Graphic Packaging Holding Company

Hello and welcome to the Graphic Packaging Second Quarter 2023 Earnings Call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. And I'd like to hand over to Melanie Skijas, Vice President of Investor Relations. The floor is yours. Please go ahead.

Good morning and welcome to Graphic Packaging Holding Company Second 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 second quarter earnings presentation, which can be accessed through the webcast and also on the investor section of our website at www.graphicptg.com. Before I turn the call over to Mike, let me remind you that today's press release will the second quarter earnings presentation, and the statements made by our executives include both the booking 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 risks identified in the press release and the presentation as well as our filings with the Securities and Exchange Commission. With that, I'll turn the call over to Mike.

Thank you, Melanie. Good morning, everyone, and thank you for joining us on the call today. We delivered solid results during the second quarter while actively managing supply to meet demand. Importantly, our global team continued to advance key strategic initiatives to drive sustained future organic growth and higher profitability through commercial execution quality improvement, and cost reduction. Central to this strategy is the strength of our packaging network and our ongoing efforts to ensure graphic packaging is the lowest cost, highest quality paperboard producer in North America focused on consumer packaging globally. The second quarter demonstrated both of the advantages of our global network and our continued actions to build upon our leadership position. Starting with highlights on slide three. Our confidence in the long-term strength of the demand for renewable and recyclable fiber-based packaging is high. As a result, we remain focused on strategically expanding capacity across our network to service this demand while lowering costs, improving quality, and enhancing our innovation capabilities. We continue to optimize our network and will maintain important flexibility to manage production to the demand environment. This flexibility enables us to respond to short-term changes in demand, such as the customer and retailer inventory to stocking that has taken place across the industry in recent months. By actively managing supply to meet demand and our commitments to a disciplined commercial approach, we are meeting the needs of customers and delivering results for stockholders while adapting to fluctuations in demand. The short-term stocking dynamic does not impact our confidence in the opportunity for long-term, sustained organic growth or our plans to invest strategically to best position graphic packaging to provide the renewable and recyclable packaging consumers prefer. I am pleased to report that our K2 machine investment in Kalamazoo continues to meet the return expectations, and the new recycled paperboard investment in Waco remains on track become another cornerstone for our optimized mill system. The acquisition of Bell Incorporated, which we're pleased to announce today, is another example of a strategic investment we are making in our packaging network. The pending acquisition will add three new packaging facilities, increase our integration rates, and expand the customers and categories we serve. As we invest in growth through both strategic M&A and capital investments, We remain focused on returning capital to stockholders as an important part of our balanced approach to allocating capital. We are pleased that the Board of Directors has approved a $500 million increase to our share repurchase authorization, making a total of $590 million available for potential future share repurchases. Finally, we are reiterating our full year 2023 guidance and remain on track to meet or exceed our enhanced Vision 2025 financial goals. Our innovation engine continues to increase and diversify opportunities for consumer experiences with fiber-based packaging as we work with customers to deliver sustainable packaging that consumers prefer. Because of this long-term trend towards more recyclable and renewable packaging, We remain confident in our ability to drive 100 to 200 basis points of net organic sales growth annually for years to come. Slide 4 captures our key financial metrics for the quarter. Second quarter sales increased 1% to $2.4 billion, with adjusted EBITDA growing 14% to $453 million as margins improved 210 basis points. These results led to adjusted earnings per share of 66 cents, a 10% increase year-over-year. Given the short-term destocking dynamic we faced in Q2, it is important to look at the year-to-date results where sales increased 5%, adjusted EBITDA improved 26%, and adjusted EPS was up 31% year-over-year. It is helpful to view this quarter in the context of the supply chain disruptions that dominated the headlines a year ago. Retailers have not historically held high levels of packaged goods inventory in part because the products we package have expiration dates. In the middle of last year, however, many accumulated supplies to insulate themselves from potential shortages. 12 months later, we are seeing the offsetting effect of that buildup in slower organic sales as retailers and customers work through their inventory. We are actively responding to ensure we are keeping our inventory backlogs, and operating rates at appropriate levels. We have and will continue to utilize planned maintenance downtime, scale back production to meet demand, and manage cost implications. Importantly, we've continued to realize the value of our packaging solutions in the marketplace, providing confidence in our ability to deliver sustained EBITDA margins in the 18 to 20% range. Looking ahead, we believe retailer stocking will be a relatively short-term headwind with normal customer order patterns and organic growth expected to return in the fourth quarter of this year. On slide five, you can see examples of two key initiatives we expect will drive growth and category expansion. An entirely new grade, the highest quality recycled paper board available, which we call Paysetter Rainier, and our proprietary cup innovation that launched with Chick-fil-A during the quarter. Paysetter Rainier is an innovation that will facilitate recycled paper experiences thanks to the surface brightness and smoothness enhancements that have historically only been possible with virgin fiber substrates. While Rainier will be a great-looking package option for many food applications, we are also excited about its potential for health, pharmaceutical, and beauty products that, for example, utilize packaging to hold a pill bottle or a blister pack. Health and beauty customers prioritize packaging appearance and readability. We will continue to look for opportunities to win in this large market with our lower cost packaging solution made from recycled materials. Customer trials for PaceCenter Rainier are underway and we've received excellent feedback on the quality of this new innovation. We are focused on driving continued packaging trials with customers and plan to ramp up production in the second half of the year and into 2024. Last quarter, we announced our longstanding customer, Chick-fil-A, was going to market with our new, highly insulated double wall cup as a potential long-term solution for their beverage program. Three months later, the rollout to 10% of their stores is on track and going well with excellent feedback from Chick-fil-A and their consumers. Our proprietary fiber-based cup has a number of distinct advantages that allow it to operate similar to the foam cup. It utilizes a built-in insulated sleeve that controls condensation, increases the rigidity, and is made with sustainably sourced material. Turning to slide six, you can see our current paperboard mill network with the production strategically located near our packaging facilities. Our newer K2 machine in Kalamazoo utilizes leading-edge technology and produces the highest quality coated recycled paperboard for consumer packaging in the world. The new machine and mill campus is a crucial part of our network that gives us flexibility to optimize our CRB production to meet packaging demand. The success in Kalamazoo is an important example of our long-term strategy of driving organic growth and delivering strong returns on capital investments. We believe the strategically located Waco recycled paper board mill will also deliver tremendous cost and quality benefits when completed in late 2025. Progress at the Waco site continues with a number of milestones achieved, including key mill management roles have been filled, 85% of the equipment has been ordered, foundations and floor pads completed for the finished goods warehouse, and we are pouring concrete for the recycled fiber warehouse floors. These investments support growth, drive down costs, and advance our position as the leading fiber-based packaging company focused on consumer markets. On slide seven, you can see details of the acquisition we announced today. Bell Incorporated is a family-owned packaging company that has been in business for over 40 years. It operates three packaging facilities in South Dakota and Ohio. The acquisition strategically expands our packaging network and customer base in North America, while also increasing integration rates. Bell provides packaging to a host of household names, and we are particularly excited the acquisition will expand graphic packaging into the fiber-based consumer mailer category, where Bell has a substantial presence. In terms of financials, Bell has annual sales of approximately $200 million and EBITDA $30 million. The acquisition cost is approximately $260 million, and we estimate annual synergies of approximately $10 million over 24 months. We expect the acquisition to close in the fourth quarter. Turning now to slide eight, consumers are showing a preference for plastic packaging alternatives made from fiber-based materials and are using their purchasing dollars to support brands that are doing the right thing for our planet. Increased consumer demand creates a tremendous opportunity to partner with our customers on innovative packaging that resonates with end users. On the slide, you see examples of products that our development team is working on as we actively expand and deepen our presence in food, food service, beverage, and other consumer markets. Our integrated packaging platform and product development approach, which always keeps the consumer in mind, are key differentiators in how we are running a different race. We are actively pursuing a $12.5 billion addressable market of which $11 billion is represented by plastic and foam packaging replacement opportunities. In summary, our operational execution, advancements in innovation, and investments to strengthen and strategically grow the business all give us confidence that we will continue to drive 100 to 200 basis points of annual net organic sales growth in the years ahead. With that, I'll turn the call over to Steve to provide more detail on the financial results.

Steve? Thanks, Mike, and good morning. Turning to slide nine and the results for the second quarter and first half of 2023. Q2 was solid, building on first quarter results and a strong start to the year. Net sales increased 1% year-over-year to $2.4 billion, with positive pricing partially offset by a decline in net organic sales and lower open market paperboard volume. For the first half of the year, net sales of $4.8 billion increased 5% over the first half of 2022. Met organic sales in the first half were lower by 2% from the prior year period due to inventory destocking in the quarter as Mike discussed earlier. We see these moves by customers and retailers to normalized inventory levels as relatively short term and expect to return to organic sales growth during the fourth quarter. Consistent with our track record of organic sales growth over the last few years, we remain confident in our ability to capture new packaging opportunities and deliver net organic sales growth. Our expected four-year cumulative average organic sales growth rate of 2% from 2019 to 2023 is at the high end of our targeted 100 to 200 basis points annual range established with Vision 2025. As you can see on the slide, our second quarter consolidated sales benefited from our diverse portfolio of end markets and customers. The food service market, which represents approximately 20% of our portfolio, had a very strong quarter, growing 10% compared to the prior year period. Our food, beverage, and consumer markets, which represent Approximately 80% of our portfolio experienced flat sales year-over-year. Adjusted EBITDA was $453 million of $57 million over last year. A 14% year-over-year increase was driven by net sales growth and margin expansion. We were pleased to see adjusted EBITDA margins of roughly 19% for the quarter and approaching 20% for the first half of the year, in line with our Vision 2025 financial aspirations. Adjusted EPS grew 10% year-over-year to $0.66 and to $1.42 for the first half of the year. As a reminder, our sales and EBITDA waterfalls are available for reference in the appendix of today's presentation. remains strong at over $1.25 billion. Importantly, our paperboard integration rate increased to 79% during the quarter, up 500 basis points from the prior year period. Since January of 2018, when we completed our combination with International Paper's North American consumer packaging business, We have increased integration rates from 67 to 79%. The pending acquisition of Bell is estimated to increase our integration rate by an incremental 200 to 300 basis points over the next 24 months. Our backlog averaged four weeks across all substrates, and second quarter operating rates across the business remained in the mid-90s. We were running our business to serve the customers at a high level while actively managing supply to meet their demand for packaging. Slide 10 features our full-year guidance, reflecting growth across key performance metrics and a reduction in leverage to the low end of our historical targeted range. As Mike mentioned earlier, we are reiterating our financial guidance for 2023, including the increased expectations for adjusted EBITDA and adjusted EPS we provided last quarter. Guidance does not include the pending acquisition of Bell. Turning to slide 11 in our balanced approach to capital allocation, expectations for continued growth and significant cash generation support our prudent allocation of capital into initiatives that strengthen the business and drive future growth, while at the same time provides a path to return leverage to two and a half times or below by year end. In closing, we are investing in initiatives that support our vision 2025, including today's Bell Incorporated acquisition announcement, our investment in Waco, and ongoing collaborative innovation projects with customers. We are resolute in our focus to drive profitable growth and extend our leadership position in consumer packaging while returning capital to stockholders through our dividend and potential future share repurchases. Thanks for your time this morning. With that, I will turn the call back to the operator to begin the question and answer session. Operator?

Operator, are you there?

Thank you. Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure your device is unused locally. And today, we ask you to limit yourself to one question and one follow-up. First question today comes from Kangshan, Punjabi with Baird. Your line is open.

Hey, guys. Good morning. I guess first off, you know, clearly the operating environment during 2Q got much more challenging on volumes and also productivity. And, you know, you've been able to offset that with better price cost than you originally got it towards. But, Mike, you know, we're starting to see some price leakage in paperboard, including SPS and CUK. And there's a lot of investor concern over CRB pricing as well and the potential for, you know, total price cost to flip negative in 2024. So with that, I'd just love to hear your updated thoughts as it relates to that risk for graphic packaging. as you look out ahead, you know, the next 18 months or so.

Yeah, thanks for that, Gansham. And as we've talked about here, as we've been out, you know, visiting with investors and various conferences, I mean, Steve and I both talked about the fact that there could be some leakage around, you know, the margin, you know, and some of the pricing, you know, we saw, as you alluded to, you know, $20 on SPS and 20 on CUK as well. You know, but I think you got to take a step back and those substrates have gone up for $350 to $500 a ton. So they've gone up pretty substantially. And having said that, the other thing that we continue to do as part of our commercial excellence initiatives here that we really started at the beginning of the pandemic on contractual resets we've got with many of our customers. And so that's flowing through. the P&L as we do those. And again, we don't spend a lot of time breaking those out. Those are customer proprietary, as you can appreciate, but those resets are significant. And that's why it's been very difficult for the analyst community to truly trap our pricing relative to just RISD as the only indicator. Certainly RISD is one factor that goes into that, but it's not the only factor. And we've been pulling multiple level levers as demonstrated by what we've been able to achieve here.

Okay, great. And then just for my second question, your confidence on core sales turning positive in 4Q, what is that based on?

Yeah, so look, I mean, our crystal ball on that isn't any better or any worse than anybody else's. But we do talk to our customers, as you can appreciate, on a routine basis. And the comps actually start to get easier towards the end of the year. If you look at our Q3 comp year over year, it's 5% last year we grew. So that's a tough comp. You go into Q4, it's 1%. And as we alluded to in our prepared comments, many of our customers, actually almost all the products we make for our customers have expiration dates associated with their products. And so they need to deal with those in a relatively quick fashion. And so what they're talking to us about which is what, in fact, we are seeing. And then, you know, we've been listening and watching as they've been starting to go through their earnings season as well for promotional activity that will need to occur as they work to drive their volumes up again as well. I mean, it's a key part of how they operate their stocks, too. They've got to have volume growth, as you well know. And so we're starting to see some green shoots in some of the planning processes on that. And that's really what informs us, you know, that Q4 could actually inflect positive.

Good morning.

It's Steve.

Just to add to Mike's points there, we've also, since kind of a low watermark in May of this year, we've seen month-to-month sequential modest improvement. And so the combination of the comps that Mike was talking about, Q2, Q3 last year, and then Q4, being more modest, and then month-to-month kind of sequential modest improvement gives us confidence that Q3 may look a little bit like Q2, probably down a bit, but Q4 should inflect based upon what we're seeing. So those are the fact patterns that we're monitoring that give us confidence in the statement.

Okay, perfect. Thank you so much.

We now turn to Mark Winshaw with CPORT Research Partners. Your line is open.

Thank you. First, just one follow-up. You may mention of resets, et cetera, and how that's been affecting your pricing, et cetera. Can you give us any color as to how much more of that might there to be to come and how that might impact 2024, recognizing that there could be other real-time adjustments happening as well?

Yeah, Mark. So, you know, our contracts, as you know, tend to, you know, be anywhere between, call it in North America, two to five years in duration. And so, you know, those things have a fairly long tail associated with them. And we're not going to give you an absolute percentage there right now, kind of what we work through, but there's still, you know, meaningful contracts that are out there that will be addressed in the next, you know, 12 to 24 months.

Okay. And I assume it's fair to speculate that given the comment you made about things being up 350 to 500 and only coming back 20 to date in some of the substrates, that there would be potentially significant upside bias on the ones that are resetting?

Well, we have to go back and, yeah, get those resets. That's exactly right, and that's what we've, in fact, been doing.

Okay. And just on slide nine, I think there is a mention of unplanned downtime in second quarter. Could you kind of walk through a little bit what happened there, how big an impact that had on your business profitability as well, and is that all resolved at this point?

Yeah, I'll hit that a little bit, and then Steve can talk a little bit more around some of the financial implications associated. But really, if you take a step back and you look at the first half of this year, Mark, We have now dealt with 80% of our planned maintenance outages for the year. So those are behind us. And as you know, when you take these mills down, you've got 1,500 to 2,000 contractors on your property. They're quite expensive. And then you've got the lost production that goes along with that as well. In addition to that, in the second quarter, we took roughly 30,000 tons of what we'll call market downtime just to manage our supply with our demand, what we were seeing. and really controlling our working capitals and specifically our inventories. In addition to that, in the month of July here, through the month of July, which is now August 1st today, we took an additional 80,000 tons of market downtime, really focused on our inventories and matching our supply and our demand. The timing of that is actually quite good relative to You know, the 4th of July break and some of the other things that are going on there, our employees actually appreciate that. Of course, we prefer to be busy. We prefer to have those orders. But if we need to take downtime, we wanted to be able to do that. And that's all reflected in the guide that you see and the results that we posted here in the first half of the year.

Yeah, Mark and Steve, and how that plays out in our guide is we continue to have very high confidence in the returns on Kalamazoo and the $80 million a year type level, and we're offsetting that in our assumptions around our guide, kind of the midpoint of performance now down at zero that incorporates in how we're thinking about continuing to actively manage supply and demand with, as Mike mentioned, you know, 80,000 tons of market downtime being taken in July. And so that's how that holds together relative to how it's incorporated into our full year guide and our full year thinking.

Okay, super. So just to clarify, so the unplanned downtime, that was your decision to take market-related downtime as opposed to some operational issues or something like that. And then additionally, the cost of the market-related downtime is showing up in your productivity in the way you are categorizing it.

Mark, that's correct. And so the estimated cost implications of actively managing our supply to meet specific customer demand is incorporated into performance. That's where it flows through. the P&L, and, of course, Kalamazoo is also in there. So you've got positive offset by the expected negative, and then what we're speaking to specifically is exactly what you said. This is market-related downtime relative to supply and demand. Overall, our facilities have been operating very well. Actual while-running operating rates have been very high, mid-90s, So overall, we're executing and operating very effectively. We're just doing so to match up with the demand of our customers.

Super. Thank you.

Our next question comes from George Staffos with Bank of America. Your line is open.

Thanks, everyone. Good morning. Thanks for the details. I want to take a step back and talk a little bit about the pace setter on your board. And Mike and Steve, how you see that and CRB relatively fitting into the substrate mix, relative in particular to bleach board over time. And over time, do you see, clearly you do with Kalamazoo and Waco, but do you see more and more share gain by CRB over time for bleach? And what does it mean for your bleach presence?

Yeah, thanks for the questions, George. I think from that standpoint, as we kind of take a step back, you know, Rainier, pay side of Rainier, you know, the smoothness and brightness in particular do rival what we see with Bleach Paperboard. And that opens up a whole bunch of avenues for us, as we've talked about in our prepared comments, so I won't repeat those. But, you know, the initial trials and qualifications we've been doing with customers, both open market customers and internal customers, You know, we show a lot of promise, and we've got a pretty heavy dose of those here in Q3, and we'd expect to actually be placing some of that material into the marketplace, you know, towards the end of Q3 and into Q4. So we like the momentum we're seeing there. Relative to how it squares up with our overall SPS business, you have to remember a big portion of our SPS business is uncoated and goes into COPS, 400,000 tons, you know, roughly of our 1.2 million tons. And as you saw and Steve talked about in his comments, our volumes on food service were up 10%, you know, here from a sales standpoint. We continue to grow that business. We continue to invest behind that. Bell's acquisition of Bell is another, you know, element of that is they've got a large food service business that we're excited to put, you know, as part of our portfolio. So, again, part of our run in a different race, we really know where we want those substrates to be. For us, SBS, both uncoded and coded, is indexing more towards food service. Our open market customers we service with our SPS business tend to be more plate-oriented, which is not something we manufacture. So we're thinking about where we pick our spots. And when it comes to general folding carton, you're going to see us push and flex our advantage on CRB because of the quality advantage we have and the cost advantage that we have in Kalamazoo and soon we'll have in Waco.

Thanks, Mike. appreciate the color on that and then my next question is around guidance and to some degree you've already covered this with the overarching organic uh you know revenue trend commentary but you know looking at some of the industry data that we received recently there had seemed to be a fairly sharp drop-off in food service and bleached late into Q. If I heard you correctly, and I think it was answering Mark's question, you said the low-water mark was in May. So can you sort of help us square that circle if, in fact, those trends were what you saw in the market as a whole? And then relatedly on guidance, you took the price-cost guidance up. Pricing doesn't seem like it's heading higher from an index standpoint. So is that more the resets or is that cost that's been trending more favorably for you relative to your last commentary? Thanks and good luck in the quarter.

Thank you, George. I'll take the first part of that. So specifically in the month of June, we had a very long outage at our Augusta mill, which really had a big impact on the numbers that you

quarterly cadence of that and i'll let steve take the other the second part of the question yeah on price cost george the 200 million dollar improvement there two things so one is that what mike talked about earlier we continue to have very good outcomes from a commercial excellence perspective on overall uh net pricing now moving into the five to six hundred million dollar range for the year with a continuation of some positive pricing here in the second half of the year. And then as we've talked before, the mark to market on commodity input costs have been at the low end of our earlier estimated range. We've now moved them down into that range such that the relationship on price cost is up 200 million and consistent with our prior conversations. And if you do the second half of the year in the second half, still have positive price cost, some continued positive price execution, and then a very benign inflationary environment, roughly zero at the midpoint. And so that, as Mike was talking earlier, kind of then starts to transition into 2024 with both of those categories being reasonably benign as you kind of march out of 23 and into 2024 on a mark-to-market type basis.

Thanks very much, Steve. You bet, George.

Our next question comes from Mike Roxland with Truist Securities. Your line is open.

Thank you, Mike, Steve, Melanie. Can you just talk about how you weigh economic downtime against maybe pulling forward some of the closures that you have planned for your mill system in terms of like Middletown and Angus, East Angus, excuse me?

Yeah, I'm happy to take that, Michael. I mean, as you can appreciate, like in Kalamazoo, what we would do is we would run, you know, K2 and we'd run K1 and we'd do a rolling outage on K3. It's the highest cost machine. You saw it there. And so, you know, that actually is how we actually look at that if we don't have, you know, the demand for what we're capable of producing there. The other action we took, as you know, as we announced, you know, at the last earnings call and through the quarter, we took down the Tama mill. So that was another are moving to match our supply and our demand.

Thank you for that, Mike. But just in terms of if you're now in a more challenging environment where the demand is not there for C or B or for some of the other substrates, why not move to closed Middletown or East Angus sooner rather than later?

Yeah, well, our forwards would suggest we're going to need those tons for growth. But you're right. If something was to change, we always have those levers that we can pull.

Yeah, Michael and Steve, I think to reiterate Mike's point, of course those are levers that are available, but as we see a return to organic sales growth coming out of 23 and into 24 consistent with our expectations, we would have an expectation that we would need those tons to meet demand, but we will obviously only produce to the demand that we have for our products.

Got it. And then just one quick question on imports. One of your global competitors just finished anti-capacity at Sweden Mill. It's now the most efficient and largest folding Bospor plant in Europe. So I want to get your thoughts around increasing exports to the U.S. and any initiatives that you can take to offset increasing European Bospor capacity.

Okay. I think, Michael, actually, if you look at the data, imports are down significantly. And as you probably have seen and was well chronicled by the European producers that have already announced their results here in the quarter, their wood costs are up substantially year on year as the structural cost of wood influx higher, structurally higher it would seem, relative to not having the imports of European pulp or Russian pulp into the Nordic countries there. So I actually don't believe that that supply chain is one that we can't compete with. I believe that we can absolutely compete with imports of FBB into the North American market with our embedded mills in the locations where they're at. And so that's how we look at that.

Got it. Thank you very much.

We now turn to Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone. Maybe, Steve, just a clarifying question, just how you frame the third quarter. I think, obviously, the organic sales and volume mix down year-on-year, but I wasn't entirely clear when you said the third quarter looks like the second quarter if you were referring to sequentially, but that dollar's gear-on-year growth. Just can you just clarify kind of what you were trying to – what the point on the third

Yeah, Adam and Steve, the statement was just purely about organic sales growth. We're currently assuming very modestly down in Q3 and then up in Q4, and hence that results in the full year guide of between zero and minus 2%, which implies that the second half of the year is somewhere around plus or minus 2%, right? That's the math that gets you to a full year either at minus 2, which would say that minus 2 in the second half of the year would be within that range. We're assuming better than that as we would have modestly down and then modestly up if you kind of look at it organically. We're not providing, as you know, quarterly guidance on EBITDA. Generally, we're nearly halfway to our midpoint of our EBITDA, you know, I think a planning expectation of that being, you know, pretty consistent Q3, Q4 is probably reasonable, mostly because we have less planned maintenance downtime in Q4 this year, which is kind of going to kind of play itself out over the coming two quarters. But we're pleased with where we're positioned halfway through the year, 937 million, a midpoint of 1.9. It's, you know, in the 960s as you kind with a guide towards the midpoint.

Okay, that color is really helpful. And then just as we think about the demand side, I love any color you have on maybe if there's any difference in trends between your European business and North America, and especially as we think about the benefits of some of the price-cost benefits that have kind of been stickier. Is that disproportionate in Europe as some of the European benchmark indices where you are not integrated have fallen?

Yeah, I'll take that one, Adam. So from that standpoint, as you correctly point out, with the exception of the CUK that we ship over to Europe to run in our own facilities there for our beverage customers, we do buy the paperboard for the rest of the sales that we have. So if the price goes down, it's a pass through. So it doesn't help us one way or the other, up or down. And what I'm really pleased about is our overall volumes have held up quite well in the European market relative to some of the other comps that we've seen kind of come out. And I think it's really all a function, again, of the focus that we've got on innovation, new product development, and the investments that we're making into our European platforms. So our strategy there is actually working quite well.

Okay. That's all very helpful, Colorado. I'll pass it on. Thanks.

Our next question comes from Cleve Rueckert with UBS. Your line is open.

Hey, good morning, everybody. Thanks for taking my questions. I think most of the questions have been asked and answered at this point, but Mike, I'm just curious. I think you said to George, you sized the SBS side of your production that goes into CUPS. I'd just be curious if you could remind us of that $12.5 billion total addressable market. How much of that is CUPS? And maybe you could just remind us what the stats are behind CUPS. We talked about it a lot earlier this year, but I think it was an opportunity to get into into replacing more foam with paper. So, you know, how much of that TAM is really, you know, skewed towards cups, really, is the question.

Steve, I'll take a cut at that, and then Mike can add some additional perspective. But of our $12.5 billion addressable market, roughly $11 billion of that falls into the category of plastic or foam type replacement. So, it's the majority. And then when you look at the categories underneath that, you know, in round figures, I mean, you know, kind of what you'd characterize as cups and bowls and trays, those kind of categories, which would fall into a lot of your QSRs and a lot of those transitions, you know, it's a couple billion plus. So it's a sizable part of the addressable market as we look at that and As Mike had in his prepared remarks, I mean, we see real momentum on the CUP side, which is why our confidence in SBS as a platform remains high. We're obviously adding our capacity elsewhere on the CRB side, the highest quality, lowest cost there. But our ability to mix and enhance our SBS platform with CUP and other growth that falls heavily on the food service markets, as an example, It's quite high, and the testing we're doing and conversions we're doing are successful today.

It's a really good follow-on question, Cleve, because if you look at kind of the momentum and assuming we're successful and Chick-fil-A adopts that on a more national level, it's over 100,000 tons once it's converted in there. And for us, what that really does then is you know, 400,000 now becomes 500,000 tons of uncoated, which is, you know, not in a lane that everybody else is trying to compete in and certainly not in a lane where some of these conversions are taking place. So we're trying to pick our spots and really be thoughtful about where we compete, where we invest, where we can create competitive advantage and provide a differentiated experience for our customers.

Got it. Thanks for that. That's pretty clear. And just one quick follow-up. Is that You know, I think you said a couple billion dollars plus of addressable market. Is that skewed towards the U.S., or is there opportunity in Europe as well?

Yeah, there's some opportunity in Europe, but it's definitely more skewed towards the U.S. There's virtually no foam in Europe that we compete against.

Yeah, got it. Okay, thanks very much.

Our next question comes from Aaron Vist-Wannerton with RBC Capital Markets. Your line is open.

great thanks for taking my question um i guess i i want to ask about the guidance first of all it seems like um you know the volume mix side is a little bit uh weaker than expected but then uh that is being offset by um maybe a greater tailwind from the price to commodity cost spread um is that an accurate kind of summary of of uh how the year is kind of playing out versus your occupations

Yeah, Steve, I mean, I think if you stand back and talk about the year, it's pretty straightforward in some ways. Made $1.6 trillion last year, 2022. $500 million of positive price commodity input cost relationship this year, offset by $200 million of labor benefits inflation and the costs that we're incurring to actively manage supply and demand. And so it's 1.6 plus 500 minus 200. And that's the company as we're executing on it, you know, this year. And it's us taking decisive action to manage through the temporary inventory destocking by running our business to the specific demand of our customers.

Great. Steve and then just looking ahead then you know it seems like the volume mix side again you know maybe below your longer-term organic growth targets of one to two percent what's the path to get back there I know that you guys have discussed some destocking amongst your retail you know customer base bringing down weeks of inventory maybe from six to four Do you see that process kind of coming to an end in Q3? And then maybe as you look out into next year, likely a very high probability of getting back into that 1% to 2% range or potentially even exceeding it with some of the actions like Bell and Kalamazoo productivity and Waco and continued substrate conversions?

Yeah, Rudy, it's a very important question, and one of the things that we tried to do with today's remarks is if you take a four-year view, 2019 through 2023, so a very good cross-section of four years of consumer behavior in our innovation engine, when we execute on the second half of the year, roughly, as we're providing, that's 2% organic sales growth over a four-year period of time. the majority of which will be driven by new-to-the-market innovative products that are fiber-based, that are recyclable and renewable. So our confidence that as we look out to 24 and beyond that we'll continue to operate in that 100 to 200 basis points with our recyclable, renewable, innovative packaging products is high. And as such, we should inflect back and continue to grow organically consistent with what we've seen on balance over the last Four years. And yes, we operated above for a while. We have a correction happening in inventory. Four-year view of the business would indicate 2%.

And lastly, if I may just ask one more. Just on the end market side, you know, we've seen some significant pullback in some volumes in beverage and some other areas. What are you hearing, I guess, from your customers as far as future promotional activity, if there is any? Are they looking for ways to potentially start pushing volume again, or are they still focused mostly on offsetting inflation? Are there any initiatives such as lightweighting or anything else that would affect you as you move forward? Thanks.

So Roon really, if you look what they've been focused on over the last 18 to 24 months, it's really been pushing price, right? And they've been willing to sacrifice some volume in the form of getting higher prices. And they've been largely successful in doing that. But coming through this earnings season, as you saw, you know, they're starting to get more pressure to get back to volume growth. I mean, it's... I mean, you do this for a living. You know how the math works relative to the modeling. You've got to have a company that grows its volumes and ultimately its sales and generates higher earnings year on year. And that's done by, you know, growing volumes. And so what we have been watching, like you have been, you know, as these customers announced, they've been talking about the fact that they need to do that. As I said in my prepared remarks and one of the questions earlier, you know, early green shoots, but still early days on that. I would expect it to occur based on history as a guide, but, you know, we're looking for some more tangible evidence of that as well. As I mentioned, our comps get a lot easier in Q4 than they do in Q3, and so that's why we've talked about the business modeling the way that we have. You know, but look, you know, I'm confident that, you know, these multinational global customers that we have big positions with will work to find a way to position their brands and drive growth, you know, in the outlying years. And we're going to participate with them along that with our solutions.

Great. Thanks.

Our next question comes from Phil Ng with Jeff Rees. Your line is open.

Hey, guys. Thanks for squeezing me in. Steve, you usually give us an early read in the forward year based on where pricing is kind of shaking out and costs. Did I hear you correctly? You're expecting price cost, at least based on the current run rate for 2024, to be pretty benign. So if that's the case, do you have enough levers effectively on an organic basis to drive EBITDA going into 2024?

Yeah, Phil and Steve, I'll start and then Mike can add. I think just for clarity, we're not providing any, you know, any snapshots on guidance into 2024, but what we were providing you with is that on a mark-to-market basis, both current pricing and commodity input cost inflation are reasonably benign currently on a mark-to-market basis. And then obviously that sets us up for growth as we return to organic sales growth and return to productivity levels that are positive and earn on organic sales. And so those are the things that certainly probably at the end of Q3 we'll come back and provide you with a little more color as we look out into 2024. But hopefully that gives you a response consistent with what we're seeing on a mark-to-market basis. I don't know, Mike, anything you'd add to that?

No, I just think, look, you've got to watch how our overall demand, you know, continues to develop. Obviously, we've got a fair amount of negative, you know, under-absorption fixed costs in the market downtime and what we provided you today. As that inflects into Q4 and into next year, obviously that could be a pickup. You know, we obviously don't have the Bell acquisition closed, but if we're successful in doing that and get that done in Q4, that'd be another, you know, catalyst as we go into next year. And there's some synergies associated with that, too. So we continue to have good momentum. And, Phil, you've covered this story for a long time. That's just kind of how we do it. We just grind it out.

And, Steve, just to clarify, that mark-to-mark basis being pretty benign, that's a commentary for Q4. 2024, as we said, or are you talking about mark-to-market being neutral for calendar 2023? I just want to make sure I get that finer point correct.

Well, that specific mark-to-market statement was with regards to 2024 as you look at the pricing momentum that we know, so known pricing actions and a mark-to-market on commodity input costs. Both of those are reasonably benign. Our guide for the second half of the year is on price cost is modestly positive as we execute on pricing that we are executing on and have a midpoint of inflation that's closer to zero.

Okay, that's super helpful, Steve. And then on the bell acquisition, the margins are quite impressive for just a phone card player. I guess the first question is, I assume these assets are pretty well capitalized, any color on that front? And if you called out 95,000 tons of paper boards, being consumed from Bell. Any color on the splits between the grades? Were they buying from you in size? And do they have any ongoing agreements that take a little time for the flip over where they could buy from you more fully going forward?

Yeah, so we've known the Graham family for a long time. They've built a wonderful business over the last 40 years, and we're thrilled to be able to have the opportunity to have them join our company here. And relative to the overall tonnage, Phil, it's 95,000 tons. It's predominantly CRB. That's the vast majority of what they do. So it really fits well into our investments in Kalamazoo and Waco. And relative to agreements, we're not going to comment on those right now. That would be premature to do so, just given we've got to go through the regulatory process. And we'll get to all that in due time.

Okay. Thanks for the great call.

We now turn to Anthony Pettinari with Citi. Your line is open.

Good morning, Mr. Das, Mr. Schroeder. This is Greg on for Anthony. I just have a question about your CRB products broadly. Good morning. I have a question about your CRB products broadly and then one follow-up on specifically the mailers and the new paper cup. So, you know, first, I mean, you've talked about the quality premium of your CRB versus the market. And my question is, what actions can you take internally to further translate that quality premium into earnings? Whether that entails decoupling from benchmark CRV prices, gaining share of wallet with existing customers or something else. And then relatedly, would you flag any mix shifts, trade up or trade down you've seen into Q and then here in July?

Yeah, so like I mentioned earlier, the neat thing about how we position the business is we've got a unique ability in Kalamazoo to make a sheet appearance if you will of that sheet that's going to allow us to target different uh categories both uh open market customers things like health and beauty pharmaceutical as steve talked about in his prepared comments and ultimately some of our food applications as well so yeah we're using you know we've talked about kalamazoo being a cost reduction project in fact it was we've been able to grow on that but in the back of our minds all along we felt we'd have ability to make a grade a paper board that was unique out of 100 recycled fibers and uh that's playing out as we speak with the trials that we're running here in q q3 and you know we believe we'll actually have some sales yet this year and good momentum as we go into next year so that's our overall strategy there thanks mr goss that's very helpful um and then i guess shifting gears to the specific crb products um first question how does chick fully like the cup

And I guess, you know, relatedly, I can imagine, you know, other quick-serve restaurants have noticed the product, maybe have tried it themselves. Have you seen a response from Chick-fil-A's competitors interested in the cup, maybe trialing it from you guys, whether they're an existing GBA customer or not? And then, you know, one follow-up on paper mailers, do you have any thoughts on the current market size for CRB mailers and what's the conversion opportunity there? Okay.

Sure. So a couple questions there. Relative to Chick-fil-A, our overall trials are going as planned. We're ramping up towards that 10% number that we talked about in terms of the number of stores that our products are being sold in or distributed to. And their feedback today has been solid. They've been, as you can imagine, it's a bit of an iterative process. I mean, we learn things together as we go along. But overall, the general consumer reaction has been very positive, and I would expect that to continue to be the case. We'll continue to work with them through the course of the summer and into the fall as they really do all their work and studies associated with this. As you know, Chick-fil-A is a very well-run company. They do their homework. They make sure that they... have materials that are going to resonate with their customers. And they don't move quickly until they know exactly that everything is going to meet their quality expectations. So I would expect this situation to be no different. Relative to what's going on with other competitors of theirs, I'm going to refrain from commenting on that. Just that wouldn't be appropriate for me to comment on a call like this. But I will tell you that the conversion of Chick-fil-A into our cup is an important one. vast majority of people in the food service market really look up to Chick-fil-A and what they've been able to accomplish. It's been quite remarkable. And so in that regard, this is a very important initiative for us. In regards to mailers, yeah, we're learning that space. We still got some work to do there. It's early days for us, but that was a key consideration in terms of you know, the acquisition of Bell, because that's a market we didn't have, and we didn't have a position in. So this allows us to actually have a little bit more of an e-commerce position with, you know, paperboard, if you will. And this is all coated recycled paperboard. So, again, it fits right into our wheelhouse with the investments that we've made in both Kalamazoo and now Waco. So we really like that a lot. Great. Thank you very much.

Our last question comes from from Wells Fargo. Your line is open.

Mike, Steve, thanks for taking the question. I have three. Hopefully I can get them out quick. The first one on slide 14, I think you talked about, Steve, the net productivity number 15 million being related to underabsorbed fixed overhead. On one hand, I would think to myself, well, normally you guys deliver productivity, so the underabsorbed fixed overhead number was actually bigger than that. But even if I just take the 15 million and the 30,000 tons of downtime that you talked about of EDT, I get $500 a ton of underabsorbed fixed overhead. I know it's kind of putting a finer point on that, but is that maybe due to things sneaking up on you and not being able to plan around that a little bit better? Or is there something unique about the mills in which you're taking the downtime that impacted that number?

Yeah, no, David, Steve, I think that minus 15 million, you're roughly right in terms of the impact of the 30,000 tons is in there, the positive Kalamazoo is in there. And then keep in mind the actual impact of minus 4% organic sales volume flows through productivity as well. And so that's kind of the combination. I think we don't think about it the way you just suggested. I mean, this obviously, destocking happened over a relatively short period of time. We took 30,000 tons out in the quarter. And then as Mike mentioned, in a timeline that really works for us, in July, we took 80,000 tons, which matches up extremely well with our teammates, the mills, the right time to do it, leveraging a holiday. So, no, we actually moved with a sense of urgency. It just fell just outside the quarter relative to the timeline around which we, you know, were actively addressing this short-term destocking.

Okay. And then I guess relatedly on the guidance, I mean, it sounds like you're reasonably confident on the price-cost elements. You know, you suggested kind of Q4 rebounding a little bit on the volume side. And, you know, as you pointed out, admittedly, no one else, your crystal ball isn't maybe better than anyone else's. Why such the big range? I mean, you know, last year you guys were able to kind of tighten to $100 million range. And I appreciate there's maybe a little bit more uncertainty as we sit today than there was a year ago. But is there anything else in there that we should be mindful of thinking about, you know, as it relates to the range?

No, Gabe, and we just chose not to touch it. I mean, at the end of the day, we have a long history of our ranges being guided towards the midpoint. That's our history, and we just didn't touch it. There's no message in there around variability that is any different than anything we've handled in the past.

Okay, and then last one. I think the number that you threw out there, Mike, was, you know, once kind of fully integrated, and again, I appreciate you It's not closed yet, but the spelled deal, it sounds like you would, in fact, be able to integrate nearly all the 95,000 tons, which, again, if I kind of do the backward math, implies maybe $100 a ton of incremental EBITDA that you're assuming as part of the synergy number, and that would sort of suggest maybe nothing on SG&A or procurement or otherwise.

are you guys being conservative there or is there something else that we should read maybe just proximity to mills and things like that when i think about you mentioned it's mostly all crb synergies are a multitude of different things we go after as you can appreciate given our size there are savings that we can generate in terms of procurement foods bigger you know than a 200 million dollar business on things like angst coatings adhesives corrugated boxes freight uh all those kind of things and of course we get to leverage an SG&A profile across that as well. I would be careful, you know, just trying to back into numbers, you know, dividing the tonnage by what the synergy number are. There are also sometimes some offsets relative to, you know, systems we have to install, you know, for a larger company that we've got here and how we do all that stuff. But in general, look, we're thrilled to, you know, have those tons, you know, assuming we get, you And ultimately, integrating those in, we're well over 80% now in terms of our integrated position in the marketplace. And as all of you recall, when we closed the deal with International Paper and purchased our consumer packaging business, Steve mentioned this in his prepared bars, it was 67%. So that's a key strategy of ours, both organic and inorganic. And we've made tremendous progress on it. And that just kind of de-risks our business going forward in terms of how we operate the mills. in the business.

Yep. No, thank you, Mike.

You bet. Thank you, Kate.

This concludes our Q&A. I'll now hand back to Michael Doss, President and CEO, for closing remarks.

I'd like to thank everybody for joining us for our second quarter call today and look forward to talking to you again in October with our Q3 results. Have a great day.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.