This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: 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.
spk01: 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.
spk14: 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.
spk08: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question and please do remember to unmute locally. We please request that you keep to one question and one follow-up. Thank you. Our first question today comes from the line of Ganshan Punjabi from Baird. Please go ahead. Your line is now open.
spk10: Yeah, thank you, operator. Good morning, everybody. Could you just start off by giving us more detail on what you exactly saw across the major verticals that you have exposure towards, you know, breakdown between food service, packaged food, beverage, And also, if there's any notable divergence across your two major geographies, I'm just asking because there's a lot going on with inventory destocking and so on.
spk14: Yeah, good morning. It's Steve. Just to start that, I think if you look at our organic sales growth, the 1%, we saw continued organic sales growth in Europe, which was driven by the innovation engine that we have there. We saw growth again in our food service platform. And all that was partially offset by very slight decline in kind of the core food, beverage, and consumer businesses in the Americas. So as we've seen in the past, the portfolio held up extremely well, some positives, and then obviously some of the places to be stocking, as you mentioned, we're not immune to, but it's very small and a slight decline in the Americas for food, beverage, and consumer.
spk10: Got it. Perfect. And then for my 2nd question, you know, obviously a very, very strong year in 2023 from an earning standpoint. And I know it's incredibly early, but as we think about our earnings outlook for 2024. Should we expect productivity to be in the vicinity of what you're projecting for this year? And at this point, do you foresee a path for earnings growth in 2024 to be up despite what will be a very difficult comparison?
spk14: Yeah, no, God, I'll start and then Mike can add some additional color. Obviously, you said it well, it's very early as we finish the first quarter. But, you know, as we look out to 2024, we would expect our model to continue to advance forward. We would expect to see 100 to 200 basis points of organic sales growth that we can earn on. And we would expect very strong productivity again in 2024. We'll have our normal $50 to $70 million of productivity we would expect that we would always have line of sight to. But it is noteworthy. We would expect to have less both planned and unplanned maintenance downtime next year as we look at it, both based upon some of the unplanned downtime that we've had here in the first quarter, as well as less planned downtime next year. So to your question, yes, productivity should be on the high end of our historical norms. And then overall, the balance sheet will be in a great spot. Obviously, if we continue to take that down, interest costs would move down relative to EPS. Or the balance sheet will be in a place that drives strategic optionality. I don't know, Mike, if you want to add anything to that. I think that's right. You know, Ganshan, if you look at the fine point we put on guidance, having our debt to EBITDA ratio down at 2.5 times or below here at the end of the year while we're investing in Waco. We've got a tremendous amount of optionality as we go into 2024 to continue to deploy capital in a way that benefits shareholders and customers.
spk10: Okay, fantastic. And congrats on the Chick-fil-A launch as well. Thank you. Thanks, John.
spk08: Thank you. The next question today comes from the line of Cleve Rucart from UBS. Please go ahead. Your line is now open.
spk15: Morning, everybody. Thanks for taking my question. Just a couple of brief ones for me because the story is pretty clear at this point. I guess to start, can you maybe give us some more color on what's driving that $100 million increase in EBITDA at the midpoint of the guidance? You didn't take revenues up, so is something on the margin? Is that really just the productivity you're getting out of K2? Is there some input cost there? What's kind of driving the change?
spk14: Yeah, I believe it's Steve. I'll be glad to do that. If you kind of look through the guidance, the incremental $100 million is primarily driven by an improvement overall to our price execution. We took the midpoint of that up $50 million, and we took the midpoint of our inflation guide down $50 million. So the net of that is the $100 million overall. The Kalamazoo positive is driving incremental productivity. It was offset by the first quarter unplanned downtime that we had at West Monroe. Those two negate out to roughly a zero. So, the net improvement is the improvement in overall price cost.
spk15: Got it. Okay. That's very clear. And then, you know, just quickly following up on the sort of the longer term, you know, vision 2025. The area that maybe you've got some work to do on is in the integration side. I'd just be curious if you can get to that 90% plus integration level with your existing platform, or if the strategic options that you opened the door to discussing a second ago would be sort of an area of focus downstream in terms of integration.
spk14: I think if you go back to 2018 and really look at it on a combined basis when we acquired the consumer packaging business from International Paper, our combined integration rate at that time was 62%. And we just announced this quarter that we increased 200 bps over where we finished last year. We're now at 75%. So we've made tremendous progress really over the last five years along those lines. And as you know, That's been a combination of both, you know, inorganic, you know, some tuck under acquisitions that we've done, as well as our organic growth, which is, you know, three-year staff, you know, coming into this year was roughly 10%. And we continue to grow here in the quarter. So it's going to be a combination of both of those things. But, you know, if you just kind of wind the clocks forward as that supply agreement that we talked about at the end of last year on wines, we'll be pushing towards 80% by the end of this year. 90% over the next couple of years.
spk15: Got it. Thanks very much for that. I'll hand it over.
spk08: Thank you. The next question today comes from the line of George Staffos from Bank of America. Please go ahead. Your line is now open.
spk11: Hi, everyone. Good morning. Thanks for the details and congratulations on the progress so far this year. I guess the first question on CRB and broadening the application that CRB can get into, including some food end markets, can you explain how you're getting around the food contact issues with recycled material and the substrate? Is there anything that you need to add that would ultimately take away from the sustainability of that package? And I had a follow-on.
spk14: we're going to call Rainier as we put in the materials there. And the reason for that is if you look at the appearance properties of that particular grade of paper that we're going to manufacture, the brightness and the smoothness are substantially similar to SPS grade. So when we think about that grade and how we're going to position it in the marketplace, it'll compete for some food applications for sure, both here and in Canada. But the real area that we believe we can push that You know, some of the health and beauty, pharmaceuticals, you know, anything that has a bottle or a blister pack that's kind of, you know, encapsulated with carton. Historically, those have been, you know, upper-end products. And so, by definition, they were packaged in SBS, and we did some of that as well. But now that we've got a CRB that can compete, a CRB sheet that can compete with, you know, the appearance properties there, you know, we see a lane there that's quite large that over time that we're going penetrate. And so that's really where our focus is going to be with that particular grade. We've got some other grades that we're able to make in Kalamazoo that have high sizing, that can work well in freezers. As you know, we've got the ability to make a grade that can, you know, package beverage. That's really what that slide was trying to point out, is that you're going to see more CRB in more places. And, you know, it's a couple hundred dollar a ton advantage over SBF. look at it, what it is. So you can imagine, you know, customers, if they can get the appearance capabilities, you know, there's a lot of interest there. So we'll be in trials here in the second quarter in a pretty heavy way. You know, our focus, you know, initially on Kalamazoo was to take the cost out. We committed that we would do that. As you heard Steve saying, it's prepared remarks. We're on track to deliver the $130 million of EBITDA improvement one year early. So now our focus has turned to how do we take advantage of what is a very unique formation back end or front end of the machine, our calendaring capabilities and our coding capabilities, which really no one else except for us have in North America here. And we've got them in Kalamazoo and we'll have them in Waco as well. So that's
spk11: Thanks for that, Mike. I had a couple of other follow-ons on that, but I'll save it for the offline. I guess the other question I had, so, again, I think so far not many companies that we track had organic revenue growth in this quarter. Having said that, at least from our math, the organic revenue that you put up was a little bit under 1%, you know, 0.6%, 0.7%, nothing to sneeze at, but a little bit below what you'd been targeting there. can you talk about whether there were any variances that were a bit surprising to you in terms of your key end markets? Maybe going back a little bit to Gansham's question and kind of what the exit rate is into 2Q relative to that 100 to 200 basis points. And relatedly, whether or not we're in a recession, it's obviously a tougher environment out there. Is there anything else that you're rolling out of the playbook as we go through the next couple of years to prepare for this sort of, you know, volume uncertainty that a lot of companies are dealing with. Thank you, guys.
spk14: Yeah. So I'll start by saying, look, we were really pleased with our performance in Q1 as it relates to volume. When you compare it against kind of the rest of the packaging world, we showed positive growth. And it's really a testament to our diversification. both Europe and food service grew. Food service was quite strong, and you'd expect it to be with unemployment at 3.6% and people wanting mobility and convenience. We expect that to continue to be the case. There was a little destocking in the America side of the business. As you said, we're not immune to that. But what you have to remember, for most of the products that we package, they've got an expiration date. They've got a born-on date. And so those We're not quite as exposed as maybe some industrial segments are along those lines. So that actually gives us confidence that we'll continue to find ways to grind out 100 to 200 basis points over the medium to long term. And if you look at how we exited Q1 and into Q2, I'd say it's substantially similar to what we saw in Q1. Okay.
spk11: I will turn it over. Thank you.
spk08: Thank you. The next question today comes from the line of Kieran DeBruyn from Mizuho. Please go ahead. Your line is now open.
spk13: Hey there, Kieran.
spk08: Please ensure you are unmuted locally.
spk02: Sorry about that. I was on mute. I apologize. Good morning. It seems like pricing is still uh trending better even though commodity prices are actually coming down so can you just talk a little bit more about how we think about that relationship into the back half of the year and if we see raw subside further how and I know it's preliminary but maybe how we should think about that into 2024. yeah Karen Steve and you you touched on it I mean price execution in Q1 that was very good very contractual as we've committed
spk14: long term. Obviously, given that we don't have any incremental new increases in the marketplace, you'll see some step down on the pricing, as you would expect. $230 million will step down into the ones and then down into the under $100 million to kind of get that path towards $500 million. The roll through obviously wouldn't be of substance as you kind of roll into 2024 because most of it would have been realized. That being said, overall inflation commodity input cost inflation while lower than the original expectations we established at the beginning of the year are still net inflationary and so it's pretty neutral uh in terms of the pricing implications of that overall across the portfolio um and so to your question as we kind of roll it in 2024 we'll continue to be extremely mindful of monitoring inflation and making price adjustments as needed to offset inflation if we continue to see it come through the business. So that part of the model wouldn't at all expect to be changed as we march, you know, through 23 and into 24.
spk02: Great. Thank you. And then maybe just one quick follow-up, and this was discussed a little bit before, but, you know, clearly you're generating strong cash. You have a very strong liquidity position. how do we think about capital deployment priorities as we go into 24? I mean, specifically, if you were to think about, you know, M&A or any investments along those lines, and I think it was discussed, like, is it focused on integration, or are there any places where you want to see, you know, further growth, whether it's geographic or in terms of, you know, health and beauty or some other areas where you maybe have a little bit less exposure?
spk14: Yeah, thanks, Kieran.
spk02: So, look, our focus in 23 is is really to make sure that we are at or below the 2.5 times lever. And you heard Steve talk about that in his prepared remarks. So that's our focus this year. For 2024, we'll continue to run a balanced capital allocation process like we've been doing for really the last five to seven years. And there's a variety of levers we can pull there. And we do those to max
spk14: debt balances continue to go down. And we're able to do that even with what we're doing in Waco. So we're quite excited about it.
spk02: Great. Thank you very much. I'll turn it over.
spk08: Thank you. The next question today comes from the line of Mark Weintraub from Seaport Research. Please go ahead. Your line is now open.
spk07: Thank you. One just quick clarification. So, obviously, you raised EBITDA guidance by 100 million EPS, also nice raise there. You didn't make an adjustment to the adjusted cash flow. I apologize if I missed it, but why no adjustment there?
spk14: Yeah, Mark and Steve, we're really just providing ourselves with good flexibility, primarily focused on Waco, the project best over the next three years uh as mike mentioned in his prepared remarks we're we're off and running uh so we're just giving ourselves some flexibility that if we keep that project you know on track and in steady state there might be a little more capex that would take us to the high end of the range there the more even down we earn we've got a little bit of cash taxes so we're just really being appropriate around some flexibility obviously debt pay down is job one this year we're on that path into the you know mid fours roughly on on a debt balance which will drive the leverage below two and a half times but we're just trying to give ourselves some flexibility on waco we really like the start we're off to we're investing the weather's been good and so we're just giving ourselves flexibility on the potential off to a good start in Waco.
spk07: Got it. And so it's just you'd be moving the spend forward. It's not that the spend on Waco would be more.
spk14: That's correct. As Mike mentioned, we're on track. No change to the billion dollars. It's just about the timing of the spend.
spk07: Right. And I just wanted to... hone in a bit on the open market sales. And I realize that your strategy is really focusing on the organic volume growth and you're doing a terrific job there. But maybe just give us a little bit more color on what's going on in that part of your business and how much of that is export versus domestic and how you are tactically working through that part of your business in the environment that we currently are facing.
spk14: Yeah, thanks, Mark. And good morning. Appreciate the question. From our standpoint, our export open market sales are very, very small. So we'll start with that. And really, as you've seen us do over the last really five years, is we're systematically doing a strategic retreat from certain parts of the open market. North American open market paperboard segments because we need those tons to run our own business as it continues to grow. And so you saw that on the waterfalls there. And all likelihood you'll see it again in quarter two because Q1 and Q2 last year were pretty strong quarters, basically anything that wasn't how we use those tons, and they're really focused to help us grow our own converting and cup business and ultimately take care of long-term customers that we've got on the open market side. So that's what we're doing.
spk07: Okay.
spk08: Appreciate it. Thank you. The next question today comes from the line of Mike Rockland from Travis Securities. Please go ahead. Your line is now open.
spk12: thank you uh thanks mike steve and melanie congrats on a very good quarter thank you um just on on i want to get a sense mike from you in terms of how do you how do you think about your portfolio on a going forward basis so obviously you built that kalamazoo it's ahead of expectations you're building out waco right now is this something that we should expect to be ongoing so that after you're done with waco maybe we should expect another capital spend period where you build up you know there's another crb no low-cost, efficient, and then basically, you know, that's something that you're going to keep doing on a go-forward basis. And, you know, similarly, are there any significant enhancements that we should expect from you with respect to both SDS and or CUK?
spk14: Michael, can you repeat the last part of that question? I want to make sure I have it.
spk12: Sure. No, sorry about that, Mike. I just want to know, in addition to what you're doing, you know, in terms of CRB optimization, are there any other significant enhancements we should expect from you guys on SBS and CUK.
spk14: Got it. No, thanks. Thanks for the question. As I talked about in my prepared comments, and I appreciate you calling it out, is what we're really excited about here at Graphic is kind of when we exit the Waco startup, we're going to have six world-class mills, two that make CRBs, two that make C-UK and two that make SPS. So we've got the redundancy, we've got the cost structure we like. They're very focused on what they do with strong leadership teams and very large, well-capitalized complexes like we've got there. And the net on adding Waco, as I said in my comments, allows us to have roughly 5% additional tons. So we'll call it 200,000 tons across the 4.4, 4.5 billion area. you know, million-ton network. You know, so if you think about that, what we're really excited about is we're going to be able to kind of shift substrates around within that six-mil system, within the substrates, to really help us grow our business. And so we believe, actually, that the CapEx requirements into those mills, you know, the CUK and the SPS mills will actually be less because we're going to be able to open up additional tons, you know, in order to, you know, It would bounce off the CRB side. So, you know, that's really one of the reasons why we did what we did in Waco, too, because it frees up those tons that we'll then be able to use. So, you know, what we'll look to do in those mills is cost-reduction projects that, you know, structure to take out carbon, take out input costs, because we're going to have the tons already that we need to run and operate and grow our business. Yeah, Mike and Steve, just to add to that, as we've talked from a modeling, long-term modeling perspective, once we are in, you know, beyond Waco here over that three-year period of time, we can see CapEx moving back down into that 5% sale type range, similar to historical, that allows us to maintain the assets at a very high level and support that 100 to 200 basis points of growth.
spk12: Got it. Very clear, and I appreciate the color there. And just one quick question on what you're seeing now with respect to demand in terms of April and anything, you know, April trends and anything thus far. I know it's only the second day of May, but anything you can comment on in terms of trends post-1Q. Thank you.
spk14: So, substantially similar to what we saw in Q1. Got it. Great. Thank you. Thanks. Bye.
spk08: Thank you. The next question today comes from the line of Adam Samuelson from Goldman Sachs. Please go ahead. Your line is now open. Yes, thank you. Good morning, everyone.
spk10: Morning.
spk04: Morning. So I guess the first question is actually a clarification, and if I just want to go back to where you were in mid-February at the time of fourth quarter results, it seemed like the price-cost kind of benefit that you realized in the first quarter was considerably above what you'd frame back in February. And I just want to make sure that we're properly calibrated on kind of what the source of it was. Was it just natural gas that really fell and was weak through the first quarter? Or help us think about the key moving pieces that drove that to be such a positive surprise in the quarter.
spk14: Yeah, Adam and Steve, price execution exceeded our expectations by a bit just because of just good strong overall performance. commercial performance and execution of our pricing commitments. And then, yes, overall inflation in the quarter was modestly below expectations, hence the move in the full year guidance range down. And so, yes, you touched on The pieces of parts, we've got some things moving down on the commodity front that are well chronicled, nat gas, some logistics costs, some OCC. But it is being offset by items that are moving up still, like the paperboard that we acquire and purchase, like chemicals. And so we've moved the range down of inflation, you know, down to the $100 million to $300 million range. dollar range, the current mark-to-market would be on the lower end of that range, consistent with the conversations that we've seen and that you just were asking about relative to kind of the mix of commodity cost movements.
spk04: Okay. Now, that's really helpful. And then a second question on K2 and thinking about the implications for Waco. And this partially got addressed earlier, but as you think about K2 kind of exceeding design capacity in terms of output, it allowed you to make the actions of TAMA earlier. But how does that, as you kind of get further along with K2 as it continues to kind of reach or exceed its investment case earlier than you thought, how is that informing WACO and how you plan for it and how you think about the potential returns in EBITDA where I think some of the network optimization benefits that could come from Waco were still kind of upside to the investment case.
spk14: Thanks for the question, Adam. I guess I'll start by saying the success we're seeing in Kalamazoo here in terms of overall productivity continues to give us increased confidence in our ability to execute the Waco project. do so in a way that delivers the $160 million of improved EBITDA that we announced when we announced the project. So that's really an important aspect of that. What Kalamazoo ramping up to 550,000 tons annually does, which is consistent with what we announced we would do on the Waco machine as well. it really just allows us to pull forward a closure that we had announced that we were going to do later on in the process and deliver, you know, the additional $30 million of EBITDA here in 2023 that Steve outlined in his prepared comments. So we're just a little ahead of the game. We're going to have, you know, the 5% of net tonnage that we talked about there, 200,000 tons still, that's our plan. Once Waco's fully operational and ramped to speed, And as I said earlier, with one couple of questions we got, that gives us a lot of optionality to balance out across our existing, you know, six large mill system.
spk04: Yeah. Okay. All right. That's all. That's all. I'll pass it on. Thank you.
spk14: Thank you.
spk08: Thank you. The next question today comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead. Your line is now open.
spk05: Great. Thanks for taking my question. I hope you guys are well. We're at a really good quarter in progress so far. I guess I just wanted to drill down back on the price-cost. So appreciating that you did bring down the cost side a little bit. Was that kind of chemicals and wood and energy as well? Or what were some of maybe the bigger categories that drove that? And I'll start with that. Thank you.
spk14: Yeah, no, Arun and Steve, it's the items that are pretty well known. I think the $100 to $400 million of original guide for inflation, we took the top end down from $400 to $300, and it's mostly because of a not necessarily seen yet a re-inflationary environment, which is why we had the original range. And yes, some of the items that are down, NatGas, pretty well chronicled, some logistics costs, and OCC, which was kind of occurring when we put the original guide together. So those are the items we look at as a basket of commodities, what are expectations around it. And as I mentioned a moment ago, just repeating it, the mark to market, as we sit here today, would be on the lower end of the $100 to $300 million of commodity input cost inflation.
spk05: Okay, great. Thanks. And then as a follow-up, you know, it seems like the pricing environment is also holding up relatively well. Could you just maybe walk through the three grades and just tell us what you're seeing from a supply-demand perspective? It does appear that You know, there may have been some looseness on the CRB side, but it doesn't appear that it's affecting you. And then is it also maybe because, you know, some of the consumer categories are doing better than industrial, and that's why, you know, Boxboard's holding up a little bit better than Container Board. Thanks.
spk14: Arun, it's Mike. So just working off facts with what the AFP probably the best way to answer your question I mean look you know it's at a high level you know you saw that we talked about our backlogs roughly six weeks across all three substrates on average that's a very healthy you know backlog and it really allows us to service our customers you know extremely well and as we talked about over a year ago now I actually went back and looked at that transfer and we said you know at nine to ten weeks we just don't have the ability to take care of our customers Because many of them run just-in-time manufacturing processes, and they need to be able to respond to the needs of the consumer, which change pretty wildly, as you know. So that's solid. The actual operating rate for CRB was 94.7% for the quarter, which is very healthy. SBS was a little bit lower. folding was down at 85% for a total of 90 but we also know because they publicly announced it that one of our competitors is removing a mill from the system and at 360,000 tons going away that'll be You know, it's obviously in the mid-90s as well. And then on the other grade, which is, you know, combined with gypsum wall facing, clearly we had some unplanned downtime that factored into it. Presumably gypsum wall facing was also, you know, somewhat weak just given the housing market. So that's what we're thinking about. And I guess maybe, you know, since you opened the door for me to talk about it, I really want to spend a few minutes on this call just saying that I think we're making a mistake as we kind of look at it. just to try to define us, you know, graphic packaging as, you know, backlogs and, you know, operating rates, because at a high level, you know, we're a packaging company that happens to make the raw material that we actually convert in our system. And we've got the ability, given the markets that we've got and the high level of integration that we do have, to run that system to demand. And that's, in fact, you know, here going forward. So it's really more relevant for us and for you, at least in Steve and my opinion, to have you guys think about us in terms of how we're driving overall package growth and cup growth, which was positive in the quarter. And then, you know, we happen to make the raw material that we make. So it's not that those statistics aren't relevant because they are, but sometimes I think they're just, you know, an over myopic focus on those two things. So I'd ask you guys to kind of consider that as you think about the company you're going forward.
spk05: Okay, great.
spk08: Thanks a lot. Thank you. The next question today comes from the line of Gabe Hajdi from Wells Fargo Securities. Please go ahead. Your line is now open.
spk09: Mike, Steve, good morning. Appreciate that I'm not a paper maker. And I think it's really great that you guys are I guess, exceeding kind of main plate capacity on K2. But I'm just curious, it seems pretty early for a project of that size to maybe extrapolate out, you know, the fact that, okay, you know, maybe we exceeded productivity for a few months or six months or something like that. So why not keep that? I guess the question is the strategy behind maybe why not keep that in your back pocket and take a little bit of EDT across your CRV system if and when things do, in fact, slow, as opposed to take this more permanent adjustment to the system kind of shortly after buying that panel mill?
spk14: Yeah, I appreciate the question, Gabe. And look, we've had a lot of those discussions internally here. The bottom line is just the momentum we have is incredibly solid. And our confidence level that we can service the business and the optionality we have within the existing assets that we still have very, very high where we wouldn't do it. The last thing we want to do is, you know, put our customers in a situation where they don't have the material that they need to run their business. We just wouldn't do that. So, you know, look, I think, you know, relative to what we've done here, we do have a cautious lens on it and we've got those contingencies covered. So we can make that announcement that we're making and have a lot of confidence that we're going to be okay.
spk09: All right, and then I guess I appreciate you advise us kind of maybe not spend too much time focusing on these statistics. I'll just ask the question, to the extent that we roll forward in the second quarter, and maybe you tell us backlogs are at four and a half weeks, when do you kind of start to, I don't want to say the alarm bells go off, but just make different decisions internally in terms of running the business? when those backlogs start to compress? Or is that, I'm assuming that's a determining factor, but not the end-all be-all.
spk14: It is. And look, as I mentioned earlier, the great thing that we've got at Graphic given our high integration rates is we've got the ability to run to demand. So the last thing we're going to do is run a bunch of paperboard and stick it into inventory and tie up a bunch of working capital. And look, that's all in our outlook. And it's all in how we're operating the business. And we do that as a matter of normal course. And you can expect us to be very thoughtful in terms of how we're operating the business here. And that's why I think it's just so relevant for you to look at the top line growth of the business relative to cartons and cups and the markets where we participate in, which are holding up very, very well. And just understand that you happen to be a packager that makes our own material. And so, yeah, I think I've covered that topic as best as I can.
spk09: Appreciate it. Thank you.
spk08: Thank you. The next question comes from the line of Kyle White from Deutsche Bank. Please go ahead. Your line is now open.
spk13: Hey, good morning. Thanks for taking the question. I wanted to focus on the food service opportunity you highlighted in the 600 ton addressable market for foam and plastic cups that could convert to fiber based in the US. Does your asset based capacity situation allow you to take advantage of this opportunity? or would you need to shift the cup stock versus folding part and improve mix while holding capacity constant uh or maybe just what what can you do to ensure that you maintain your market share uh here for this opportunity yeah kyle's mike thanks for the question um the um the answer would be maybe just take a step back to remind everybody we make you know almost 400 000 tons of you know
spk14: integrated machine that we have in Texarkana we have the ability to make cup stock in Augusta and we do and we have here already this year in 2023 in order to kind of service our business and take care of customers so you know as we have opportunities to grow our cup business which is a stated strategy we will absolutely ship SBS general quality card tons into cup stock you know it makes a lot of sense for platform we were talking about that we've got the ability to leverage, and we're kind of uniquely positioned to be able to do that because we already have those capabilities. If Chick-fil-A launches beyond where we currently are with roughly 10% of their stores, there will be investment that's needed in our complaints to make sure that we've got the capacity to take care of all their needs on a wide distribution national profile that they operate in. But again, that's all within the 5% of sales CapEx number that Steve talked about. And we'll just deploy the CapEx there because it's where we'll be growing. So from a modeling standpoint, really no change. It just really supports the 100 to 200 pips of organic growth that we've got a lot of confidence in here over the medium to long term. Yeah, Kyle, just to add to that, to Mike's point, we have the SPS. capacity capability within 1.2 million tons to service those growing needs and the only capital requirements would be on the converting the cup making side which we can do plant by plant and so that's an excellent optionality and it's really in support of you know 100 200 basis points of organic growth over the next several years
spk13: Josh, that makes sense. And then on labor, the labor and benefits inflation is running twice the headwind as it was two years ago. Now, obviously, it's on a bigger base with the AR packaging acquisition, but still a pretty sizable increase. Are there opportunities to kind of reduce this headwind using automation, or is this just kind of new normal inflation rate for labor going forward?
spk14: Yeah, Kyle, Steve, just briefly, it's generally the new norm. However, A lot of our ongoing capital tends to be around automation. And so taking labor, lower skilled labor out where it makes good sense to do. We've got a long-term multi-year strategy to do that within our capital spending expectations. And the labor and benefits has also become a big other. So insurance and property taxes and other things that don't fall into the commodity category are fundamentally up. And so that's, you know, we're obviously attacking all of that in terms of the overall footprint. But yes, AR vaccine came in, the numbers moved up, probably modestly escalated because of higher labor rate inflation, which might more stabilize over time. But I think about it more as the new norm, which means that our overall productivity commitments need to be at or above that same category as we talked at the beginning of the call.
spk13: Gotcha. Thank you. I'll turn it over to Kyle.
spk08: Thank you. The next question today comes from the line of Phil Ng from Jefferies. Please go ahead. Your line is now open.
spk06: Good morning, Mike. Good morning, Steve. This is John on for Phil. Thank you for all the details and congrats on a good quarter. I wanted to just go back quickly to the TAMM for a second. You talked about it closing in the second quarter here. Are there any cash costs associated with closing that mill?
spk14: John and Steve, they're modest. We had incentive programs in place for the team there with the longer term in mind. But no, there's nothing that we characterize as of substance relative to the cash costs there. And we're going to shut the mill down as we announced. So it was just a move forward.
spk06: Right. Okay. And if I could just quickly jump to West Monroe in the second quarter. It's already back up and running, but are there any lingering impacts from that in the second quarter? No. Great. And then if I could just squeeze one more in. During the quarter, It was reported that Graphic had a new partnership with Fortprint Packaging in Bulgaria. But I didn't really understand from the press release what exactly the nature of the partnership was. Can you help us understand the nature of that and maybe are there any financial implications from that partnership?
spk14: No, just an opportunity to have a converting partner that can help us grow our business. in terms of its overall impact on the corporation, John. But it's important for that growing segment of Europe. And John and Steve, no cash investment. That's just the relationship with the converting partner, as Mike said, who can help us grow in that marketplace with assets that we don't have on the ground. But there's no cash investment.
spk06: Got it. Understood. Thank you guys very much. And I'll turn it over.
spk08: Thank you. Our final question today comes from the line of Anthony Petraneri from Citi. Please go ahead. Your line is now open.
spk03: Hey, thanks for squeezing me in. I just had a quick one. Understanding you don't give quarterly guidance, is there maybe a way to think about the cadence of how earnings might flow through over the course of the year in terms of maybe being a little second-half weighted? And as we think about, you know, the remaining three quarters of the year, are there any particular, you know, tough comps from a volume perspective or outages that we should sort of keep in mind for modeling purposes?
spk14: Yeah, Anthony and Steve, just briefly, you know, we're executing on about 80% of our maintenance downtime here in the first half of this year. So you're correct from an earnings cadence perspective. It's slightly edging towards the second half, but it's all planned. Maintenance downtime implications you'll see in the second half in the details of our guidance that we pick up about $30 million in reduced planned or maintenance downtime in the second half with some of those being headwinds in the first. And you're correct, we don't provide quarterly guidance. I think you can get a sense for last year's EBITDA. in the 400 range you could kind of stare through price cost and a little bit of net maintenance downtime headwind that we've chronicled in the details uh probably give you a good sense for where where q2 would be heading okay that's very helpful i'll turn it over too bad thank you that concludes today's question and answer session so i'd like to pass the call over to mike dos for any closing remarks end in August when we report our second quarter results. Thank you and have a great day.
spk08: This concludes today's conference call. Thank you all for your participation. You may now disconnect.
Disclaimer