Graphic Packaging Holding Company

Hello and welcome to today's graphic packaging first quarter 2023 earnings call. My name is Bailey and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during today's call, please press star followed by one on your telephone keypad. I would now like to pass the call over to our host, Melanie Skeegis, Head of Investor Relations. Melanie, please go ahead.

Good morning and welcome to Graphics Packaging Holding Company's first quarter 2023 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 first quarter earnings presentation, which can be accessed through the webcast and also on the investor section of our website at www.graphicspackaging.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 filings with the Securities and Exchange Commission. With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone, and thank you for joining us on the call today. Graphic packaging is off to a great start in 2023. We continue to advance our proven strategies centered around running a different race as we build our leadership in fiber-based consumer packaging. strategic capital investments and enhancing long-term partnerships with customers while expanding consumer packaging expertise and innovation capabilities. During the first quarter, strong execution by our global team enabled us to deliver on this strategy, create value for customers and shareholders while positioning the business for the future. Let's start with this quarter's key highlights on slide three. Amid a challenging macroeconomic backdrop, we drove continued net organic sales growth and margin expansion during the first quarter. This performance is a testament to the resiliency of our business model, as well as the strong and growing consumer demand for renewable, recyclable fiber-based packaging. As part of our differentiated strategy, we continue investing to capitalize on this clear consumer preference by building new capabilities and driving innovation. Our recycled paperboard investment in Kalamazoo is exceeding expectations and we are making progress to build upon our distinctive competitive advantage with the new mill in Waco, Texas. Importantly, we're not the only ones investing in response to the consumer preference for more sustainable packaging. Leading brands and manufacturers recognize this consumer trend and the solution our new capabilities and innovations can provide. We are pleased to announce today that Chick-fil-A, is going to market later this month with our new highly insulated double-wall fiber-based cup as a potential long-term solution for their beverage program. This is the latest example of the significant opportunity for us within the food service space. Given our strong start to the year and confidence in the path ahead, we are raising our full-year EBITDA guidance by $100 million to $1.9 billion at the midpoint of the range and updating other guidance metrics as a result. In 2019, we established our original Vision 2025 goals. With the increased outlook for 2023 we are providing today, we are on track to achieve those original targets two years early and have a clear path to meet the enhanced Vision 2025 financial goals we announced in February of 2022 at our investor day in New York. Slide four captures our key financial metrics for the first quarter. Sales increased 9% over $2.4 billion primarily by positive pricing and organic sales growth. Adjusted EBITDA $484 million grew at a faster pace than sales as our margin expanded by 430 basis points to 20%. This represents a new high for adjusted EBITDA margin and provides further confidence in achieving our Vision 2025 financial goals. Taken together, our strong sales and EBITDA performance led to adjusted earnings per share of $0.77, an increase of 60% versus the prior year quarter. As we deliver on our near-term financial goals, we are continuing to invest in new capabilities to build on this strong performance in the future. Most notably, we are making considerable progress on our CRV platform optimization, which is detailed on slide 5. Our new K2 machine in Kalamazoo results in graphic package coated recycled paper board mill. The largest capital investment we have made to date, K2, came to life in early 2022 as we successfully ramped production on the machine. Now that we are fully ramped, the capability of K2 is exceeding our expectations in several ways. First is quality. We are now capable of producing a new, innovative, higher quality CRB grade that meaningfully expands opportunities for the substrate I will elaborate more on this exciting development in a moment. Second is yield. We now expect K2 to deliver 550,000 tons of annual production compared to the 500,000 tons we previously announced. And finally, financial benefits. We had previously announced the investment would drive approximately $130 million of incremental annual EBITDA improvement over three years. I'm pleased to report that we now expect to reach that target in only two years, a full year ahead of schedule. The outstanding execution of the K2 ramp is a testament to the great work and dedication of our Kalamazoo team. Additionally, the success of the investment provides us with the expertise and confidence to continue to strategically invest to redefine the fiber-based consumer packaging landscape as we are doing in Waco. We announced the Waco investment less than three months ago key employees. We remain on track to meet our previously communicated timeline, including the startup of the machine in the first quarter of 2026. Taken together, these investments help us meet the increased demand for CRP at an unmatched cost compared to our competitors. The investments in Kalamazoo and Waco will allow us to optimize our network further by closing higher cost mills while still expanding capacity strategically over time. Due to the better-than-expected production from K2, we have decided to close our CRB mill in Tama, Iowa during the second quarter, earlier than we had previously anticipated. Among our recycled paperboard mills, Tama has the smallest capacity and the highest cash production cost per ton. This closure advances our strategy to simplify our paperboard network while strategically expanding capacity and lowering costs. Factoring in both Waco and planned mill closures, our optimized mill network will net approximately 5% more capacity than we currently have today with flexibility to adjust capacity in line with demand. As I mentioned a moment ago, our CRB investments don't simply deliver cost and production advantages. They enable us to make an entirely new grade of the highest quality coated recycled paperboard available. By utilizing K2's state-of-the-art technology, We can produce the new grade of recycled paperboard with enhanced appearance and performance characteristics as well as superior economics. The improved quality expands the breadth of our opportunities for CRB-based packaging to new consumer and markets that have historically only been served by virgin substrates, such as FBB or SBS or other materials. Slide 6 illustrates a few examples of where we expect CRB to play over time. In short, we expect to see CRB in more products and consumer experiences. We're in the early innings and are currently conducting trials of our higher-quality CRB grades. We look forward to sharing more on these opportunities in the coming year as part of our ongoing innovation story. The adoption of CRB for certain packaging applications historically requiring virgin fiber will enable continued substrate optimization across our mill network. This is important as it frees up virgin capacity in our other mills to capture growing global demand without the need for additional capital investments. Our CRB investments in paperboard-grade innovation are clear examples of what I mean by running a different race. We are creating opportunities for ourselves and for our customers to deploy fiber-based consumer packaging options in places where that simply hasn't been possible in the past. This is a key factor in driving not only the depth of our customer relations, growth, and performance. Slide 7 is a great example of innovation in our virgin substrates and the enormous opportunity to replace packaging created from non-renewable resources not as widely recycled as fiber-based packaging. Illustrated on this slide is a proprietary, highly insulated, double-walled fiber-based cup solution developed as an outstanding alternative to the foam cup. Our new cup boasts a number of features that set it apart from others available at quick service restaurants, providing consumers a to-go cup solution that sweats less, is more durable, and has enhanced insulation properties. Delivering added appeal to consumers are the improved sustainability features. The result is a better beverage experience for the consumer. Chick-fil-A is the largest quick service chicken restaurant chain in the United States and an existing graphic packaging customer. Today, we are announcing an expansion of that relationship with the launch of our proprietary cup innovation in Chick-fil-A locations from California to Maryland. Stage one of that launch is focused on approximately 10% of the customer's restaurant footprint. Over time, our innovation can be a potential long-term solution for Chick-fil-A's beverage program, including the ability to work in both cold and hot beverages, driving innovation transition toward more sustainable packaging solutions and how we are partnering with them to effectively manage that transition. While progress has been made to transition away from foam and plastic, Americans still use roughly 45 billion of these cups each year. Consumers are calling for a change and an environment with less waste. Our customers are looking for us to help. We believe our new insulated cup innovation has tremendous potential to win and what we estimate is a $2 billion addressable foam and plastic cup market in the U.S. To put that in different terms, our $2 billion addressable market opportunity equates to roughly 600,000 tons of SBS paperboard demand. We are uniquely positioned to service this demand by leveraging our integrated platform as our customers meet the call from consumers. Our CRB mill project underway in Waco, with its enhanced cleaning and separation system, will provide increased cup recycling capabilities. We look forward to partnering with QSR customers like Chick-fil-A on enhanced cup recycling programs in support of a move to a more circular economy. And with that, I'll turn the call over to Steve to provide more detail on the quarter's financials. Thanks, Mike, and good morning. Turning to slide eight and the key financial highlights for the first quarter. As Mike mentioned, it was a great start to the year. Net sales increased 9% year-over-year to over $2.4 billion, driven by positive pricing execution and 1% net organic sales growth, partially offset by planned lower open market paper board sales and foreign exchange impact. As you can see on the right side of the slide, Our sales performance benefited from the diversity of our portfolio. Our food, beverage, and consumer markets, which together represent approximately 80% of our portfolio, increased sales 8% year over year. The food service market, which represents approximately 20% of our portfolio, grew by 13% compared to the prior year period. Adjusted EBITDA was $484 million. of $134 million over Q1 last year. The 38% year-over-year increase was driven by price execution, organic sales growth, and net performance. We're very pleased to see adjusted EBITDA margins at nearly 20% during the quarter, consistent with our goal for Vision 2025. Adjusted EPS continued to expand. growing 60% year-over-year to 77 cents. As a reminder, our sales and EBITDA waterfalls are available for reference in the appendix of today's presentation. Liquidity remains very strong at over $1.2 billion. Our paperboard integration rate increased to 75% during the quarter, up 200 basis points from the prior year period. Meanwhile, we are pleased that our backlogs and operating rates remain healthy. Our backlogs were down slightly to six weeks across all substrates. This level is more in line with historic norms and supports our growth while allowing us to provide exceptional service to our customers. Operating rates across the business remained high in the mid-90s in the first quarter. We continued to return cash to shareholders. consistent with our balanced capital allocation approach. During the quarter, we paid a quarterly dividend of 10 cents per share, totaling $31 million. We also repurchased $28 million of shares to offset dilution related to long-term incentive compensation. Slide nine features our current guidance targets for 2023. Given our strong start and outlook for the balance of the year, We are pleased to be in a position to increase our 2023 guidance for adjusted EBITDA by $100 million to $1.9 billion at the midpoint of our guidance range. As a result, we have also increased expectations for adjusted EPS by 20 cents to a range of $2.70 to $3.10. and updated our year-end net leverage ratio target to be at or below 2.5 times. We are also reiterating our guidance for sales and cash flow. Robust cash flow generated from our business this year will result in further pay down of debt while providing flexibility for continued investment in the business. Turning to slide 10. You can see the substantial progress we have made since announcing our original Vision 2025 goals in 2019. As Mike already noted, the improved 2023 guidance we are announcing today puts us on track to achieve our original Vision 2025 financial goals two years early. We remain confident in the path ahead and our ability to achieve our enhanced Vision 2025 financial goals provided last year. Thank you for your time this morning. With that, let's turn the call back to the operator to begin the question and answer session. Operator.