Graphic Packaging Holding Company

Hello and welcome to the graphic packaging Q4 and full year 2022 earnings call and webcast. My name is Elliot and I'll be coordinating your call today. If you'd like to register a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I'd now like to hand over to Melanie Skijas, Vice President of Investor Relations. The floor is yours, please go ahead.

Good morning and welcome to Graphics Packaging Holding Company's fourth quarter and full year 2022 earnings call. Joining us on our call today are Mike Dodd, 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 fourth 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 four 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 relief and in our filing with the District Juries and Exchange Commission. With that, let me now turn the call over to Mike.

Thank you, Melanie. Good morning. Thank you for joining us on the call today. 2022 was an outstanding year for Graphic Package. We significantly grew our business and continue returns for shareholders in line with our Vision 2025 goals. Turning to slide four, let me walk you through the year's accomplishments and a brief look into 2023 before sharing the details of the exciting new strategic capital investment we are announcing this morning. Our financial results in both the quarter and the full year were excellent, characterized by strong growth and margin expansion. Sales for the full year increased 32% to $9.4 billion, driven by $1.1 billion in positive pricing, 3% organic sales growth, and acquisitions. Adjusted EBITDA of $1.6 billion grew in a faster pace of sales of 52% as margins expanded by 210 basis points to 16.9%. Decoded recycled paper early 2022 as we successfully ramped production of the machine on our original timeline. The investment is evidence of our long-term commitment to high-quality, low-cost production of fiber-based consumer packaging utilizing recycled content. The investment returned the first $47 million of EBITDA in 2022 and remains on track to achieve the total annual run rate of $130 million of incremental EBITDA in 2024. with the expertise and confidence to continue to strategically invest as we will detail further in a few moments. The AR packaging acquisition in Europe continues to meet our high expectations. Growth opportunities provided by new consumer markets, geographic expansion, and proprietary solutions protected by intellectual property have further accelerated our excellent momentum. Our combined team successfully integrates the business, and the initial targeted $40 million synergy goal remains on track, with the first $15 million realized in 2022. As committed, our net leverage ratio has declined 3.2 times at year-end from pro forma 4.6 times at year-end 2021. Through new product innovations and expanded geographies, We increased the addressable market for organic growth $12.5 billion from $5 billion just a few years ago. We remain confident in our ability to achieve 100 to 200 basis points annual net organic sales growth in 2023 and beyond, given strong demand from global customers for our robust pipeline generating strong cash flow we will invest for long-term value creation while having balance sheet prudent for today's uncertain economic environment. Before I walk through the details of the significant new investment we are announcing today, let me take a moment on slide five to reflect on our performance over the past three-year period since announcing Vision 2025 in September 2019. Our global team has successfully executed the pivot to sustainability-supported organic growth with net organic sales up approximately 10% since 2019. We have pursued and achieved critical milestones on our journey to Vision 2025, including growing net sales, expanding margins, and building a much larger-scale business focused almost entirely on fiber-based consumer packaging. Over the past three years, growth rate. Adjusted EBITDA and adjusted earnings per share have expanded at a faster pace than sales driven by margin expansion. Our financial results and achievements over the last three years have resulted in a total shareholder return of 41%, outperforming the S&P 500 return by 1,600 basis points. We are creating value through our leadership of Vision 2025. The investments we have made to advance our capabilities as a fiber-based us. As you've heard me say before, we are running a different race. Let me now turn to slide six to provide details regarding our announcement this morning and the role it will play in our long-term commitment to meeting consumer demand for sustainable packaging. Graphic packaging is the only North American producer investing to meaningfully upgrade and expand CRB capabilities. We are confident this is the right strategy to deliver value to our customers and to think opportunities this substrate can provide. The future of consumer packaging will include more CRB in more places, and we're taking steps to position our paperboard network to meet this growing demand. We have a strong leadership position in CRB from a cost and capability perspective, and this investment will further these advantages. We will be leveraging our unique expertise in CRB production, our muscle memory from the recent K2 investment, and our leading North American mill system build a new CRB mill in Waco, Texas. Importantly, this investment not only enhances our CRB capabilities, but supports optimization of our full paperboard network and improves our environmental footprint, further distinguishing Graphic Packaging as the low-cost, highest-quality paperboard producer in North America. As a result, we expect to drive significant and sustainable EBITDA improvement well into the future. Referring to slide 7, the growing demand for packaging made with recycled materials is driven by the consumer. Today's consumer is more environmentally aware than ever, and according to a recent survey, consumers rank packaging made from recycled materials as the most appealing sustainability claim. Through a package made with CRV, consumers see the benefit of their recycling efforts each time they place the fiber-based packaging to a recycling bin. As you can imagine, our customers are responding to what consumers are telling them by seeking to use more recycled materials in their packaging. Not only is doing so in line with consumer trends and preferences, it's also a key driver for advancing their recyclability goals and supports their overall publicly committed sustainability programs. This growing demand, combined with the improved quality of CRB produced by Graphic Packaging's modern mills utilizing the latest in-the-art technology, is expanding the breadth of our opportunities for CRB-based packaging. Slide 8 demonstrates how we believe this new investment will meet the increased demand for CRB at an unmatched cost compared to our competitors. As you can see, the addition of Waco allows us to further optimize our network by closing higher-cost mills over time while still expanding capacity to meet growing global demand. Kalamazoo. It's clear to see that the modern technology inherent in these new machines provides a meaningful cost to produce step-change improvement compared to decades-old machines used elsewhere. Notably, this expansive competitive cost differentiation is unique to the CRB substrate as compared to other fiber-based substrates. We are building for the future in a manner that is far more efficient than what was built in the past. Turning to slide nine, in addition to the efficiency of the mill itself, we are very excited to have secured a location that is ideally positioned within a growing economic center. The city of Waco is situated in the Texas Triangle. Our new mill will be strategically located within 200 miles of approximately 80% of the population of Texas, providing easy access to a strong existing recycled fiber basket. Waco also has existing infrastructure and our customers. We're looking forward to joining the Waco community and working with the great talent base in the area. We appreciate the strong support and engagement we have received from the city and the county as we conducted our site selection process. From a timing perspective, we expect to start construction this quarter and begin commissioning the machine by the end of 2025, with production ramping up in early 2026. Our decision to build this mill shortly after K2 allows us to leverage key learnings from that process, both internally and with our external partners, which gives us added confidence in our ability to meet the projected timeline and quickly ramp up production on the new recycled paperboard machine. Slide 10 shows an updated map of our current and future mill network. With this new investment and targeted mill closures, We are looking at a simplified and optimized mill network that will lower costs and strategically increase capacity. Our virgin paperboard mills are located throughout the southeast, which is the best virgin fiber basket in the country. Our two industry-leading CRB mills in the future will geographically to make the optimized mill network will have 5% more capacity than we have today with the flexibility to adjust capacity in line with demand. Importantly, while the capacity expansion is driven by the addition of the new Waco mill, the benefits run across other substrates. The improved CRB quality made possible by our new machines will enable substrate optimization across our mill system as some packages that historically required virgin fiber can now be made with CRB. This will free up incremental merchant capacity in our other mills to meet our growing global demand. The combination of our global packaging growth plan and our mill network optimization plans will support integration rates in excess of 90% once the new mill is operational. Overall, this investment will extend our position as the lowest cost, highest quality paperboard producer in North America. Beyond cost, quality, and capacity, there are also client on slide 11. First, we will be increasing circularity of our system through an enhanced drum pulper investment. This investment increases our ability to clean and separate broader range of secondary fiber. Today, a large percentage of our paperboard waste that we cannot recycle is exported. Our Waco mill is designed to enable the recycling of 100% of our own internally generated paperboard side rolls and waste. We plan to cap offshore for processing. We are estimating around 200,000 pounds of side rolls and waste will be processed at the Waco mill versus purchasing external secondary fiber as we do today. This will also significantly enhance the security of the secondary fiber supply. This machine also increases our paper cup recycling ability. The drum pulver has the capacity to process up to 15 million paper cups per day. To take advantage of this increased recycling capacity, we have launched teams to engage with our customers and recycling partners to increase the collection rate of paper cups to further support recovery and a more circular economy. As you would expect, initial interest from customers is very high. Additionally, the CRV mill network optimization is expected to improve our environmental footprint. Our absolute greenhouse gas emissions are expected to decrease in our optimized North American CRB mill network by 12%. Investments in technologies such as the gas turbine to generate all the electricity needed by the mill, as well as produce steam for paperboard drying, will improve overall efficiency and reliability. Lastly, let me cover the financial highlights of the project on slide 12. This approximately $1 billion investment will be internally funded with operating cash flow over the course of three years. and is consistent with our balanced approach to capital allocation. We have flexibility to invest in our business and have a strong balance sheet with manageable debt levels. As Steve will detail further, we remain focused on continuing to reduce our net leverage in 2023. We expect the state-of-the-art mill will generate $160 million in incremental annual EBITDA at its full run rate, driven by approximately $100 million in cost reductions. and $60 million benefit through optimized milk path. We expect to realize approximately $80 million in return on the investment in 2026, the machine's first year of operation. In summary, this strategic investment showcases how we are extending our leadership in fiber-based consumer packaging to meet growing demand for more sustainable packaging solutions. Thanks, Mike, and good morning. Turning to slide 13 and the key financial highlights for the fourth quarter and full year, net sales increased 20% in the fourth quarter to $2.4 billion and 32% for the full year to $9.4 billion. Fourth quarter, net organic sales growth of 1% was in line with our expectations as our customers managed year-end inventory positions resulting in full year net organic sales growth of 3%. This represents our third consecutive year of delivering organic sales growth at or above the high end of our targeted range. Q4, just to even it out, of $413 million, increased $128 million, or 45%, year over year, meeting our expectations despite the $20 million unfavorable impact from the late December winter storm, which impacted paperboard production by roughly 40,000 tons during the month. The adjusted EBITDA margin of 17.3% improved 300 basis points from the prior year period. Full-year adjusted EBITDA of $1.6 billion increased $544 million, or 52%, from 2021. Adjusted EBITDA margins of 16.9% was up 210 basis points year-over-year. Adjusted EPS, excluding amortization of purchase intangibles, continued to expand, growing 78% for the full year to $2.33. On slide 14, let me walk through additional details of financial performance markets, operations, and capital allocation. Our food, beverage, and consumer sales grew 37% in 2022, driven by positive price, organic sales growth, and acquisition. Four-year sales were up 16% before acquisition. Food service sales also achieved strong growth of 25% from 2021. Significant growth in both sales and adjusted EBITDA were driven by positive pricing, organic sales growth, and acquisitions, partially offset by unfavorable foreign exchange. Four-year adjusted EBITDA was also positively impacted by $47 million from the K2 CRB investment and $15 million in synergies realized from the AR packaging acquisition. These positive benefits We're partially offset by supply chain challenges and costs that our teams successfully managed throughout 2022 in order to meet customer demand. For your reference, our sales and EBITDA waterfalls are available in the appendix of today's presentation. Turning to paperboard market data, industry operating rates reported by the FDA remain solid across substrates in the fourth quarter. SPS was 91%, and CRV was 95%. Our CUK operating rate remained over 95%. Company backlogs of seven to eight weeks remained healthy and are reflective of a balanced supply-demand environment. During the year, our strong cash flow engine really was on full split. In addition to investing strategic capital to grow our business, we returned capital to shareholders while significantly delivering our balance sheet. Net debt declined by $526 million to $5.1 billion. And as committed, we reduced leverage to 3.2 times at year end 2022 from pro forma 4.6 times at the end of 2021, a significant achievement. Liquidity remains very strong at over $1.5 billion. As a reminder, our Board of Directors announced a quarterly dividend increase to $0.10 per share that was effected in January 2023, given the strength of our cash flows and the progress we have made toward achieving our Vision 2025 goal. On slide 15, let me provide our guidance for 2023. Many of the positive drivers that fueled growth in 2022 will continue in 2023. We believe that organic sales growth driven by innovative packaging solutions, positive pricing, returns from the K2 investment, synergy capture, and core productivity will drive financial performance improvements year over year. 2023 sales are expected to grow over $500 million to approximately $10 billion. Adjusted EBITDA is expected to be in a range of $1.7 to $1.9 billion, reflecting an increase of 13% or $200 million at the midpoint. Adjusted EPS, excluding amortization of purchased intangibles, is expected to increase to a range of $2.50 to $2.90 per share. We expect to generate robust cash flow of $600 to $800 million. which includes an initial $250 to $300 million investment to support the new CRB mill in Waco, Texas. We are targeting further reduction in our net leverage ratio to approximately 2.5 times by year end. Slide 16 presents strong progress we have made toward achieving our Vision 2025 goal over the last three years. Our 2023 guidance reflects momentum in the business towards achieving the enhanced financial goals we established last February. We expect to further expand our margins, grow returns on invested capital, increase our paperboard integration rate, and deploy capital to support growth and reduce costs. Finally, as noted on slide 60, we believe Graphic Facts Gene is well-positioned to consider pursuing and investment-grade credit rating. Our leadership position and progress to date achieving Vision 2025 growth and return milestones, coupled with our confidence in the sustained future cash flows of the business, provide us with the flexibility required to continue to invest for growth while pursuing an enhanced credit rating. We will be engaging with the rating agencies in 2023 to assess options and the associated benefits of a potential upgrade. Thank you for your time this morning. I will turn the call back to Mike for closing remarks. Steve, thank you. Building on Steve's comments, cash flow generation in our business is significant and provides the means and financial flexibility to make investments, such as the new CRB mill in Waco we announced today, while simultaneously further reducing debt and exploring an investment-grade credit rating. Let me now wrap up my prepared remarks on slide 17. Through our established track record of delivering net organic sales growth and productivity gains, along with our long history of deploying capital strategically to strengthen and grow the business, we are creating value for all stakeholders. We are executing strategically. We are running a different race. Thank you for your time this morning. Let's turn the call back to the operator now to begin the question and answer session.