Graphic Packaging Holding Company

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.

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.

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.