increasing our adjusted EBITDA guidance at the midpoint by $50 million to $1.6 billion. This reflects growth of 52% over 2021. Expectations for sales for the year are now closer to $9.5 billion. Turning briefly to cash flow, $525 million as we make investments to capture current and future organic sales growth. Cash interest has moved slightly higher to reflect the current interest rate environment, while our range for cash taxes has declined. Adjusted cash flow is expected to be in the $600 to $800 million range. Our guidance update on adjusted EPS, excluding amortization, can be seen on slide 14. Continued execution of our growth and margin expansion initiatives this year has increased our expectations for adjusted EPS. We now see a range of $2.20 to $2.40 per share, up from the guidance we provided last quarter. That will conclude our comments this morning. Let me now turn the call over to the operator for questions. Operator?

Before I provide instructions on Q&A, please note that due to global connection issues being experienced this morning, if you experience any difficulties on this call, please contact Melody Skigis and Investor Relations via email. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star followed by 1. We ask that you limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. The first question is from the line of Ghanshyam Punjabi with BEAR. Your line is now open.

Thank you. Good morning, everybody.

Good morning, Ghanshyam.

I guess, good morning. Just making sure you can hear me. I guess first off, Mike, obviously very strong momentum on the volume side during the third quarter as well. But we are starting to see some sort of concern on the consumer staple side, especially in the beverage side. Can you just give us a sense as to how volumes progress throughout the quarter, what you're seeing in terms of new product activity, maybe across both Europe and the U.S. as well?

Yeah, sounds good. I'll start and see if you can add some color to that. I think we saw pretty broad-based strength across, you know, our overall business in the third quarter. It didn't change much materially, you know, from month to month. It was strong. Some of that was a function of the fact that, you know, we had Kalamazoo up and running. We were creating more paper board. We had Middletown running. So it created an opportunity for us to really service our business incredibly well with the fact that we had paperboard to meet customer demand. As you kind of look through the different verticals, we saw food and beverage grow. We saw mobility continue to be strong on the food service side of the business here in North America. Europe grew in certain categories, and a couple of them, they were down slightly. But overall, Europe had a positive growth trajectory, which we were pleased with. And as we've kind of rounded, you know, out of third quarter and into early fourth quarter, you know, to date here, we're seeing our growth at the top end of our kind of long-term target. So 2%, call it 200 basis points. And if we finish the year at that kind of level, you know, that'll be fantastic because what that will be then is for the third year in a row will be about 3%. organic growth. If you do a three-year stack on that, it's over 10% in terms of organic growth. And as you know, that's a real pivot from the kind of trajectory we had before that time period. So that's That's kind of how we're thinking about it and what we're seeing. And Steve, I don't know if you have anything else to add.

No, nothing to add, Mike. I think you described it well. I think the broad-based nature of it was positive for us, both food service and kind of core food and beverage. And probably the only thing to add is we can continue to identify a couple hundred basis points of real new-to-the-market innovation products, primarily plastic replacements, that are supporting the net organic sales growth.

Okay, fantastic. Thanks for that. And then just for my second question, you know, in terms of how we just sort of think about capital allocation in 2023, Paul, and obviously your focus on debt paid on this year, and then just related to that on AR packaging, can you just touch on some of the opportunities you see to cross leverage some of the innovation that they have, you know, some of it, which highlighted at Pack Explorer this week, just anything you can share there as it relates to the U.S.? ?

I'll start with that. I mean, I think that's been really one of the positives we've seen on the AR acquisition. We anticipated that we would learn and be able to kind of move trends that we're seeing across the globe much faster. That was part of our investment thesis. And as we talked about when we made the investment, Europe is really ground zero for sustainability. And we see a lot of those trends come out of Europe. And that's part of what you see on the slide in the deck that showed the expansion of our you know, our TAM. You know, we've got the ability to, you know, be able to, you know, increase that because we got line of sight into, you know, additional plastic replacement opportunities and expanded that now to, you know, $12.5 billion. You know, so we're very pleased at what we see there. You saw an example of one of those, you know, products when we put in the deck, you know, that had, you you know, detergent and what we did there with paperboard for Unilever. We're really pleased with that one and anticipate we'll see continued, you know, acceleration of those kind of trends and be able to leverage that really on a global platform. So we're excited there too. In regards to capital allocation, you know, this was a year where we told everybody, you know, we were going to focus on debt reduction. And that's, in fact, what we've done. As you heard Steve saying his prepared remarks, We'll finish, you know, at the midpoint of our guide around 3.2 times. We want to get down in the two and a half to three times long-term target, which will be, you know, sometime, you know, next year, probably early next year. And then as we kind of look at what to do with a strong, healthy cash flow generation, what I love is the optionality we've got in the business. You know, we've got the ability to look at, you know, game-changing M&A. where it makes sense and comes with high returns and synergies that make sense to us. We can pursue, you know, a capital project, a large capital project or two to change our cost structure and our mills or our converting business. And obviously, we've got the ability to return cash to shareholders too. And you saw our board, you know, here in September increased our dividend by 33% as an example, and we continue to buy back our dilution. So, We've got all of those things available to us, and we'll look at the types of returns we can see for shareholders along those lines. But ultimately, going into an uncertain macro, what I love is that we're going to throw off a lot of cash, and if we actually drive our debt down a little bit for a period of time here while we're kind of watching the market develop a bit, that's not a bad option for us either. So I love the optionality that we've got, multiple levers to pull, um and you know the team's done a fantastic job this year positioning the business with this acquisition of anr and the startup of kalamazoo to really position us heading into 2023 with a lot of momentum great perfect thanks so much mike you bet thank you for your question the next question is from the line of mark wild with bank of montreal your line is now open

Thanks.

Good morning, Mike. Morning, Steve and Melanie. Good morning, Mark. I wonder just to start off, Mike, can you just give us a little more color on what you're seeing over in Europe right now? It does seem like the economic pressure there is even greater than we're seeing in North America. And I wondered kind of when you talk about Europe, if you can also talk about what you're seeing from your customers in front of the winter season prospects of energy cuts.

Hey Mark born at Steve, I'll start and Mike can add on to it as Mike mentioned, we saw modest organic sales growth in Europe in the quarter, which was given the macros and the challenging environments. There was net favorable to us in terms of The consumer-based food beverage consumption holding up. We saw a slight weakening on the core beverage business in the quarter as folks actually returned to being out and about a little bit. As we move around towards the winter, we actually expect that to kind of come back to the positive given the amount of investment that's been made in fiber-based packaging for at-home consumption of beverage. As Mike mentioned, just adding on to it, AR packaging specifically, those economics actually are on our expectations, $118 million of EBITDA year to date. We expect to be at the $150 to $160 million level for the year, even in the face of foreign exchange and the environment that we're in. So really outperformance at the operating level there, and as Mike mentioned, the innovation component. Certainly we're turning towards what can be some challenging winter months ahead. Mike can talk briefly about the energy and ability to run basis. But to date, because we're not as energy dependent as some other manufacturing type businesses in the region, we have been operating successfully and meeting customer demand. Anything to add to that, Mike?

No, I think maybe just to add, Mark, you know, so we buy 25 million MMBTUs in natural gas, you know, as a company. A little less than one of those is in Europe because it's converting only, as you know. And so our exposure there on the NatGas side isn't real high. We buy a fair amount of paperboard, a million tons on a global basis. So we're watching that, you know, and obviously you've seen, you know, the ability for those producers to push those prices along. And we've got that reflected in our contracts and Really in the market market that we we gave to you here as part of our prepared remarks. So look, I think, you know, all our customers are watching, you know, what's going on right now. The weather's good in Europe. It's been very good. The last couple of weeks and their injection levels are high net gas prices have come down over the last couple of weeks from their all time highs in June and July, as you well know But that can change quickly. And so we're monitoring closely. We've got really good communication between that business and Steve and myself. And in some cases, it's changing on a daily and weekly basis. And that's part of why you saw in the mark-to-market, we have a range there of $100 million. And it's largely due to the fact that that inflation in Europe is just a little hard to call right now. And so we'll continue to watch it. We'll be aggressive around our pricing actions and make sure we recover that as we've been. and that's kind of how I think we're thinking about that operating environment.

Okay, that's helpful, Mike. And then just for my follow-on, I wondered if you could just give us an update on a couple of conversion projects that you've talked about. One is using that mechanical pulp mill that you bought down in Augusta to potentially make FDB at Augusta, and the other I think is the – you know, talk we've had about converting from SBS to CUK over at Texarkana. And I guess I'm asking those questions just in the context of all of this, particularly all this box board capacity. We're seeing the Scandinavians talk about adding.

Sure. Yeah, thanks for that. And it is a very good question. I mean, in terms of what we're doing, We continue to run trials on FBB, you know, pulp type that we've got in Augusta. As you mentioned, we acquired a thermal mechanical pulping operation right adjacent to our property. So we've got some optionality there. And we're continuing to look at that, you know, over, you know, what the costs would be, what the benefits would be, those kind of things. Same thing with the The swing machine in Texarkana that we talked about a couple of years ago, we've still got that optionality to convert one of those machines over. But to be fair, with eight-week backlogs and strong growth we've seen, we haven't seen the need to really take any action on those. We're also looking at our CRB platform, to be fair. You know, the startup with Kalamazoo has been very good. You know, we like what we see so far with the new machine. And so, you know, I think as you think about graphic, we've got a number of levers that we can pull, and we're trying to really make sure we're being smart about what we do, how we allocate capital, and having a medium-long-term perspective, you know, in mind relative to what we make and integrate into our own operations as well as what we would buy externally, which is, you know, roughly a million tons. You know, so... You know, that is we kind of look at that we look and study that, you know, as a leadership team and talk about it with our board and that will be something we continue to do here as we grind forward.

Okay, very good. I'll turn it over. Thank you.

Thank you for your question. The next question is from the line of Mark Weintraub with Seaport Research Partners. Your line is now open.

Thank you. First, kind of a smaller question, but on the incentive accruals, $80 million this year, what would be more typical? And so do we then, therefore, get some sort of, assuming it's a lower number next year, do we get almost like a double catch-up next year? Do we get a bump next year on the bridge?

Hey, Mark, it's Steve. As you know, last year we had significant underperformance on incentives driven by the inflation that rolled through the business this year. I'd characterize this as a return to more normalized incentives, both short and long-term, as we kind of put the bridge together. Obviously, we'll look to continue to perform at that level. I wouldn't assume a significant snapback in 23. I'd consider this a little bit more at the At the more normalized level, there might be a modest one. We'll be able to articulate that with guidance in January, but it's really a return to more normalized compensation.

Got it. Thank you. And also, when you're doing the mark-to-market, when was the date that was as of? Is that as of kind of very recent? Does that capture what's been some pretty big declines in recovered paper pricing in the recent past?

Yeah, Mark, it's Steve. It sparked the market as of the moment we're talking, as we kind of pull things together as we head into this conversation. So it's very current. So it takes into consideration latest SPS pricing on the pricing front. It takes into consideration what we know. As Mike just mentioned, though, one of the reasons we've got a bit of a range on it on the cost side into 23 is just because of variability in Europe. We're obviously in a day-to-day mode in Europe in terms of knowing even what the market is for certain costs that we're managing through. We think that overall, the midpoint of the price and cost is very representative of if you truly did Mark to market, those would be the numbers, both price and cost, but the variability is a bit wide right now, primarily repeating it, just driven by Euro.

Okay. Appreciate the added color. Thank you.

You bet. Thanks, Mark.

Thank you for your question. The next question is from the line of George Staffos with Bank of America. Your line is now open.

Hey, thank you. Hi, guys. Good morning. Hope you're doing well. Thanks for the details. First question is on sort of top line and volume growth expectations. And, Mike, could you give us a bit of color in terms of how the addressable market grew from $9 to $12.5 billion? What were the – I know it's going to be a lot of things, but if there was one or two or three markets that in particular drove that, and relatedly, how are you seeing – the new products that you are bringing into the market allowing you to generate growth that the consumers want to pay for in an environment where we have lots of stress related to inflation and how do you prevent against the demand that you're seeing being just your customers double ordering, double booking because backlogs are at eight weeks and we've seen signs of this elsewhere where You know, there's ordering and anticipation as a precaution, and that ultimately dissipates. And then I had a question on capital allocation.

I'd take that latter part first, George. And as you remember, you know, our growth in, you know, kind of that 3% range this last quarter was exceptionally strong. Quite frankly, we've been outperforming our medium and long-term goal of 100 to 200 basis points, which we believe over the medium to long term is the right target for our company. So we've outperformed that the last three years. That's how we look at it. And if you look at kind of what we did, we didn't see growth of 10% or double-digit increases like some other packaging firms and segments saw during the last couple of years. Ours was pretty steady there. As a matter of fact, we were actually, as we disclosed in the first quarter and the second quarter this year, a little behind where we wanted to be in terms of our ability to service customers. Our backlogs were up at 10 weeks plus, which is just too long for us to give the customer what they need to run their business. So actually, we're quite pleased with our backlogs now being strong at eight weeks. That's historically where strong backlogs would be for our industry, and that allows us to service our customers quite well. So look, we've got limited visibility into our actual customer inventory building process, But in this kind of macro, it's a little hard to see that anybody really wants to build a bunch of working capital. So if it's happened, we don't think it's broad-based. And obviously, we're going to continue to work with our customers and make sure they have what they need. And we're seeing our service levels actually correct themselves. Our on-time and in full are actually moving back into the 90% range, which is where we'd expect them to be. And it's been probably six, nine months since I can actually say that. We're pleased about that as well. And in terms of the addressable market growing, George, that's really just our innovation and design personnel globally with the enhanced capabilities we acquired with AR packaging and really sitting down and looking at different segments and different markets and where we can find opportunities for paperboard packaging, consumer-based fiber packaging to win. And that's why every earnings call, we try to profile something different to give you a snapshot on the margin around the types of things that we're seeing. I thought this one was particularly good, what Unilever did, getting out of plastic tubs and really going 100% into paperboard. They did it in a way that was childproof. It's a great looking package. It's got excellent graphics and it's got a huge sustainability story. We're seeing customers continue to do that. That's part of their mantra. When you look at their ESG requirements and the reporting they're doing publicly, our large customers are all focused on driving that type of improvement. We fit right in the center of that and we provide some really unique options and innovation that allow them to accomplish those objectives. It's the team in Europe, the additional resources we have, the work that we've done now to take a look at different segments that we can penetrate and find real meaningful growth and value creation for customers. And it's working. And that's what gives us confidence, Steve and I, that our 100 to 200 basis points and the commitments that we've made as part of our Vision 2025, the enhanced goals that we laid out in February, are the right ones for our companies.

And George, just to add to Mike's point, specifically on the $12.5 billion, it's plastic replacement is the category, so the actual broad-based category. And of course, it's consumer-based. And so I think it speaks right to the heart of our food, beverage, food service, consumer packaging. So consumer and plastic replacement are really the kind of what's been honed in on to allow us to increase that addressable market.

Okay, just a quickie, and it's not a huge number, but the increase in CapEx, can you talk about what drove that, any key end markets, to the extent that you can share on a live mic call? Thanks, guys, and good luck in the quarter.

No, thanks, George, and we're pleased to actually take it up a little bit, because it's all about organic sales growth, both known projects that we're investing behind, you know, at the $2 to $5 million type of investment at a time. These are typically modest size investments that are high return for us to have the capacity, mostly converting capacity in this case, to capture the growth. And so think of it as categories like we were just talking about, a fiber bowl replacement or that kind of a replacement or a cup replacement into fiber. So these are primarily organic sales growth capture investments that will give us confidence in the 100 to 200 basis points on a multi-year basis.

Okay, thanks. I'll turn it over.

You bet. Thanks, George.

Thank you for your question. The next question is from the line of Kyle White with Deutsche Bank. Your line is now open.

Hey, good morning. Thanks for taking the question. I wanted to go back to, I believe, Wisconsin's earlier question. Um, you know, we had a better scan peer reports and week volumes, especially in September. Curious if you guys saw a noticeable drop off in September on your, on your CUK grade, um, or, or was this being offset elsewhere? Or is it something that maybe you expect to occur in October?

Hey Kyle, it's Mike. We had a little problem there. Can you repeat the question please?

Yeah, apologies about that. Do you hear me better now? Yep. Yeah, we got you good. Got it. I wanted to go back to Johnson's question on on we had a beverage camp here report some weakness here, especially in September. And I was curious if you guys saw noticeable drop off and demand on your see UK grade in September, or if it's something that you expect to occur in October. Or anything you can give us in terms of details that you're seeing on that great specifically

Yeah, no, we have not seen a meaningful drop off on our C-U-K. As a matter of fact, our demand remains strong. But remember, it's much more broad based than just beverage. Beverage is a big market for us, but we're now in the frozen food market. That's really strong there. There's a lot of strength applications for C-U-K. And we buy a fair amount of it, as you know, Kyle, globally too. And so every time that we're making out of Macon and West Monroe, we've got a plan for both in 2022 and 2023.

Got it. And then a lot of volatility on OCC here recently. Just curious what your near-term outlook is for that and then what you think it will average out for next year. And then more importantly, how should we think about, you know, the relationship between OCC costs versus kind of a code or recycle board pricing over the long term?

Yeah, so why don't I take that, Steve, you can jump on with anything to add. But look, paper board pricing, like, you know, all commodities is based on supply and demand. And we just got done talking about the fact that we've got eight-week backlogs on all our materials. We grew 5% in the quarter, and we're growing here at least a month to date here in October. We're at the 2% range. So we continue to grow. And that requires paperboard because every package needs paperboard. That's what we do. And so if you look at what that means, I saw we got a few in the early write-ups around CRB and how does that square with some of the comments made in one of the trade organization magazines. You know, from our standpoint, I can see why someone who's buying paperboard might want to poke around on that, you know, given, you know, OCC's gone down a little bit. But they're probably not on a call with the same responsibilities that Steve and I are, you know, here to be able to kind of talk about what's actually happening. And if you look at our backlogs here, they're eight weeks plus. And that's with Kalamazoo accelerating. And we're still running our Middletown mill. And we plan to continue to do that. We need those tons to run our business. So look, you know, As Steve mentioned in his prepared comments, the APPA data will come out here on Friday, so we'll get another look on it. But we're actually about half of that market, as you know. And so we feel like we've got a pretty good beat on it. And relative to OCC pricing to the actual pricing of paperboard, again, it all comes down to supply and demand. And right now, demand is strong.

And Kyle, the only thing I'd add is just specifically for you is that OCC on a year-over-year basis will turn into a deflationary environment in Q4, but it's being more than offset by the ongoing inflation we're seeing for external paperboard, chemicals, net energy, et cetera. So hence the continuation of net inflation that we're managing even here in Q4. And then for our market, we're just assuming as is.

That's helpful. I'll turn it over. Thanks, Kyle.

Thank you for your question. The next question is from the line of Cleve Rupert with UBS. Your line is now open.

Hey, good morning, guys. Thanks for taking our questions. I just wanted to go back to organic growth. And I guess specifically just sort of looking at slide eight, you know, In the past, we've said that most of this growth is mainly driven by new products and not necessarily accelerating growth within the existing portfolio. Steve, you touched on it a minute ago in response to George, but I'm just wondering, what do you have to do now to access this addressable market? I mean, is it mainly that sort of incremental investment in the downstream converting capacity as you sort of explore opportunities in R&D with your customers? Is that what we should expect you to focus on for the next couple of years?

Yeah, no, Cleo, I think that's right. I mean, the reality is, as you know, innovation in our segments take time. And so the team, as we continue to look at that ongoing 100 to 200 basis points, it's multi-year in its orientation. It's what's our line of sight? in 23 to give us confidence that there's at least a couple hundred million dollars there? Do we have line of sight to even convergence in 24, 25? Because some of these conversions for our customers are multi-year in their orientation, like you've seen with Keoklip. It takes years for it to totally play out. So that's why That backlog of opportunities is significant. We're looking out even today, probably out to 25 for certain projects that we already, some of the investments we're talking about making are to support multi-year initiatives. So it is about today, but also it's multi-year. Mike, anything to add?

No, that's well said, Steve. I think the other part of it, Cleve, and Steve mentioned this earlier on the call regarding the increased capexes. We're investing behind this, and we've got to have the capabilities to drive that level of growth and those kind of innovations. And that requires investment on our behalf, but that also makes us quite sticky with that end use customer. And those are categories we really want to win in because we believe that our fiber-based solution has a unique competitive positioning to be able to do it, in many cases replacing plastic as we've talked about here. So it's a combination of really strong innovation and design capabilities that we've invested in heavily over the last three or four years in terms of human capital and process capabilities, as well as the CapEx and the investments that we've made in our converting operations to support that. And you really got to do both. And I think that we're really kind of hitting our stride along those lines and making a pivot away from what historically had been a company that had great operating prowess and focused on cost reduction in a flat market, and you did a really good job with that, to one where now we truly are driving meaningful top-line growth that's been sustained over a number of years. And that's the DNA we're really trying to build and the pivot that we've made as a corporation. Hopefully that's coming through and you're seeing that.

Yeah, I mean, low cost, highest quality, well-capitalized tends to win the day over time. And our customers recognize that, too, because they want to invest behind companies a company that's willing to put the dollars to work.

Yeah, that's a great point. Thanks for making that clear. And just one sort of, I guess another follow-up on an earlier question, but we get the question all the time, so I'm going to pose it to you. It sort of relates to paperboard capacity, especially from competitors. I know we've talked sort of extensively about the North American market on these calls before, but I guess just thinking about capacity expansions in Europe and also in China, how does that affect your business? How should we think about it and how are you thinking about it and planning for some of these changes? More so outside the U.S. than inside.

I appreciate the question. It's an important one. I guess I'm going to parse it apart a little bit. you talk about both China and Europe because they're different in terms of what's going on there. But first, what I'm going to say is we share a common view that the market is going to continue to grow. I think we've demonstrated that over the last three years of what we've been able to do. So there's going to be a need for more paperboard here in the future. The question, of course, on investors' minds, as it should be, is what do those operating rates look like? Are the tons covered? Where do they go? And kind of what are the implications? As we think about China, And those of you on the call who kind of followed that market for a long time, I mean, ivory board's been overbuilt in China for the last two decades plus. And a very modest amount of that actually makes its way to North America. I think last year it was less than 25,000 tons. And the primary reason for that is the vast majority of the mills in China are non-integrated in both pulp and energy, which make them high cost. And so they tend to service that local market quite well. but that stuff just really doesn't export well to different geographies because of the costs associated with it. So it's not to say that it can never show up here, but the cost structure and the cost curve over the medium term, it's disadvantaged. There's no other way to say it against North American and European consumers. So that's how we think about China. In terms of Europe and some of the announcements that have been made, and to be fair, some of these have been just, A hypothetical look, I'm looking at potentially doing this, I'll let you know in 2024 what I'm thinking type thing, versus a very well-capitalized company last week announced that they're going to spend a billion euros, which is a lot of money, and by their own estimation, create the Europe's lowest cost FBB mill. And look, that makes sense to me, given what they're spending, given they have an existing mill location, to put that money into it. And what I believe will happen over the next few years is that machine comes online in 2025, that's what they said at least, is that that will put a fair amount of pressure on a lot of non-integrated small FBB and recycled board manufacturers in Europe, particularly given the energy situation that's playing out there now that I don't anticipate will be, you know, materially different over the next two to three years. So time will tell. We'll have to kind of see how that all plays out. Ultimately, the question for investors as it relates to graphic packaging is what the implications are, you know, for the imports here into the U.S. as they stated that some of that material could come to the U.S. I think that's a hard question to answer for me to answer right now for anybody to really know for sure because it comes down to what's FX doing, what are costs doing in 2020, 2025, which is a long ways away from now. So what we know for sure is that graphic packaging is going to throw off a lot of operating cash flow over the next few years. I think we've done a very good job of reinvesting it intelligently back into our business to create value for shareholders. And we're going to be a very, very strong company in 2025. And so we'll be ready to respond based on what happens there and how it kind of all plays out. And we'll be very thoughtful in terms of the decisions we make around investments back into mills. how we manage our supply and demand, you know, to grow our business. But what we'll continue to do, Cleve, is drive our integration rates up. You saw we had 200 basis points of improvement this year. We'll make progress again next year. And, you know, by 2025, that'll continue to grow. And so, you know, that's how we kind of think about it. And as I mentioned earlier, when Mark asked the question around kind of what are you thinking in terms of potential investments back into CUK, FBB, or CRB, It's through that lens that we study this. We spend a lot of time thinking about those trade flows, where we buy tons, what we make, how we integrate it into our own business, and how to create the most value for shareholders over time. So it's a very thoughtful process that we spend a lot of time on as a leadership team and as a board. And you can rest assured that that will continue to be the case here going forward. So hopefully that gives you a little bit of color on the topic. Yeah, I appreciate you asking the question.

And, Cleve, the only thing to add, kind of to round it out to Mike's point, just in North America, probably as of this morning, any additional investments here in North America are probably out in the 2026 timeframe, but the earliest based upon at least most recent facts from other competitors.

I appreciate it. Thank you very much, guys. You bet.

Thank you for your question. The next question is from the line of Mike Roxland with Truist Securities. Your line is now open.

Thanks. Thanks, Mike. Steve, Melanie, congrats on another good quarter. Thank you, Michael. Mike, just wanted to follow up quickly with you on some of the, you mentioned CRB and the eight-plus weeks you have in backlog. I'm wondering, you know, obviously some of this some noise about some of the trade regs mentioning, you know, moderating CRB demand. So I'm wondering if you just can elaborate on really what you're seeing real time in your business with respect to CRB. And whether the backlog moderation really has to do with, you know, moderating demand or is it more of a function of maybe easing supply chain constraints that have allowed you to really clear out the backlogs that have been extended?

Yeah, it's hard to know for sure what other people are seeing. So I'll speak to graphic, Michael, but we have an eight-week backlog on our CRB business today. And that's with a ramp in Kalamazoo that's gone better than planned. And, you know, the Middletown Mill continues to operate as we said it would, you know, into the future here. So those combination two factors are really, you know, what we're seeing. And so I don't know As I kind of indicated earlier, what someone else is seeing when they say they've got a four to five week backlog, again, we don't have clear visibility into all that. All I can say as a producer of roughly half of that material, we haven't seen that. Our demand has remained strong. The center of the store is actually pretty good. I think you've seen some of our customers. They've taken a lot of price, but their volumes are holding in there, maybe down 1%. And I think the other thing to remember, Michael, for us is that over 20% of our actual portfolio business here in North America fits into the store brand or private label sector. So if a customer is trading down for whatever reason, we tend to participate at an equal level there, if not a little bit more, which is purposeful on our behalf. And we built the company over the last really decade to be able to do that is that portion of the business continues to grow. So we might be benefiting more than others. It's hard for me to know. Look, we'll look on Friday and see what the data says. But I think, you know, overall, you know, the robustness of our backlogs on all three substrates remains, you know, very, very good.

And to repeat something Mike said earlier, actually moving from 10 weeks to eight was actually a benefit for us in terms of our ability to meet customers' expectations, still significant demand. But it's actually a healthier customer relationship experience as well for them in terms of our ability to get them product on time and in full.

Gotcha. And I appreciate the comment there. And just one quick follow-up on Kalamazoo. You know, Mike, you mentioned this in your commentary that it's ahead of schedule. And I think you mentioned the same thing on the field trip as well. If the mill is running better than you anticipated, I guess, you know, can you provide some color around why you're reiterating your EBITDA guides I don't see upside to those numbers that you laid out there if it's actually running a lot better than you anticipated.

Well, I think on a day-to-day operating basis, as we mentioned in the prepared remarks, I mean, we're very pleased with the ramp up into the 1400 plus tons a day and line of sight to the 15. It's a big, strong ramp up with 17 million in Q3. you know, 30 plus in Q4. So I guess we reiterate that we have a lot of confidence in the $50 million and in the next $50 million. And so at this point, just consider that high confidence in the context of our overall guidance. The returns are there.

I think that's well said, Steve. I mean, when you look at 23, Michael, you know, we said there was, you know, $50 million there. We feel really confident in that. Gotcha. Good luck in the balance of the year. Thank you so much.

Thank you for your question. The final question will be from the line of Gabe Hodge with Wells Fargo. Your line is now open.

Mike, Steve, Melanie, good morning. And I apologize. I joined a little bit late. But I'm a little surprised I was taken to the last question to try to take a peek around the corner into 2023. And like I said, I apologize if I missed it. um if i take the midpoint of the mark to market on price cost seeming to apply 225 even if i assume kind of flat volumes we assume that the 50 million from kalamazoo plus maybe a little bit more of normal graphic productivity seems to me like inflation non-material related or not input cost related might be running maybe 80 to 100 would seem to imply a i don't know directionally a 1.8 EBITDA number. And then I guess on the bottom end, if I were to annualize, and I appreciate this isn't the best way to do it, but maybe the midpoint of Q4, call it 405.410, would kind of get me to a, I don't know, 1.620 number. Are there pieces, parts in there that we're missing? And I appreciate that we're trying to forecast in the future and we don't know the biggest component, which is price cost or swing factor, I should say.

Yeah, David, Steve, I mean, obviously, you know, I think we provide more transparency into 23 than certainly anyone in our respective space. And I know you appreciate that we're not in guidance mode yet. We'll do that at the end of January and we'll provide it. Something we have talked about in public a few things. You're correct on all your, you know, basic assumptions. The company is going to look like a lot of like it looks like in the past in terms of how we'll execute. But next year, obviously, FX headwinds the potential for not owning the Russian business, and we are likely to have a little more maintenance downtime. And we've talked in other public environments that that's probably a $50 million type year-over-year headwind. So we'll provide full detail guidance when we round the corner here, get out of the quarter, and move into 23.

I appreciate that. All right. Thanks, guys. Good luck.

You bet. Thanks, Gabe.

Thank you for your question. There are no additional questions waiting at this time, so I will pass the conference back to Mike Doss for any closing remarks.

I want to thank everybody for participating in the call today. I apologize to anybody we were not able to get to in terms of the queue and for any issues with sound quality that may have been out there given some of the web problems we're experiencing today. I hope you're all able to join us in January for our fourth quarter and full year 2022 results and an update on our continued progress towards achieving the goals established with our enhanced Vision 2025. And with that, I hope you have a great day. Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your line.