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.
spk09: Good morning or good afternoon all, and welcome to the Graphic Packaging First Quarter 2024 Earnings Call. My name is Adam, and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the call to Melanie Skeegis to begin. So, Melanie, please go ahead when you are ready.
spk01: Good morning, and welcome to Graphic Packaging's Holding Company's First Quarter 2024 Earnings Call. Joining us on our call today are Mike Dobbs, 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 the investor section of our website at www.graphicpkg.com. Before I turn the call over to Mike, let me remind you that today's press release and the presentations made by our executives include four looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that can 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.
spk02: Thank you, Melanie. Good morning, everyone, and thank you for joining us on the call today. As those who joined us for our investor day in February are aware, Graphic Packaging's transformation to a global leader in sustainable consumer packaging is well advanced. We spent the last eight years building a stronger, more diverse consumer packaging portfolio capable of delivering more consistent results, solid consumer purchasing patterns continued to shift, we moved with them. We are seeing volume improvement in certain markets and customer categories, and excluding the impact of the Augusta Bleach Paperboard Manufacturing Facility sale, we expect to generate positive full-year sales growth in 2024 as we partner with our customers to deliver the sustainable packaging solutions that consumers prefer. Let's start with a brief overview of results. In the first quarter, graphic packaging sales were $2.3 billion, adjusted EBITDA was $443 million, and adjusted EPS was 66 cents. As Steve will discuss later, the biggest part of the sales decline, and essentially all the EBITDA decline, was a function of our decision to reduce production of bleach paperboard to match demand. In the context of that decision, adjusted EBITDA margin down just 30 basis points at 19.6%, Turning to slide three, at our investor day in February, we introduced ambitious targets that are better aligned with the sustainable consumer packaging leader that we have become. You can find a replay of each presentation on the investor relations website, and I encourage you to listen if you weren't able to join us. Also in February, we announced an agreement to sell our Augusta Bleach Paperboard Manufacturing Facility to Clearwater Paper. We expect that sale to close tomorrow, May 1st. At that point, has historically been a significant source of earnings volatility for us will be a very small part of the business. Turning to our recycled paperboard system, Steve and I visited our Waco recycled paperboard manufacturing facility site a couple weeks ago and I am pleased with the progress the team there is making. The Waco machine and supporting systems will be nearly identical to what we have at our Kalamazoo facility. That was a strategic decision we made to further increase our competitive advantage in recycled paperboard. The decision not only significantly shortens the project timeline and reduces engineering costs, but it also creates real and valuable synergies in training and operations. In fact, an operator from our Kalamazoo K2 operation could almost immediately step into the same job at Waco, and we plan to train many of our Waco teammates at Kalamazoo prior to Waco's start-up. Waco will utilize high-value scrap from our wood fiber paperboard manufacturing facilities, as well as numerous packaging facilities in the region. We are also progressing our plans to collect paper cuffs, another high-value fiber source, within a radius around the Waco facility. We see Waco as a billion-dollar investment in the long-term competitive advantage, taking the advantage we already have in Kalamazoo across all of North America. A broad and diverse portfolio of sustainable consumer packaging solutions really does move with the consumer, allowing us to deliver consistent results even as consumer purchasing patterns and economic conditions change. That was evident in our first quarter results with continued strength in food service and stronger beverage volumes, helping to offset weaker results in certain food categories and household products. and we were able to offset some of the declines we saw in grocery with gains in the club channel. The diversity of our product portfolio combined with the agility and execution strength of our team to offset the weakness in one market or channel with the strength in another is exactly what we intended to build, and it is working. Within food and household products, we did see pockets of year-over-year growth, but for those of you who follow consumer product markets, categories. I do expect to see volumes improve further in the second quarter and anticipate a material acceleration in volume growth in the second half with new innovation wins, product launches ramping up, and a broader return to growth across our customers' businesses. We delivered $37 million of innovation sales growth in the first quarter with contributions across all five of our innovation platforms. Key contributions came from our new Nissin Noodles cup, and our Chick-fil-A cold and go cup, as well as Bordeaux paperboard canister solutions. The cups are replacing foam, while Bordeaux, in these instances, is replacing plastic. Our innovation pipeline is robust, and while we don't control the timing of customer product launches, I'm confident that we will meet our 2% innovation sales growth target for the year. Slide four is a reminder of how broad our packaging portfolio has become. We serve five markets, with food the largest, next and our growing food service category not far behind our investments and new capabilities have taken us further into household products and provide entry into the new health and beauty markets further enhancing our portfolio balance growth opportunities and consistency let's go a little deeper into our sales results with slide 5 we don't need to just the arrows on this chart because we want you to be able to see the performance versus the reported sales If we did adjust for days, the total sales arrow in the bottom right would be sideways. Our days adjusted consumer packaging sales overall were down about 1%. As in the fourth quarter, our portfolio offset weaknesses in some of the markets with strength in others. I want to take a moment to reflect on that because eight years ago, we couldn't do that. Our portfolio was too narrow and our exposure to a handful of customers was too concentrated. Today, our portfolio is much markets, customers, and geographies. This allows us to deliver more consistent results across a wide range of economic conditions. Food saw some modest weakness in the first quarter, with categories like cereal and frozen pizza weaker in both Americas and in our international business. There were some bright lights, too. We saw improvement in dry foods, including prepared foods and bakery items. Beverage results showed a rebound, even with the impact of fewer shipping days. We saw year-over-year growth in both beer and soft drinks across both the Americas and international markets. Food service results were strong, marking the ninth consecutive quarter of strong results for us. As you've heard me say before, a third party's lower price declaration and paper board for cups is 180 degrees removed from the reality of a consistently strong and healthy market. Our customers ultimately want the same thing we want, accurate and transparent pricing. We plan to eliminate from our customer contracts over time. Turning to packaging for everyday household products, we have seen growth in some pet care categories and in home air filter frames, offset by declines in tissues, soaps, and cleansers. Health and Beauty is the smallest of our five markets, but offers very attractive growth opportunities. Most of our current business in this market is in Europe, where we supply many of the leading global brands. As we saw in Q4, there's been a pullback on the healthcare side broadly with some offsetting strength in beauty markets. Yet if we look to the future, our Pace Center Rainier 100% recycled paperboard has opened up a whole new range of customer opportunities here in the Americas, markets that are currently served almost exclusively by bleach paperboard. With pockets of improvement across our portfolio and a high level of engagement with our customers, our expectations. If you join me on slide six, the chart at the top of the page is a summary of typical seasonality across our five markets. And while there are some modest differences in seasonality between our Americas and international businesses, this chart won't change much if we looked at those markets separately. Food sales, for example, aren't especially seasonal, but there is a dip most years in the second quarter and a pickup in the third. Again, these are a matter of a couple of percent, so they aren't huge, but they are real and they are persistent. Every seasonality probably won't surprise you. People tend to drink more in warmer, drier months and less in colder, wetter months. Second quarter tends to be so much stronger than the third quarter, but both tend to be stronger than the colder parts of the year. Service has the most pronounced quarterly seasonal variation of any of our five markets, which is mostly a function of consumers eating more meals at home during the colder months and after the winter holidays. So the fact that for the third year in a row, we've had strong results in what's typically the weakest quarter confirms that the innovation we are bringing to the market is driving real value. Right now, new product introductions like the Chick-fil-A Cold and Gold Cup are important growth drivers. One thing we really haven't talked about much in the past is the degree in which sales in a particular month can shape quarter. February is the shorter month, but even if we adjust for that, February tends to be a slower month. March, on the other hand, usually has an extra day or two and is nearly always the best month to quarter. But this year, March has an extra weekend, and with the timing of Easter, and particularly Good Friday, negatively impacting our results in both the U.S. and Europe. Looking ahead, reports that consumers are feeling the impact of price inflation and more focused on value are consistent with what we hear from our customers. They tend to correlate with higher at-home food and beverage consumption, which is good for us. Meanwhile, as more consumers return to the office, they have less time to prepare meals at home, and that tends to support a pickup in prepared foods, convenience items, and on-the-go meal options. We're beginning to see that in our order patterns. Now let's turn to innovation. Slide 7 comes from our Investor Day presentation, and I included it here as a reminder of just how big our growth potential is. The figures represent market opportunities in Canterbury as where we already have a packaging solution in the market or that will be commercialized very soon. Last week, the European Union passed a new packaging and packaging waste regulation called PPWR that will dramatically reshape the European consumer packaging industry. PPWR put significant new restrictions on single-use plastic and a range of other materials and containers. We talked about PPWR at our investor day and highlighted our significant investments in innovation and execution capabilities, including our acquisition a few years ago of Europe's best consumer packaging innovator, AR Packaging. Those investments have positioned us very well to partner with customers to deliver the new and better packaging solution our customers will need to comply with the new regulations. On slide 8, I want to highlight one of the more exciting innovations from our European team contributing to our innovation sales growth. Our Bordeaux paperboard canister was first developed for a French infant formula customer. We then adapted the package for candy and gum, and more recently developed a third-generation package specifically for coffee. Last week, we announced a partnership with Mother Parker, the largest coffee supplier to private label brands in the United States. Mother Parker will bring our Bordeaux paperboard coffee canister to the U.S. coffee market for the first time through large mass retailers. Our growing penetration of the coffee market really demonstrates the Bordeaux value proposition For our customers, Bordeaux reduces transportation and warehouse space. Meanwhile, our integrated degassing belt keeps coffee fresher and longer. Bordeaux for coffee reduces plastic by roughly half, and our container has been verified to be recyclable by two of the leading recycling authorities. So consumers get an attractive, convenient new package that keeps the coffee fresher as a built-in liquid. Before I turn it over to Steve, I want to spend just a moment on slide nine, which summarizes the four pillars that define who we are and what we aspire to accomplish. We are a results-driven company with unmatched capabilities in scale and substantial competitive advantages. We really do have each life's everyday moments for a renewable future, and our products are in consumers' hands throughout the day. I'm excited by what I see ahead of us. for investors and for all our stakeholders in the years ahead. Now let me turn it over to Steve. Steve? Thank you, Mike.
spk14: Turning to slide 10, in the first quarter, our portfolio did what it was designed to do, driving consistency in overall sales while managing changing consumer purchasing patterns. More than half of the 7% drop in reported net sales reflected our decision to produce and sell less paperboard in the open market. somewhat unusual first quarter calendar with fewer shipping days even with leap year and the timing of the easter holiday reduced our packaging volumes by about two percent the normal pass-through of input costs in our european business reduced sales by approximately one percent on a day's adjusted basis our sales are down about one percent year over year a good improvement sequentially but modestly shy of the slattish result we were expecting. Turning to EBITDA, effectively all of the decline was a function of our decision to reduce production and open market sales of bleached paperboard for the carton market, consistent with our practice of matching supply with demand. Even with that negative impact, we delivered a 19.6% adjusted EBITDA margin. just 30 basis points lower than a year ago when our open market paper board sales were much stronger. That kind of margin consistency is the result of a strong and balanced portfolio with solid execution and cost control. Turning to slide 11, let me take a few minutes to provide an update on some of our operations and capital investments. As we grow our sales and global capabilities, We regularly review our network to make sure it matches our needs. We discussed that investor day, the strategic rationale for the Augusta sale. So I'll not repeat that here. We've always run our bleach paperboard manufacturing facilities as a system. So during the quarter, we made the necessary preparations to separate Augusta and to align the Texarkana facility to support our internal needs. As Mike pointed out earlier, Waco is moving ahead well. Foundations are largely complete. Buildings that will handle incoming fiber and outgoing paperboard are well advanced and already in use as staging and assembling facilities for the rest of the construction activity. The infrastructure for our new recycled paperboard machine is being moved into place and framing for that building is on track. As a reminder, Once Waco is up and running, we anticipate shutting down our Middletown and East Angus recycled paperboard manufacturing facilities, which will lower our overall costs and reduce future capital requirements. We continue to expect the Waco investment to deliver an incremental $80 million in EBITDA in each of 2026 and 2027. Our packaging facilities are delivering the results we and our customers expect with excellent performance and cost discipline. One of our key initiatives this year is to build out the capacity to support our cold and go cup Chick-fil-A as well as our new Nissen noodle cup. We are one of a very small group of consumer packaging companies who can invest at the scale necessary to support the largest consumer products launches. In Europe, we opened our new Bristol UK beverage packaging and innovation facility. Bristol's new space is roughly double the size we had previously and is now well positioned to support our growing beverage business in Europe, where products like our keel flip are steadily replacing plastic ring carriers. Having a beverage packaging innovation team co-located with a modern new production facility allows us to showcase our capabilities to more customers more often. Meanwhile, the Bell acquisition, which we closed in the third quarter of 2023, has significantly extended our reach and expanded our capabilities in the food service market and our geographic reach in food markets. Another great thing about Bell is that it brings us real opportunities to grow in both of those markets with plenty of room to increase volumes at those locations without significant additional capital. Turning to the outlook on slide 12, we expect to see an acceleration in volumes as the year progresses and positive sales growth for the full year. That is, of course, excluding the impact of the sale of Augusta. As Mike has mentioned, our innovation sales are off to an excellent start, and we are on track to deliver $200 million of innovation sales growth this year. The Augusta sale should close tomorrow, May 1st. Net proceeds are expected to be approximately $550 million. We have made some updates to our guidance on slide 13. As a reminder, The guidance we provided in February included a full year of Augusta production. With the sale expected to close tomorrow, we have updated guidance to reflect expected results for the four months that we will have owned Augusta. Again, keep in mind that we historically operated our bleached paperboard manufacturing facilities as a system and sold $100 million and $33 million of adjusted EBITDA at the midpoints represent the book of business that we are selling along with the Augusta facility rather than how Augusta might have performed independently. We have also narrowed the guidance range for the business. As such, the only change to the midpoints is to reflect the partial year of ownership of Augusta. And while we don't provide quarterly guidance, I do want to point out that we expect our second quarter EBITDA to be impacted by roughly $50 million versus the year-ago quarter, which includes approximately $40 million related to the sale timing and the exclusion of two months of contribution from Augusta, and approximately $10 million of higher planned maintenance costs. That will impact the second quarter EBITDA margin, but we continue to expect full-year margins consistent with our guidance and the targets we established with our Vision 2030 long-term financial model. Turning to slide 14 and stepping back for a moment, let me remind you of those Vision 2030 financial targets. Our base financial model is about consistency, reflecting the strength of the consumer packaging business we have built. Low single-digit sales growth, mid-single-digit adjusted EBITDA growth, and high single-digit adjusted EPS growth capture our outlook for the business over the next several years. Our customers decide the timing of product launches. Therefore, innovation sales can be lumpy, so we could be a little higher or lower than these annual targets in any given year. We have the assets and the capabilities we need to reach these goals. and our 5% of sales target for capital spending leaves plenty of room for discretionary investments that will make us a better and more capable consumer packaging leader. Turning to slide 15, we are in transition between Vision 2025's substantial investment programs and Vision 2030's focus on execution and cash flow. That shift really becomes clear as we move past peak CapEx this year. In 2025, the drop in CapEx alone should drive a $200 million improvement in cash flow. In 2026 and 2027, we will see the incremental EBITDA benefit from the Waco investment. And through 2030, we expect to generate upwards of $5 billion of cash. We will deploy that cash to drive returns for our stockholders with benefits for all of our stakeholders. Reinvesting to keep our business strong and to maintain our leadership position will always come first. We believe that a solid dividend that grows over time represents appropriate and responsible capital allocation. Equally important is maintaining a strong financial position. I want to be clear about how we think about leverage. With the substantial and increasing cash flow we expect to generate, We plan to reduce leverage over time. But we will remain opportunistic. So our debt levels may fluctuate. You saw them rise modestly this quarter, for example. As we see it, we already have a business capable of being investment grade. We will only pursue an investment grade credit rating when doing so brings the most benefit for our stockholders. We view share repurchase as an attractive way to return excess cash to stockholders, and we continue to review every potential capital deployment against the alternative of share repurchase. As I said a moment ago, we have the assets and capabilities we need to reach our financial targets. We will, of course, always consider tuck under M&A that can make our company's sustainable consumer packaging portfolio even stronger. As we have discussed, the bar for M&A is set fairly high right now. We've included some supplemental information as an appendix for your use and modeling. That concludes our prepared remarks. Let's turn the call back to the operator to begin the question and answer session. Operator?
spk09: Thank you. If you would like to ask a question on today's call, please press star 1 on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. Politely asked question is to limit themselves to one question and one follow up each so that we may process the queue in good time. Our first question comes from Mark Weintraub from Seaport Research Partners. Mark, your line is open. Please go ahead.
spk04: Thank you. First, a real quick simple math question. So it seems that Augusta balance of the year 65 to 70, I'm sorry, 65 to 70 million impact on EBITDA. Since you highlight 40 million in the second quarter, does that mean the second half is only 25 to 30 million?
spk14: Hey, Mark and Steve, I think your math is directionally right. Most of the earnings profile last year with our board facilities incurred in the first half of the year. We took very meaningful market-related downtime in the second half of the year. We had almost $100 million of market-related downtime in the second half of the year. So, yes, second half. EBITDA is much more modest. Most of the comparisons relative to the earnings decline here in Q1 as well as in Q2, where we also, you know, is where you see most of the reduction.
spk04: Okay, thank you. And then second, at the start of the year, you guys announced February price hikes on CUK and CRB. To date, these increases have not been reflected in pulp and paper week. So kind of two related questions on that one. How do business dynamics look to you now versus how they did when you made those announcements And then second, practically speaking, if they still look as good or better than they did then, would you need to be announcing again or do you consider the February increases to still be live?
spk02: half of a year. So at a high level, that's how we're viewing the markets that we sell in. And again, by way of reminder, when we talk about markets, we're talking about the 95% of everything we sell that winds up in a package. And we're not specifically speaking about paperboard. I think that's an important distinction to make, particularly now, given, as we've talked about today, that come tomorrow, the Augusta mill will no longer be something that we own. And We choose to make paper board where we have higher ROIC and competitive advantage, but we also buy a lot of paper board on the open market. In regards to the announcements that we made earlier this year, we're still actively implementing those and the agreements that we have, and we have had success. So, I'm going to leave it at that. we are finding ways to pass along our input cost inflation to customers over time, which is what you'd expect us to do.
spk04: Okay, I appreciate this. Just to clarify, if I just could. So, because I know you talked about you're moving towards eliminating third-party indexes as well, and not clear necessarily from the outside how much of that's been accomplished and what replaces it. But am I right to understand that with the price increases that you've announced, that perhaps some of them you might be getting from your customers, whether or not it's reflected by pulp and paper week, and that being distinct from cost inflators and things like that, but from price increase announcements that you come to them with.
spk02: That'd be a safe assumption for you to make. And again, all those relationships are proprietary, so we're not going to break out percentages, but we are actively implementing those increases where we have the opportunity to do so.
spk09: Okay, appreciate that. Thank you. The next question comes from Lewis Merrick from BNP Paribas. Lewis, your line is open. Please go ahead.
spk07: Good morning and thank you for taking my question, too, if I may. Focusing on the food service end market, we've heard from some of the major food service players talk about this slowdown in customer traffic growth and a shift to cheaper menu items. How does the shift from the premium end of food service to the more value end of food service impact you? I'll leave my follow-up after this question.
spk02: Okay. So from our standpoint, Louis, as you saw in Q1, we still are seeing an acceleration, our ninth quarter in a row of quarter-on-quarter gains in sales in that category. So we have not seen a trade-down there per se, at least in the products that we're selling to our customers.
spk07: Thank you for that. And also, you flagged that Waco will be at 160 million EBITDA run rate after two years of operations. Is that the fully ramped contribution, or can we expect a bit more trailing into the third year for that project?
spk14: Bill Lewis and Steve, the 160 million is what we have direct line of sight to in the first two years of the ramp-up, similar to what we saw. With Kalamazoo, and given that we'll be utilizing a lot of the same capabilities, we see the kind of vertical ramp that we saw with Kalamazoo occurring in Waco. It'll be a combination of cost takeout, overall lower cost to produce, and to support some of our growth. Beyond that, you would expect to continue to see us to improve upon the business year over year through our own productivity initiatives and more efficiencies. million over the first two years is what we can see through cost and supportive of our growth.
spk07: Many thanks.
spk09: Thank you. The next question comes from Gancham Punjabi from Baird. Gancham, your line is open. Please go ahead.
spk08: Thank you. Good morning, everybody. Morning. Hi, Gancham. Good morning. So I guess, you know, if we go back to slide five, we have all the, you know, breakdown across the end markets and so on. You know, beverage and food service, clearly we're, you know, improving in the first quarter at least year over year. But are you surprised given the level of destocking that was in food and some of the other categories like household, et cetera, that Q1 did not track a little bit better?
spk02: Well, certainly from the standpoint we were 1% off of where we were kind of indicated we'd be. Yeah, I mean, there was a little bit there that was specifically on the food side of the business. We saw a little weaker cereal and frozen pizza market, both in the Americas and international. We did see some improvement, though, in dry foods and bakery items. So it was kind of a little bit of a mixed bag there, for sure. But yeah, I think as we look at it, Easter was really just the way it played out this year. Some years, Easter is really busy. So this Friday, are running this year. They did not. And so it impacted us in the quarter. But we've seen a good correction on that here in April. And our confidence is high. We'll inflect growth in the second quarter and the second half of this year. Gotcha.
spk08: Okay. Thanks for that, Mike. And then in terms of inflation, so clearly we're seeing a sort of a sequential pulse of inflation across many different upstream inputs, OCC, energy, and so on and so forth. You know, what are the offsets? I mean, I know you're sort of reiterating guidance on an EBITDA basis for the rest of the year if you're just out for Augusta, et cetera. But, you know, if inflation is a little bit higher, maybe volumes are tracking a little bit lower, what are the positive offsets that give you comfort on the EBITDA?
spk14: Yeah, gosh, man, Steve, I think you touched on it. In the first quarter, as an example, we had inflation, as you noted. OCC, obviously, some logistics costs were up for a while. we saw wood um energy primarily nat gas and overall in our chemicals and residents so those were playing you know relatively modest the mark the market today remains uh relatively modest that being said you're correct there's some inflation out there that we're actively looking to and will continue uh to manage uh as mike said volumes were about one percent shy of our expectations overall and with the nearly 20% even down margins. Inside of the business, overall productivity was very good. Obviously, we were matching demand with supply on the open market paperboard side, which was well chronicled, but the core packaging business performed very well in terms of across our packaging platforms. Productivity was strong, and it successfully offset other inflationary items.
spk02: I think maybe just a little bit to add on to that. We tried to give you a little insight, Don, It's not major in a normal year, but the 23-24 setup really, because of the stocking that occurred in 23, really kind of sets the stage the back orders that we have and how we're running. We don't see that. And again, again, the exposure to, you know, bleached paper board on the open market side, you know, is not going to be something that we manage, you know, going forward with. So we put all those things together and we see a nice setup for the balance of the year.
spk08: Thank you for that.
spk09: The next question is from Phil Ng from Jefferies. Phil, your line is open. Please go ahead. Good morning.
spk06: This is actually John Lottigan on for Phil. Thank you for taking the time. I wanted to first ask about how much visibility you have into those innovation sales. I mean, it's a little bit lighter than I would have thought to just start off the year, but obviously it's got to be ramping up, and you talked about some of the wins that you already have. Are those already locked in, or is there just some conversations that are ongoing at this point that gives you some assurance in the pipeline for the back half of the year?
spk02: I appreciate the question, John. I mean, in terms of those kind of sales and innovation sales, and you mentioned $37 million we achieved in Q1, you know, the selling cycle on that is out six, nine months. So we've got really good visibility into kind of the flow through of what that looks like. And our confidence level is high. We'll meet our $200 million number that we put out there for 2024.
spk06: Okay, great. And then on the Augusta sale, if I remember correctly, the transaction value was at 700, and I think you were expecting a little bit over 100 million in tax. The net proceeds are calling out now of 550, a little bit lower than I had been expecting, although I know the number was supposed to be somewhere in the 500 range. I was thinking more high fives. Is there something that changed there? You know, anything to note or call out, or that was kind of in line with your expectations originally?
spk14: Yeah, John and Steve, I think at our investor day, we were at $550 million in net proceeds and no change to that. So $700 million transaction, $550 after the taxes associated with the tax gain on the business. So no change relative to the $550 million that we'll have available to us tomorrow.
spk06: Got it. All right. Thank you very much. I'll turn it over.
spk14: Thanks, John.
spk12: next question comes from george staffos from bank of america george your line is open please go ahead thanks very much uh hi guys thanks for the detail um i guess maybe a different take on a similar question you've had earlier today as you looked at the first quarter and the volume that you ultimately had across the end markets where was the biggest surprise And what do you attribute it to? And you said you've had a nice rebound into April and the second quarter. Can you tell us what types of volumes you're seeing early in the quarter across your big end markets?
spk02: Yeah, I can give you a little insight into that, George. So, again, at a high level, And we got a couple things emailed into us around, you know, was that some pull forward? The reality of it is, for us, than we usually give you there. But on the other side of that, we saw, you know, a strong market for air filter frames. So, you know, there tends to be a bit of a mixed bag, and I think it's important to remember, you know, relative to where we were in the middle of February, we're off about 1% from what we thought we'd be, which is pretty darn close, you know, at the end of the day. And, George, to the second half.
spk12: I'm not picking at, Mike, if I may, I'm not trying to pick at you guys were on or off from your forecast. I'm trying to figure out From what you reported, what may be going on underneath the hood from your customer's perspective, so that we model on a going forward basis. So it sounds like cereal and frozen were weak, but your customers don't see that. And this is really what I'm getting at. Don't see a change in underlying consumption from what they're seeing, i.e. versus relative inflation or anything like that. I'm sorry, go ahead.
spk02: We've not seen anything to suggest a difference from kind of the recovery and from the stocking that occurred in 2023, largely for many of those customers. I think the question becomes, how fast does it bounce back? I know everybody wants it to bounce back really quickly. From our standpoint right now, we've kind of modeled in kind of a steady state. which is kind of how we're thinking about it, it's a pretty conservative view.
spk12: Okay. Mike, just to that point, and then I had my second follow-on. You said steady state, so we should assume that so far in April you're running relatively flat or you're actually up a little bit. And then my second question, understandably because of Augusta, you're going to have largely because of Augusta, you're going to have a $50 million impact. So when we look either year-on-year or versus the first quarter sequentially, are we somewhere in the low 400s in EBITDA in terms of what you're sort of expecting for the quarter? Thank you.
spk02: Yeah, thanks, George. I'll take the first part of it. And the answer is yes, we're up a little bit here in April as we expected to be kind of coming out of the Easter holiday weekend. And I'll let Steve put a little finer point on that.
spk14: Yeah, no, George, you summarized it. Low fours in Q2. By reminder, it's a pretty intensive planned maintenance downtime quarter for us. We have two of our wood fiber facilities, Exarchana being one of them, down for normal planned maintenance. So that's a normal activity in the quarter. And then we have very limited And what we expect is the elimination of other supply-demand So, yes, you can do the midpoints on the EBITDAs. You can kind of see an 840, 940 kind of midpoint. And that holds up very well from what Mike just indicated, 3%, 4% volumetric growth, good, strong productivity, and ability to run our overall manufacturing facilities to demand. And that gives us confidence. in the retention of the midpoint of the guide and the expectations we have for margins continuing to be in the 20% range on EBITDA.
spk12: Thank you, gentlemen.
spk09: Next question comes from Matt Roberts from Raymond James. Matt, your line is open. Please go ahead.
spk11: Hey, good afternoon, everybody. Thanks for the question. If I could touch a little bit on the pricing strategy, have you seen any near-term impact on your market share, or has there been any near-term trade-off in volumes for price? And when you do present new initiatives to customers, are there any certain metrics or cost inputs that you're able to demonstrate to warrant those price changes?
spk02: Yeah, so the way I'd answer that question, Matt, is, look, it's – That's really been the competitive backdrop that we've faced ever since I started in this industry almost 35 years ago now. So what we have is we've got a very broad-based converting network that tends to be able to take care of what our customers need, have the capabilities in those package manufacturing facilities to be able to sell them the wraps, the trays, the cartons, different things that they need. and really provide them exceptional service and quality. Beyond that, as we talked about, where it makes sense, where we can drive higher ROICs and create competitive advantage, we've invested in paperboard manufacturing. And then the grades that we manufacture post-Augusta, we are clearly the low-cost producer of those grades. be able to deal with a competitive situation that we do each and every day. And so in terms of share loss, it's pretty de minimis. There are some of those things that you take a few nicks here or there. You also get some wins. And so really, from that standpoint, I won't spend a lot of time thinking about that dynamic. It's really our future and our success will be driven by our innovation and our ability to drive new product sales. And as you know, our target this year is $200 million. that we've got going there. And then the balance of that is something that we just kind of do day in and day out.
spk11: That's helpful. Thank you, Mike. Appreciate that. Maybe a thing a little longer term about Waco. You talk about the $15 million cut per day recycling capabilities. What percent of your output does that represent, and what's the cost tradeoff like versus existing procurement methods? Are there any incremental costs with procuring those cups that we should consider? We're trying to think about the potential margin tradeoffs there. Thank you.
spk02: Take a step back and really think about how we in Waco, and I think the part of it that's really not completely understood at a high level is that's going to be the first fiber source that we put down. When we clean that paper cup up, it's incredibly high-value bleached fiber, and we'll lay that fiber down on the very top of the paper board that we're manufacturing in Waco, and historically, producers that make coated goal really helps us create competitive advantage there. And it's a very differentiated model than really any of our competitors are doing. And that's really what gets us so excited. So we'll see some costability there, work with our customers, and ultimately we'll create a more sustainable package. And it's really exciting.
spk11: Certainly. Thank you all again for the time.
spk05: the next question comes from aaron vizwanathan from rbc capital markets or in your line is open please go ahead great thanks um i just wanted to get your thoughts on um again going back to some of the volume developments that we've observed and how you think about the rest of the year so it seems like there was a little bit of a slowdown um versus your commentary in February at the Investor Day in certain of these categories, maybe including, as you noted, frozen and food and so on. As you look out into the rest of the year, are you hearing from your customers that potentially that was transitory and maybe that there will be some increased promotional activity? And related to that point, when you think about the rest of the year, do you think that Q2 is going to look a lot like Q1 and maybe the second half is going to be higher as you you know, get some of those gains back on the volume side? Or will it be different just given the sale of Augusta? Thanks.
spk02: Thanks, Arun. So from our standpoint, really, our miss to our expectation that we talked about at the investor day, the 1%, was really all about Easter. I mean, at the end of the day, it was around, you know, customers taking a little bit more production downtime around the Easter holiday than we had anticipated they would. It's bounced back. electrically our strongest year. And that's a little unusual, as I mentioned to Gansham, but it's really a function of the 23-24-D stocking phenomenon that occurs. And based on everything that we've heard from our customers, and we're pretty close with them, as you know, in terms of managing their supply chains, making sure they have what they need, driving innovation, and new products that we're selling to them, that all seems to square up pretty well.
spk05: Great, thanks. And then if I could just have one follow-up. So, you know, you will be getting the cash from Augusta. You know, I guess you're going to be winding down the Waco investment over the next year or two. So, as you look out in the future, I guess, you've laid out, you know, a nice Vision 2030 plan that's potentially more aggressive. How does that relate to maybe how you're thinking about leverage and capital returns? So, Do you think next year you could pivot to maybe a stronger capital return profile or what are your thoughts there? Thanks.
spk14: Yeah, Rudy and Steve, I think as we discussed in the prepared remarks, obviously we measure our capital allocation decisions, you know, against share repurchase as we always have. And in the context of the funds from Augusta as an example, You know, sitting here today with the confidence that we have in the business and the forwards that we're conveying you today, you know, we're comfortable with our debt levels. And so we'll, of course, make decisions around debt for share repurchase as we always do, whether it's from funds that come in tomorrow or on a go-forward basis, primarily supported by the very significant cash flow generation that we are on the way to generating more and that we've shared with you around capital allocation trade-offs.
spk09: Thanks. The next question comes from Anthony Pettinari from Citi. Anthony, your line is open. Please go ahead.
spk13: Good morning. You know, we've heard a lot about imports impacting sbs and i'm just wondering if you've seen you know any meaningful impact on crb or cuk from imports of those or other grades and you know with the box board hikes not being reflected in pulpit paper week i mean the you know crb cuk i mean there's really relatively small number of domestic producers so i'm just wondering if there's, you know, anything about the competitive environment that's different and if the import dynamic is meaningful or different than in previous years.
spk02: Thanks for that, Anthony. I'll take that. I think, look, if you take a step back and suggest a question, I'll give you a complete answer. I mean, if you really look at the imports, which is primarily from the Nordic countries, you know, wood, energy, transportation are all off, right? Q1 calls and all through last year, the structural reset of wood costs that they're dealing with in those markets. And ultimately, as you know, there were some port issues here this year, and so imports as a category actually tracked down year on year in Q1. And the other thing to remember about that is that many of those grades don't even our standpoint, you guys and Ritzy spent a lot more time thinking about it than we do. We buy FDB in Europe, and we have normal pass-throughs that pass through into our contracts. This quarter, they were down a little bit because prices had gone down. They're starting to announce increases, and our normal pass-throughs in Europe will allow us to pass those through like we always do. And in North America, we hardly ever run into inverter that, you know, they have the reasons for using that. But it's a pretty small part of what we see. And so from that standpoint, I don't see it impacting CRB or, excuse me, our coated recycled paperboard or our unbleached paperboard markets that you asked the question on. And as I indicated earlier, we're actively implementing the increases that we put out there. So that's our approach and that's how we're managing it. And, you know, there's pluses and negatives that always occur, but We were able to grow the revenue top line the way we did it and ultimately generate a 19.6% EBITDA margin with all those things that are going on. I think that's the most important. opposed to, you know, kind of the supply and demand dynamics where we actually, in some cases now, can win, you know, some of those dislocations just given, you know, how we've set up the company in terms of our purchases and how we operate it. So it's different than it was in the past. And it will take a little while for you guys to see that, but structurally, you know, tomorrow's a big day for us.
spk13: Got it. Got it. That's very helpful. And then just quickly on your European business in the quarter, I mean, you talked a little bit about, I think, a healthcare pullback in EU. Generically, like how has that business performed in terms of sort of end market demand year to date, Europe specifically?
spk02: You can appreciate that healthcare in general tends to be pretty stable. I asked our European president, Joe Yost, a little bit about that.
spk13: Okay, that's helpful. I'll turn it over.
spk09: The next question comes from Gabe Haskey from Wells Fargo. Gabe, your line is open. Please go ahead.
spk03: Mike, Steve, good morning.
spk09: Good morning.
spk03: I want to revisit the price concept. And I appreciate that they're proprietary on an individual basis. But just for the benefit of all of us in the outside world, can you describe for us how much of your domestic converting business is today conducted on an indicee versus non-index based? And then as you do find success with your strategy to migrate away from these, when do you envision maybe not having to announce public price increases for third party recognition? And then the last one is, it sounds like Mike from your commentary that the sales ramp in the second half will be kind of a combination of all three. So in other words, additional innovation sales that you guys are able to monetize, price being positive, as well as volumes being positive on a year-over-year basis. I'm talking about sales volume versus, I appreciate, production volume will likely be up given the downtime that you took.
spk02: Yeah. Look, I think you answered the second part of the question accurately. That's exactly how we expect it to play out. In regards to pricing, Gabe, as we talked about at our investor day, we're just not planning you know, some other form of index model that we work with them because we do view them as proprietary. And I think it's demonstrated by the fact that it's working. Take a look at our EBITDA margin, how we've been able to have consistency there and continue to perform at the type of target that we put out there, the 20% target that we've got as part of our Vision 2030. It's going to be a variety of things, and maybe the best way that I can do to kind of give So the mechanism itself isn't something that, and they have for how to provide better transparency, That doesn't help you understand the business better in our opinion.
spk14: And, Dave, just repeating a key point that Mike's making. The vast majority of the pricing-related discussions we have with our customers are focused on the value of the package, the vast majority of them. We're constantly renegotiating with customers, whether you're on a one-year contract, a two-year contract, a three-year contract, and the minority of the discussions are, And so we'll just continue to talk about how we're operating and running the business holistically as a consumer packaging business, obviously with the margin profile that we're committed to continuing to maintain and grow.
spk03: Okay. I appreciate the margin comment, guys. Real quick, point of clarification, Steve. I think you responded to an answer or to a question about the Augusta mill project. 100 million of EBITDA. Did you mean 100,000 tons of downtime? And I apologize. I just missed it. 100,000 tons of downtime in the second half?
spk14: Last year, we had about $100 million of market-related downtime in the second half of the year that we do not expect to repeat this year. I think to Mark Weintraub's question, Mark was... just providing some context around kind of the earnings profile, first half, second half. Last year, the Bleach Paperboard business, as we ran as a system, generated significantly more profitability in the first half of the year than the second half of the year. Hence, the negative comp here that we're managing through in the first half which becomes much more de minimis in the second half of the year as we operate what will be the Texarkana facility with our own internal needs being run quite full to support our own packaging needs from that facility, effective literally tomorrow.
spk03: Yep, understood. Thank you.
spk09: Our final question today comes from Adam Samuelson from Goldman Sachs. Adam, your line is open. Please go ahead.
spk10: Yes, thank you. Good morning, everyone. There's been a lot of ground covered today, so I'll try to be brief. As we think about the innovation, sales growth for the year, $200 million, of which you realize $37 million in the first quarter implies a ramp to the back half of the year. Can you just share with us how much of that is Paysetter-Renier at this juncture versus just doesn't seem like some of the big items, whether it's the Chick-fil-A or Nissan or Bordeaux would be applicable on that. And are you actually seeing incremental value uplift from Paysetter-Renier at this juncture, or is that still incremental into the future and maybe dependent on a second source of supply in Waco?
spk02: Yeah, thanks for the question, Adam. important distinction to make. Since it is a new grade of paper board, we've got trials and qualifications that ultimately have to take place, and we're in the midst of doing those. We do expect it to make a contribution to that $200 million total, because it already is. Admittedly, it won't be a who pay for conversions for cups, it's trays and bowls, it's Bordeaux. We're really excited about Bordeaux. You look at Bordeaux, it started as a French infant formula. Anything that's kind of that granular, you know, like coffee we've got or rigid like gum or confectionery items, I mean, it really fits it well. It's a $2.5 billion opportunity for us, and we're quite confident we'll wind up with over There's a machine that goes in with our customers and really helps them with merchandising and branding. So that's really where our focus is. You don't have to drive that stuff. But, yeah, very excited about a set of Rainier. And ultimately, as you correctly pointed out, in 26, we'll have another paperboard machine capable of making that great paperboard, which is very exciting.
spk09: Okay. I appreciate the color. I'll pass it on. Thank you. This concludes today's Q&A session, and I would now like to hand the call back to Mike Doss for closing remarks.
spk02: Thank you all for joining us on the call today. I'm optimistic about our growth outlook and pleased with the progress we are making with innovation sales. Vision 2030 is about execution, and we are off to a good start. than it was just a few years ago, and I truly believe that our value creation story is just getting started. Thank you. Have a safe and very good day.
spk09: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Disclaimer