Graphic Packaging Holding Company

Greetings. Welcome to the Graphic Packaging Holding Company's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Melanie Skigis. You may begin.

Good morning, and welcome to Graphic Packaging Holding Company's second quarter 2024 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 report, we will be referencing our second quarter earnings presentation, which can be accessed through the webcast and also in 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 forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone, and thank you for joining us on our call today. Graphic Packaging is a global leader in sustainable consumer packaging. We spent the last eight years building a stronger, more diverse packaging portfolio capable of delivering consistent results, solid growth, and substantial cash flow across a range of economic conditions. The benefits of that portfolio transformation and the commitment and talent of the graphic packaging team were clearly evident in our second quarter results. In the second quarter, graphic packaging sales were $2.2 billion, adjusted EBITDA was $402 million, and adjusted EPS was $0.60. Our reported sales were $155 million below year-ago levels. Excluding the impact of the adjusted investiture and related bleached paperboard sales, net sales from our packaging business were down $73 million, or about 3%. Overall volumes were flat, in line with our expectation of flat to slightly positive, and both price and mix were a small negative, as Steve will discuss shortly. We ran extremely well, and our margins were strong, despite the very significant planned maintenance expense we incurred during the quarter. That leaves us well positioned for the second half. Innovation sales growth and customer promotional activity are both expected to move higher in the third and fourth quarters. Turning to slide three, we closed on the sale of the Augusta Bleach Paperboard Manufacturing Facility on May 1st, eliminating most of our open market bleach paperboard sales. And today, 95% of our sales come from sustainable consumer packaging solutions. Excellence in consumer packaging design Innovation and execution is what drives our sales, our consistency, and our growth. We do produce our own paperboard, where doing so drives significantly higher return on investment capital and helps us deliver more consistent results for customers and stockholders. That was the impetus for the Augusta divestiture and the strategic logic behind our Waco recycled paperboard manufacturing project. Construction progress at Waco has been excellent. and recent storm activity in Texas caused very little disruption. We remain on schedule, and when we begin production in late 2025, we will extend our competitive advantage we have in recycled paperboard in both economics and product quality across all of North America. The investments we are making in our global network of packaging facilities, while smaller in dollar terms, are equally important to our strategy and our success. Last quarter, we highlighted a new beverage packaging facility and innovation center in the UK. And today, I want to highlight two important investments we've made here in North America. Our Heidelberg 3B printing press, one of the most productive in the world, reached its target productivity at our Winnipeg food packaging facility in the second quarter. This state-of-the-art press replaces two older presses and allows us to offer seven colors or finishes rather than six, along with a wider range of print and design options. It also gives us greater flexibility in layouts and higher speeds, which reduces costs and raises productivity. I am very proud of the work our Winnipeg team has done bringing this new investment to its full potential so quickly. In Perry, Georgia, we completed the automation of finished goods handling at one of our largest beverage packaging facilities. Product handling in a packaging plant has historically been labor-intensive, and is the point in the manufacturing process where there is the greatest risk of product damage. The automation project helped us de-bottleneck, reduce labor costs and handling risks, and drive improved service levels. We have a deep pipeline of projects like these, most of which are relatively low capital costs and high returns. Turning to our packaging results, while volumes are recovering slowly overall, I am encouraged by what is happening inside our portfolios. Our food service results are outperforming the industry, beverage remains strong, and our food, our largest market, was dramatically better year over year than it was in the first quarter. As you read in the press, more shoppers are buying groceries at mass retailers and super stores, and that includes both private label and branded products. We are certainly participating in that shift. Mass retailers and super stores are just as committed as brand owners to giving consumers the sustainable packaging they prefer. The Bordeaux coffee canister we discussed last quarter with Mother Parker, the biggest U.S. coffee supplier to mass retail and private label, is a good example of that commitment. Innovation sales growth was $51 million in the quarter, and we are on track to deliver $200 million for the full year. I was particularly pleased to see solid contributions from strength packaging, including coffee cake cups and snack multi-packs for club stores. And we again saw encouraging contributions from both food and beverage cups. Europe has less than a quarter of our overall sales, but contributed roughly half of our innovation sales growth in the quarter. European consumers are amongst the most sustainably conscious in the world, and that has made Europe the epicenter of global packaging innovation. Our investment to build Europe's best innovation platform are delivering results that we are leveraging globally. Our packaging operations ran well, and some modest price and inflation headwinds are fully offset by strong net performance. That is a testament to the quality of the graphic packaging team and our commitment to delivering consistent results. Slide four is something you're going to see regularly in our presentations because the breadth and depth of our packaging portfolio is the foundation for graphic packaging's consistency and growth. We serve five markets. Food is the largest. Beverage and food service are next. and we see big opportunities to grow the scale of both household products and health and beauty. There's a very good chance that you have held more than one of our products in your hands in the past 24 hours and will do so again in the next 24. Now let's look at our sales in more detail on slide five. I think it's fair to say consumer consumption trends you're reading about we see in our results. Food markets, which represent 40% of our sales, saw a significantly smaller year-over-year decline. With more people back in the office, consumers have less time to cook, and that is driving the better results we are seeing in categories like frozen pizza and frozen entrees. But consumers are also trying to cut costs where they do cook, which is driving better demand for pasta, rice, mac and cheese, which have lower price points for the consumer. Dry food is one of the places where private label is gaining share, and that is certainly the case in our portfolio as well. Beverage continues to show strong performance after more than two years of positive comparisons. Soft drink growth helped pace beer during the quarter, while sparkling water and juice were both stronger versus a year ago. In food service, after nine consecutive quarters of 5% plus year-over-year growth, we did see a very modest slowdown, but despite the challenges some of our QSR customers are facing, we actually came pretty close to our 10th consecutive 5% plus quarter. That is a function of the strength of our innovation and our continued investment capabilities and execution. And finally, household products and health and beauty are recovering more slowly versus our other markets. In household, categories like filter frames, food storage, and detergents showed improvement, while tissue and cleansers remain relatively weak. Several major producers have indicated plans for higher promotional activity in the second half. Keep in mind that health and beauty is a small business for us, but it has substantial growth potential in North America over the next several years. If you'll turn to me to slide six, you'll see the seasonality chart on the left that we shared with you last quarter, which describes the typical seasonal patterns for each of our five markets. For the most part, second quarter tends to be pretty average overall, with food normally modestly lower than the other quarters, and beverage stronger, and no other notable outliers. These seasonal differences are not large, just a couple percent of the annual total. They reflect underlying super behavior patterns that follow things like summer and winter weather and holiday activities. You will notice that none of our unusually strong or weak months come in the second quarter, but you may recall this past March, which is typically the strongest month of the first quarter, was weaker for us because of the timing of Easter. That led to a catch-up in April, so that was the small timing difference this year versus normal. While overall consumer packaging volume was flat, we saw volume improvement in Europe in each month of the second quarter, while North America volumes were uneven. You most often hear me talk about the benefits of our European business in terms of innovation, but this quarter is a good reminder that Europe makes a significant contribution to our ability to deliver consistency as well. Promotional activity by our big branded customers is ramping up in North America, although that trend not as pronounced in our orders during the second quarter as we expect it will be in the second half. I've already mentioned the strength in mass retail, superstore channels we are seeing, and private label overall is certainly performing very well. We are managing some pricing headwinds, but the impact on our margins has been quite limited, as Steve will discuss. We are executing price increases across most of our North American business, which will address that price pressure. In Europe, Price is mostly a pass-through, and paper board prices appear to be rising again. Looking ahead, the third quarter brings more hot weather and back to school. And as you can see on the seasonality chart, in a typical year, third quarter tends to be the strongest quarter overall. And July is certainly off to an encouraging start across a wide range of products and customers. Even so, consumers have become much more sensitive to price and value. and brand owners are responding with plans for higher promotional activity. Meanwhile, value promotions are gaining traction at QSRs, and we are beginning to see that in our order books. Mass retail and super stores are benefiting from the search for better value with multi-packs that appeal to consumers seeking to keep per unit costs down. Back to school means the end of vacation season, less time spent outdoors, and in general, more meals prepared at home. we expect to see a positive impact on categories like prepared foods and snacks at the same time fewer remote jobs means less time to cook and that tends to drive growth in food service prepared meals and ready to eat options we are seeing that in a meaningful way in our european convenience business today and expect to see it again strength in north america in the second half slide seven outlines our five innovation platforms, which we are seeing very strong engagement with customers across all of them. Some of you have asked whether the stocking we saw last year has led to any delays in new product launches. In general, we aren't seeing that. Customers do sometimes adjust timing and pace of their launches in response to market conditions, but we tend to have good visibility at least six to nine months out. As a reminder, The $15 billion of potential sales we identified here only includes opportunities where we already have a product solution that has been commercialized or will be commercial very soon. So it isn't a TAM in the traditional top-down sense. These are figures we built based on specific target markets and specific plans we already have in place. Most of our large customers have made commitments about the sustainability of their packaging. In Europe, many tell us they want to meet the new standards earlier than they were required to. Our customers' interest in and commitment to packaging that is more circular, more functional, and more convenient continues to rise. And the investments we have made to be the global innovation leader in sustainable consumer packaging are paying off. Last quarter, I highlighted our Portio paperboard canister, which is now helping to reduce plastic consumption in the U.S. coffee market. Today, I want to highlight another innovation that originated in our European business, paper seal shape on slide eight. Paper seal was developed in collaboration with our partner, G. Mondini, as a replacement for plastic bowls, trays, and other difficult to recycle products. Paper seal started out with rectangular trays, but paper seal shape allows us to offer a much wider range of shapes and sizes, including the eight-sided salsa bowl you see on the left side of the slide. PaperSeal Shape can also be configured with multiple compartments to hold bibs and crackers, for example. The PaperSeal product line offers outstanding barrier properties and extended shelf life relative to some plastic alternatives. That ultimately reduces both cost and waste. It also offers outstanding printability that makes brand messaging really stand out. Our first PaperSeal Shape customer in the United Kingdom is Sainsbury's, one of UK's top food retailers. for their private label bread and chicken line. We and Mondini have been working closely with Sainsbury's and Moy Park, one of Europe's top co-packers. Our trays were designed to run on Moy Park's existing lines, which also handle plastic trays for other customers. Our ability to run on existing lines without expensive modifications is an important and often complex aspect of new product commercialization. Paper seal reduces plastic content in a tray or bowl by over 70%, and the lid and liner separate easily from the paper board for recycling, which is especially important for European recycling programs. This one implementation will reduce plastic consumption by about 300 metric tons per year, making it a win for Sainsbury's, a win for UK consumers, a win for Graphic Packaging, Mendini, and Moy Park. and importantly, a win for the planet. Paper Seal Shape exemplifies our success in creating packaging solutions that are more circular, more functional, and more convenient. Finally, and before I turn it over to Steve, I want to take a moment to remind you that our Vision 2030 is much more than just a set of financial targets. Slide 9 lays out our four pillars of our strategy, which describe our goals and our aspirations. Innovation is at the heart of what we do because better, more sustainable packaging is what our customers are asking for and what consumers prefer. We have an exceptional team, and we are working relentlessly to make it even stronger. We have clear plans, not just targets, for reducing our environmental footprint, and our packaging innovations help our customers meet their own sustainability targets. We know how to execute. and measure our performance against clear goals and aspirations. We are delivering results. Now let me turn it over to Steve for a review of our financials and operations. Steve?