Graphic Packaging Holding Company

Greetings. Welcome to the Graphic Packaging Holding Company fourth quarter and full year 2024 conference 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. Vice President of Investor Relations, you may begin.

Good morning and welcome to Graphic Packaging Holding Company's fourth quarter and full year 2024 earnings call. We have with us on the call today Mike Doss, the company's President and Chief Executive Officer, and Steve Scherger, Executive Vice President and Chief Financial Officer. On today's call, we will be referencing our fourth quarter and full year 2024 earnings presentation, which you can access through the webcast and also on the investor section of our website at www.graphicpkg.com. 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. Now, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone, and thank you for joining our call today. Graphic packaging is a global leader in sustainable consumer packaging. In 2024, we demonstrated the strength of our business model, delivering strong and steady margins in challenging market conditions. We are well positioned for 2025 and to meet our Vision 2030 aspirations in the years ahead. For the full year 2024, graphic packaging sales were $8.8 billion, adjusted EBITDA was $1.7 billion, margins were 19.1%, and adjusted EPS was $2.49. In the fourth quarter, graphic packaging sales were $2.1 billion, adjusted EBITDA was $404 million, margins were 19.3%, and adjusted EPS was 59 cents. Turning to slide three, 2024 marked the start of our transition from our Vision 2025 transformation plan to Vision 2030, which we presented at our investor day last February. Our transformation to a leading consumer packaging company will be largely complete later this year. I will come back to Vision 2030 later in my remarks. In May of 2024, we divested our Augusta, Georgia, bleach paperboard manufacturing facility, along with most of our open market bleach paperboard sales exposure. Augusta was a high-quality asset with a strong team, but did not have the level of competitive advantage we believe was required to support ongoing capital investment. We elected to put the capital to better use for our stockholders. After the day of estature, 95% of our sales come from high-value consumer packaging. We made a number of moves during 2024 to improve our environmental footprint, including the execution of a virtual power purchase agreement, which significantly increases renewable energy use in our European operations. Minimizing our environmental footprint and helping our customers minimize theirs is fundamental to our mission. During the second quarter, we applied $200 million to the Augusta domestic common shares outstanding, and during the full year 2024, we paid dividends of $122 million. After the close of 2024, and in recognition of the strong results our business model is delivering, as well as declining capital spending needs, the Board of Directors approved a 10% increase in our quarterly dividend to $0.11 per share, effective with the April 2025 dividend payment. Volumes did turn positive in the second half, up 1%, although the pace of normalization was slower than we and many of our customers had anticipated. Four-year volumes are down approximately 1%. We delivered a scoring 19.1% adjusted EBITDA margin for the four-year 2024, with outstanding quarter-to-quarter stability, despite a challenging market environment. Our financial performance demonstrates just how much graphic packaging has evolved. When I became CEO back in 2016, our business, which was about half the size, far less balanced than it is today, wasn't capable of generating the consistency that we now deliver. Our team has done an outstanding job executing at a high level to build a consumer packaging business capable of generating strong and steady margins and cash flow across a variety of market environments. 2024 saw clear consumer focus on finding value, significant growth in private labels, and more consumers shopping for groceries at club and super stores. Our portfolio, which is designed to move with the consumer, responded well to those trends. We introduced new packaging innovations in all categories with significant new product innovations for our private label customers across the US and Canada and Europe. As our experience demonstrates, our private label customers and retailers are just as committed as our branded customers to plastic reduction, and to a more circular, more functional, and more convenient packaging that consumers prefer. And finally, we delivered innovation sales growth at $205 million in 2024. Turning to the fourth quarter on slide four, our Waco, Texas recycled paper board investment is moving ahead well and remains on schedule for startup in the fourth quarter. On a smaller scale, but no less important strategically, we continue to make targeted investments in our packaging facilities to drive productivity and expand our capabilities. Culture is the second pillar of Red Vision 2030, and keeping our team safe and focused on delivering results for customers is essential to our success. We continue to have one of the industry's best safety records, and in the fourth quarter, we saw improvement in employee engagement. We had an 87% global participation in our recent employee survey, which is really outstanding, and we saw a meaningful improvement in 11 of the 12 categories we measure. Engagement and safety go hand in hand and are two of my highest priorities. In the fourth quarter, volume was up 1%. Price was down 2%, consistent with the second and third quarter results. Results in beverage, food service, and household were relatively steady overall, while food was modestly weaker and health and beauty remained mixed. We saw further gains during the quarter with our private label customers and participated in the continued growth in grocery sales by club and super stores. In Europe, where consumers tend to shop more often for prepared, ready-to-eat foods, we are seeing volume gains with our convenience channel customers. The European convenience channel is a high-service, rapid turnover, refrigerated food market where our extensive packaging and logistic capabilities are a critical competitive advantage. As I noted, innovation sales growth of $63 million in the quarter brought our full-year innovation sales growth to $205 million. We are well positioned to achieve our goal of at least 2% innovation sales growth again in 2025. Our customers are always looking for better, more sustainable packaging solutions, and no one has invested as much or built as powerful a platform as we have to deliver the more circular, more functional, and more convenient packaging solutions that consumers prefer. Slide five is a reminder of just how broad our portfolio really is and why we are able to generate strong results even in challenging market conditions. Turning to slide six, let's look at our sales in more detail. Overall, year-over-year fourth quarter and full-year packaging sales were roughly flat, with a relatively steady performance in beverage, food service, and household, of modestly weaker results in food. Food represented approximately 38% of our packaging sales in 2024, and here we saw a continuation of the uneven results we experienced all year. We saw significant gains in pasta, which is seeing growth from consumers looking for simple and less expensive alternatives to prepared meals and takeout. We were also participating in the growth in mac and cheese. Always an affordable choice, mac and cheese is also benefiting from the newer gourmet varieties, which are taking a classic comfort food off-market while remaining relatively affordable. It is worth noting that in both the Americas and in Europe, private label represented the biggest share of the growth we are seeing in both pasta and mac and cheese, although branded is also doing well. But these gains were not enough to offset the continued weakness in frozen and refrigerated prepared foods categories, which tend to come in at a higher price point. Confectionery continues to see weakness in Europe as a result of high cocoa prices, while the U.S. demand has been more stable. Coffee and tea saw significant gains, thanks in part to our Bordeaux product innovation, but also from a shift in coffee consumption to home and office and away from coffee shops driven in part by the consumer focus on value. Categories like yogurt did well in both the Americas and Europe as consumers opt for this less expensive source of protein. As we think about shifting food purchasing behavior, it is important to consider the role retailers are playing. While growth in private label is significant, retailers are also creating and expanding loyalty programs. Loyalty programs are designed to keep consumers coming back at a time when consumers are increasingly visiting more stores but spending less in each one. The market will continue to shift, and graphic packaging is one of the very few companies with the capabilities to execute quickly and in scale for the largest CPGs co-packers, and smaller regional customers. The average, which represents about 25% of our overall packaging sales, saw some modest improvement with continued solid growth in Europe. Our European business is benefiting from regulatory requirements to eliminate plastic, and we expect those regulations to support growth in the business for several years to come. We are well positioned after the investments we have made in anticipation of this trend, including at Bristol in the U.K., where we've doubled the size of our facility and built a world-class innovation center. Food service represented 21% of our packaging sales in 2024. After 11 consecutive positive quarters, nine in a row, with over 5% year-over-year growth, we saw stability in the fourth quarter against a very strong comp last year. Our multi-year outperformance of the food service market has been driven by the growth in investments we've made and in innovations, that are helping our customers meet their goals to reduce plastic consumption and improve functionality. Food service continues to represent a big opportunity for us, driven by plastic and foam replacement and the demand for better, easier to use, and easier to recycle containers. Promotional activity by quick service restaurants remains strong. Our food service customers continue to focus on value options and are making other menu changes to drive volume. Household products represents approximately 12% of our packaging sales, and the results were generally flat year over year. Tissue continues to be one of the weaker year over year, but we are seeing better growth in cleaning products, particularly in Europe, as we are in pet care. Over time, we see clear opportunities to expand this part of the portfolio in both the Americas and in Europe. And finally, health and beauty, a small but promising part of our overall packaging sales, continues to show mixed results. This is mainly a European business for us now. Although we have some very exciting opportunities here in North America, thanks in part to Paysetta Rainier, our 100% recycled paperboard that performs as well as more expensive bleached paperboard. The high end of the cosmetics market remains challenged, but we are seeing improvement at the lower price points. Fine Fragrance is also showing encouraging gains. Healthcare remains challenging, but we suspect the majority of the destocking is over If you'll turn with me to slide 7, we present typical seasonal patterns on the left and our actual and expected experience on the right. Seasonality in the fourth quarter was relatively normal in beverage, where we saw the usual dip, but as I noted, after 11 quarters of impressive gains, our food service results were relatively flat in the fourth quarter. Our other markets, food, household, health, and beauty, performed broadly in line with normal seasonality patterns overall, with quite a bit of variation within those segments. driven by the consumer search for value. Monthly patterns were also mixed. October overall was not as strong as we typically see. November was fairly normal, and December followed the typical pattern, but with incremental impact from the timing of the holidays this year, as expected. I have already summarized our fourth quarter experience. Looking ahead to the first quarter, we expect the consumer's focus on value to remain strong. And importantly, as you are hearing from many of our customers, driving volume is moving up in priority. Many of our food and beverage customers are rolling out more new products and new configurations to reach consumers in new and existing channels. In food service, we continue to see focus on promotion with new menu choices emphasizing value and more limited time offerings designed to drive foot traffic. Each of these represent an opportunity for us to partner with our customers to create real value and we are encouraged by the level of engagement we are experiencing. Slide 8 outlines the company's five packaging innovation platforms and notes the scale of the opportunity we see in each one. Each of these five platforms made important contributions to our innovation sales growth in 2024 and will again in 2025. Alongside volume growth, plastic substitution is a top priority for many of our customers, and we have outstanding, commercially proven solutions for a very wide range of new applications. Turning to slide nine, I thought it would be useful to step back and look at the breadth of the innovation we delivered in 2024. Each quarter I've been highlighting an innovation win, but there are dozens of exciting new packaging innovations that we haven't talked about. From trays and bowls to beverage multi-packs to toothpaste to razor blade packaging, we have introduced some of the most innovative, most functional, and most convenient new packaging available anywhere. We are a clear global leader in sustainable consumer packaging innovation, and we are excited about the opportunities we see in the year ahead. On slide 10, you can see from the picture that our Waco, Texas recycled paperboard investment is moving ahead nicely. Our decision to accelerate equipment purchases has helped us de-risk key elements of the project. Today, we have all the major equipment on site, and that gives our contractors more flexibility and more ways to stay on schedule. We are signing recovered fiber contracts to coincide with the startup, setting up the logistics to bring trimmings from our own packaging plants to Waco, and talking to a wide range of sources to collect and recover paper cups. We designed Waco to be able to recycle up to 15 million paper cups per day because cups are an outstanding fiber source. Our ability to process paper cups generated in the Texas Triangle of Houston, Dallas, and San Antonio is one of the many competitive advantages that we've designed into this important strategic investment. Stepping back for just a moment, Vision 2025 was about transformational investment, investment in capabilities to drive greater top-line consistency, investments in innovation to drive growth and create the kind of packaging that consumers prefer, and investment in competitive advantage, which is what our Waco recycled paperboard manufacturing facility is all about. Waco is the last major investment of Vision 2025 and will allow us to fully capture the competitive advantage in quality and economics that started with our Kalamazoo investment and will soon be in place throughout North America. Turning to slide 11, Vision 2030 marks our transition from major transformational investment to innovation and execution. We have built a world-leading sustainable consumer packaging company on a foundation of innovation, an exceptional team, and a commitment to protecting and preserving the planet. We focus our resources to deliver outstanding results for customers, stockholders, and all our stakeholders. We are already making excellent progress towards our Vision 2030 goals and aspirations, and I'm incredibly proud of the results our team delivered in the challenging market environment we and our customers faced in 2024. Now let me turn it over to Steve for a review of our company's financials and operations. Thank you, Mike.

Turning to slide 12, sales for the full year 2024 were $8.8 billion. Fourth quarter sales were $2.1 billion. Volumes, which turned positive in the third quarter, were up 1% in the fourth quarter. Full year volumes were down 1%, a modest decline given the challenging market environment. Price declines remained steady and relatively modest at about 2%. consistent with the second and third quarters. Prices are stable as we begin 2025. The divestiture of Augusta and lower open market leased paper board sales reduced reported sales by $389 million for the year and by $103 million for the quarter. Other M&A, excluding Augusta, was a $27 million positive for the year and a $14 million negative for the fourth quarter. The fourth quarter reflects two months of sales impact from the rush of divestiture, which took place in November 2023. Recent currency movement has been noteworthy following the November election in the United States. Foreign exchange was a $15 million sales headwind in the fourth quarter, taking the full year to an approximately $24 million headwind. I'll come back to the implications that a strong U.S. dollar could have on our 2025 results in just a few minutes. Adjusted EBITDA for the full year was $1.7 billion and $404 million for the fourth quarter. Adjusted EBITDA margins remained strong and steady at 19.1% for the full year and 19.3% for the fourth quarter. Net performance was an outstanding $270 million for the full year and $80 million for the fourth quarter, offsetting lower pricing and inflation. The adjusted EBITDA impact of the Augusta divestiture and lower bleached paperboard sales was a negative $164 million for the full year and a negative $39 million in the fourth quarter. Power issues in the third quarter and the decision to accelerate digester maintenance into the fourth quarter reduced 2024 adjusted EBITDA by approximately $30 million for the full year and $5 million in the fourth quarter. These items should not repeat in 2025. Other M&A, excluding Augusta, was a positive $10 million for the year and a negative $3 million in the fourth quarter. Foreign exchange was a $9 million adjusted EBITDA headwind for the year and $5 million in the fourth quarter. The swing we saw in foreign exchange was the largest piece of the shortfall versus our Q4 expectations. We ended the year with $5 billion in net debt and net leverage of three times, in line with our expectations. Net debt is at a reasonable level for us, given the consistency of our sales and margins, our declining capital spending needs, and the rapidly rising cash flow generation we are anticipating as we move toward 2026 and beyond. We have no debt maturities in 2025 and only modest maturities in 2026. During 2024, we reduced outstanding shares by 5.6 million, or approximately 2%, even as the company invested $1.2 billion in capital and kept leverage within the target range. Slide 13 highlights the impressive margins that our business delivered in a challenging volume environment. Despite a broad-based customer and retailer destocking and consumers under pressure from inflation, both of which reduced our volumes, we are generating appropriate value for the packages we deliver, and that is translating into strong and steady margins. Turning to the outlook on slide 14, we expect 2025 sales growth consistent with our Vision 2030 base financial model in the low single digits. That, of course, includes our 2% of expected innovation sales growth. Given the volume challenges our customers are facing, the bottom of our 2025 adjusted EBITDA range assumes a year not very different from the one just ended. Even at that level, margins would be in the 19% range, which again speaks to the strength of the business model. Over the next six years of Vision 2030, we are confident in our ability to achieve our base model of low-, mid-, and high-single-digit growth for sales, adjusted EBITDA, and adjusted EPS. We have quantified the impact of the foreign exchange headwind that developed in late 2024. At current forward rates from Bloomberg, foreign exchange is an approximately $120 million sales headwind and an approximately $20 million adjusted EBITDA headwind in 2025 as compared to 2024. Our largest currency exposure is to the Euro, but we also have meaningful exposure to the peso, pound, Swedish krona, Canadian dollar, and yen. Our base financial model and our 2025 core guidance as presented on slide 14 exclude the foreign currency impact. The column on the right adjusts those core figures to incorporate the currency headwinds. If we leave currency aside for a moment, our expectation for 2025 would call for a relatively normal overall quarterly cadence broadly in line with the pattern outlined on slide seven. In the fourth quarter, we successfully accelerated capital spending again, taking total capital expenditures in 2024 to approximately $1.2 billion versus our previous estimate of $1.1 billion. 2024 was peak capex for graphic packaging, and we are now targeting 2025 capital spending in the range of $700 million, down $100 million from our previous estimate. As a reminder, beginning in 2026, we expect capital spending to be roughly 5% of sales, with 2% of that representing maintenance capital spending and the rest available for growth projects, greenhouse gas emission projects, and other productivity initiatives. Slide 15 summarizes the company's Vision 2030-based financial model and our capital allocation priorities. Once the Waco investment is completed later this year, our priorities turn to a more normal level of reinvestment for growth, which is included in our 5% of sales CapEx target, growing the dividend, opportunistic share repurchase, deleveraging, and tuck under M&A. Turning to slide 16, over the next several years, we expect to generate significantly more cash than we require for reinvestment. 2025 marks the beginning of a multi-year cash flow expansion cycle, and we intend to deploy that incremental cash to generate outstanding returns to stockholders while we further strengthen graphic packaging's position as the world's leading producer of sustainable consumer packaging. On slide 18, you will find supplemental information that may be useful for modeling purposes. That concludes our prepared remarks. We will now turn the call back to the operator to begin Q&A. Operator?

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions.

Your first question for today is from Louis Merrick with BNP Paribas Exane.

Morning, Mike. Morning, Steve. Thank you for taking my questions. Just to start, I was wondering if you could give us a bit of a flavor for how you're thinking through the impacts from any possible tariffs we've had mentioned from President Trump, both for yourselves and the wider industry, and if there are any potential second-order effects that might entail. And now I've just got a quick follow-up.

Yeah, thank you, Louis. I'll start with some of the macro on that, and I'll turn it over to Steve to make some commentary perhaps on the financial side of that. I guess if you just think for a minute around what was announced here at the end of the last week in terms of Canada and Mexico, kind of high level, we manufacture products largely for customers in those geographies and the facilities we have both in Mexico and in Canada. If you look at kind of the cross-border in North America, we estimate that around $300 million of paperboard in some cases. flowing in and some cartons that would flow out of the U.S. and into Canada, as an example. So it's relatively small, I think around 3% of our total sales. We really don't have exposure to China in a material way at all. And so as you kind of look through that, the biggest impact we've seen so far has really been on the translational impact on strengthening these currencies, and Steve gave a pretty good explanation of what that looks like. Of course, these tariffs are now on hold for 30 days, so like everybody else, we're going to have to wait and kind of see how that plays off, or certainly that's Canada and Mexico. But that's how we're thinking about it. We do have some actions as things get clearer where we could shift some production to probably minimize some of those things once we have a clear line of sight if, in fact, something does go in and we need to respond.

Perfect. Thank you.

And then just focusing a bit more on the volumes, clearly returned to positive volumes in the second half of 2024. Have you seen that trajectory sort of continue as that played out in January?

Yeah, thanks for the question on that. If you kind of look macro, you know, 2024, you know, the first half we were down 2%. The second half we were up 1%. We delivered $205 million of innovation sales. I'm really proud of that. Our funnel for innovation remains very strong, and our confidence level, we continue at that kind of pace with what you see on page eight and nine of our deck remains very, very high. So as we look at 2025, we've given you a guide of 1% to 3%. It's early in the year, but if you look at January, We saw, you know, it's our weakest quarters. You can see on slide seven relative to kind of how the timing plays out with our customers. But we actually expect it will grow up here in Q1, you know, and that's consistent with what we saw here in January.

Great. Thank you. I'll pass it over. Thank you.

Your next question is from Anthony Pettinari with Citi.

Good morning. Mike, could you talk a little bit about kind of the relative strength in the different substrates that you produce, maybe kind of industry operating rates and how your system is operating, obviously, post-investiture with Agustin?

Well, our system is operating very well, as you saw from the performance that we generated on a year-over-year basis. The relevancy of operating rates for us is a bit diminished, as you know, Anthony, relative to how we think about the business. Specifically, what I'm talking about is on our solid bleached paperboard that's made from folding cartons and our bleached, uncoated paperboard that we use for cup stock. That's almost 100% integrated into our own operations, so it's really not as relevant for us anymore. We get a ton of questions on imports. The reality of it is, as I've told you guys in the past, it really doesn't make my list of things that keeps me up at night because it doesn't impact our overall business. Relative to CRP, coated resected paperboard, and the unbleached paperboard, those grades continue to be strong and in demand. We're investing heavily on coated recycled paperboard, as you know, and what we're doing in Waco. And ultimately, we've publicly said that the ultimate, most likely result is we will close our smaller undercapitalized facilities in Ohio and Quebec once that machine is up and running, which we expect to be making commercial paperboard on it in Q4 of this year. So when you kind of think about where that positions us, we're going to have five incredibly well-capitalized assets that are making the paperboard that we need and that flow through our 120 converting facilities spread around the globe. And that's the business we're running, really selling packaging, we're selling cups, and that's why you've seen our disclosures really make more of a shift towards end-use markets, what's the consumer doing, how we're performing in those markets, because it's really more relevant for how we're running the company and how we think investors should be looking at us.

Got it, got it. That's very helpful. And then you talked about volume assumptions for 25. I'm just wondering if you could talk a little bit about pricing assumptions or at least the pricing environment as you start the year, both in terms of just kind of the strength of the market, but also your efforts to move customers off of the RISI index.

Yeah, Anthony, it's Steve. Good morning. Just a couple things there. Overall in our Our guide, as Mike just said, we're assuming continued modest volume growth, kind of in that 2% range, consistent with our innovation engine year over year. Right now, pricing heading into 2025 is pretty neutral. The 2% price declines that we managed through in 2024 are fundamentally behind us, so we've got relative price neutrality heading in 2025 and that's pretty consistent with what we're seeing on the input cost side as well which is pretty neutral over on a year-over-year basis and actually we've been very pleased Mike and I were talking about this morning with the progress we're making with our customer negotiations where we're putting in place our internal delete developed index for price changes and with our long-term customers who are on multi-year contracts. And so overall, interest and receptivity has been high, and we're executing on those on a proprietary basis with our customers. So we're actually very pleased with the momentum on that front.

Okay. That's helpful. I'll turn it over. Thank you. Thanks, Anthony.

Your next question for today is from Phil Ng with Jefferies.

Hey, guys. I was curious to get your latest thoughts on, you know, the core itself is a little softer than we expected. A little noise with some of the movements. Can you kind of help us flush out, you know, whatever it was, productivity or just how Augusta kind of shook out? Just give us a little more color and how that kind of plays in D25.

Phil and Steve, you broke up a little. You were referring to Q4, right?

Yes, key four. I mean, I thought volume and price largely in line. The relative consensus was a little lighter. Help us think through, were there any big surprises in the quarter that we should be mindful of?

Yeah, thanks, Bill. Really two things. First, our expectations. One, volume came in at 1%. We had kind of guided for the quarter inherently in a one to three. So volume was a little bit lighter than we expected, a little bit less promotional. activity and volume from our, from our customers. So about 1% was volume driven at 1% of the top line. Of course that flows through our EBITDA. And then really it was FX. This move post the election was, you know, kind of an eight to $10 million hit for us relative to what we expected it to be when we last chatted and put out our guidance. So really it's those two things, Phil, nothing operationally of any substance margin or, overall stability very high at 19.3%. So a little bit of a late FX move and 1% volume versus an expectation of modestly higher were the two things that caused a little bit of shortfall versus our expectations in Q4.

Okay. And when we think about 25, you wanted 3% volume growth. That's kind of largely assuming markets are still pretty muted and a lot of that's innovation. Is that the right way to think about it, Steve? And I guess... The reason why I'm asking is where are you seeing some of the biggest wins on the innovation side of things? You know, some of the CPG companies I've called talked about maybe dialing back to those sustainability ambitions of consumers dealing with inflation. So just kind of give us a little more perspective. Where are some of the wins? Where are you super excited? And in any way to kind of quantify perhaps any wins you've picked up on the rain and air side just because it's a low-cost, really high-quality product.

Yeah, why don't I start, Phil, and then Mike can bring some additional context. You summarized it well. In 2025, our primary assumption is that the 2% innovation growth will be the primary driver of volume growth for the year, which assumes pretty market neutral, so market neutrality. Now, keep in mind, 2024, we were down 1% on volume. part inside of that, up 2% innovation, minus three on the market. So the market goes from kind of a minus three to pretty neutral on a year-over-year basis, hence the 2% volume growth on the top line, price relative stability. So that's kind of the context around that. Mike laid it out in his commentary extremely well. The portfolio of innovation is quite wide, and it's dozens and dozens of categories and they fall across the portfolio which is good to see a lot of singles and doubles and baseball terms and I'll let Mike talk about Rainier where we're actually feeling quite good about the testing and the momentum on that front.

We appreciate the question on that Phil. I guess from our standpoint our progress with Rainier continues to accelerate. We're very pleased with what we've seen. We've got commercial Sales on that paperboard grade primarily in the health and beauty segment that are in place. Our trial activity remains quite high in interest around this high-quality coated recycled paperboard that can compete with bleached paperboard. It continues to accelerate. We'll continue to give everybody an update on that. We're just not going to break it out every quarter. We kind of see it as one of the innovations that is part of what Steve just referenced.

Okay. Appreciate all the color, guys. Thank you.

Your next question is from Gabe Hadi with Wells Fargo Securities.

Mike, Steve, good morning.

Morning, Gabe.

I had a question about inventory levels, and I'm looking at inventory days that have kind of jumped up since 2018, and I suspect part of that might be related to the CUPS business maybe holding a little bit more inventory for QSR to make sure that they have what they need. But it also kicked up a little bit in 23 and 24. I'm just curious if there's anything that's intentional, number one. And then number two, on the production side, the paper side, or maybe folding cartons, I don't suspect you guys are holding a whole lot of inventory there. what that might imply for your own operating rates in 25, meaning matched up with what you expect to be kind of 2%-ish volume rates.

Yeah, your read is good. I appreciate the question you're asking there. I mean, in some cases, we did have inventories that were a bit depleted coming out of the rush through the pandemic, if you will. And so our customers wanted us to get those back to contracted levels, which we've done. The biggest impact on a year-over-year basis, Phil, gave some of the planning we're already doing to get ready for the Waco startup. As you can appreciate, we've got a couple of paperboard manufacturing facilities that we need to take down and one we need to start up. So we have to make sure we protect our customers during that process. You'll see that wash through pretty quickly as Waco comes online. We expect to harvest that working capital. It's something we've got – you know, an eye on. We want to normalize our paperboard and the levels that we have. But when you're going through a big startup like that, you've got to make sure that you cover for some of the contingencies. That's what we're doing. There's nothing more to it than that.

Got it. Okay. And then maybe, Steve, you talked about kind of price. It sounded like price-cost neutrality, and maybe that includes productivity. We've only heard from a couple of companies thus far, but it seems like labor and some of these indirect costs are still rising. And so I'm curious, you know, what may be assumption you have for the more visible direct inputs that we can track on the outside world versus maybe where you guys are doing better on the indirect side?

Yeah, okay, you're spot on there. You summarized it well. Overall, our pricing, as we mentioned, pretty stable heading into 2025, along with accumulation of our input cost the input commodity cost we continue to have labor and benefits and other inflation it's in that you know three four percent range as we've seen in the in the past maybe a little higher than historical historical but it's in that hundred million dollar range for us on a total basis and as such our confidence that our productivity initiatives will more than offset that again in 2025 remains high given the productivity initiatives that we have in place. So those fundamentals remain intact, which is why margin stability remains extremely high. And then, of course, we'd expect to earn on the volume growth that we've shared with you. So, no, those overall fundamental components of the business all around very high levels of margin stability as we head out of 2024 and into 2025 really remain intact.

Got it. Thank you.

Thank you. Your next question is from Goncham, Punjabi, with Baird.

Yeah. Hey, guys. Good morning. You know, my kind of thinking back to 2024, you know, it's clear that your major customers started ramping promotional activity higher, but frankly, it just was not enough to move volume velocity in a material way. Do you sense any shift in terms of what they may do different in 2025, if anything, you know, maybe in terms of packaging mix or lower price point architecture, et cetera?

Yeah, well, you certainly heard it in my prepared remarks that we're seeing a lot of activity around new products and trying to position things. Some of that is tied to the GLP-1 drug set there that, you know, our customers are reacting to, and that creates opportunities for us. Anytime there's a change, you know, gotcha. That's an opportunity for us to have a conversation with our customers, and we are seeking those. But your read is right. Look, promotional activity, what we really saw in 2024 was one customer in a category promoted. The overall segment of the category didn't really grow. It shifted. That producer or that promoter actually won that at the expense of somebody else, but it didn't really expand the category. We saw it on food service, too. where some of those promotions were really high. The $5 value meal is an example where you saw a mix that improved, but then a portion of the mix actually declined. And so it was really just prioritizing mix as opposed to growing the overall pie. So I guess 2025, as you heard Steve say, we've got a pretty neutral market assumption there. I am pleased by the amount of activity we see. the engagement we have with customers, our confidence levels high in our innovation pipeline. So I guess it's got to play out here over the next quarter or two. But that's kind of how we're thinking about it and what we saw last year.

Okay. And then for my second question, as it relates to, you know, you made some comments on tariffs and the direct impact on you. But if we kind of zoom out on the supply chain, including your customers, et cetera, um you know just based in terms of your conversations with them is there any consideration to change the network of production um in any way to offset what looks like is going to be a secular issue in terms of tariffs yeah i think look every one of our customers has got a war room set up trying to game theory this thing out because as you well know it's moving pretty quickly uh and so i think they're all trying to get a pretty good beat on what uh

what kind of the path is going to be and what it looks like. Again, I mentioned and we know there's a 30-day reprieve now for both Canada and Mexico. But to your point, something that we're most likely going to have to deal with, there are a fair amount of consumer goods applications that are imported into the U.S. And any of that stuff that would be made domestically ultimately benefits us. And so I think that we look at that. I already kind of mentioned imports, paperboard. I guess we could ask them, what does that mean to you? You heard my explanation in terms of how we could beat the marketplace, but it's probably a modest tailwind for us if that actually happens. We're trying to think through all that stuff, leveraging a large platform that we have in North America. Again, we've got 85 converting facilities spread across North America. That gives us a lot more options than most packaging companies, and we'll obviously work really hard with our customers.

our supply chain and there's two you know it once we've got a clear line of sight into terms of how it all all it gets implemented in plays out assuming it does yeah God you meant Steve that Mike's commentary I think the modest potential tailwind is just a little more of a localization if you will of raw material production and and ability to produce packaging and our 120 facility network is nicely positioned to be, as you know, close to those customers and in reasonable proximity. And the vast majority of the paperboard that we produce for our own packages are for consumption here quite locally as well.

Perfect. Thank you, guys. Thank you, Beth.

Your next question is from Matt Roberts with Raymond James.

Hey, Mike, Steve. Good morning. Steve, you touched on this a little bit earlier, but I want to dig into the ongoing contract initiatives just a bit more. So last quarter, you announced you did address the remaining 5% of open market contracts. And so the open market portion is now addressed. Is there some type of natural price benefit we should see in 2025 from that? And looking at the contract resets in the consumer packaging products, I believe he's noted that 50% are still tied to the index. Are you able to provide more color in terms of how many contracts have come up since the initiative was undertaken? What is the conversion rate of those been or when we should start to see more of a material benefit flow through from that initiative?

Yeah, Matt, it's Steve. I think we might take a little different take on what you're asking. I mean, as you know, we've been on a five-year journey of really being compensated appropriately for the value of our packages, and we've made a lot of progress in that regard, and hence the market stability of the business. On the open market, 5% of the company, yes, we've made those transitions, and we're being compensated appropriately for the paperboard at market rates, and we'll have other mechanisms in place if there is a need to move that pricing with those, that small section of the customers, and And as we've talked, we're in a step-by-step renegotiation of all of our natural packaging customer contracts. And we don't really have plans to kind of put that out in percentage terms and the like because this is a journey that we've been on and we're going to stay on. What we like is that receptivity is high. There's a general recognition that having a transparent price change mechanism that works with our customers is is something that they want as well. So I think overall I would just put it into the context of the consumer packaging company that we've become and our ability to be compensated appropriately for the packages we produce and maintain those long-standing relationships with our customers.

I think, Matt, one other thing I'd point out on that in slide 13, you can really see the material benefit that we're already experiencing from that effort that Steve just referenced over the last five years, the stability of our margins. in and out of quarters and if you look back in five years before we started that process there was a lot more variation in that process so it's clear it's working and our investors are benefiting from that no it's all very helpful and certainly makes sense and

Maybe holistically, if I could ask another question on the unbleached side of the business. Maybe can you talk about how your share has trended over time? Is that market relatively stable? And given the structure, are there any differences in the contracts there versus either bleached or recycled or any color you could give on kind of the different dynamics that would be helpful? Thank you again for taking the questions.

No, I appreciate the question. I think on the unbleached paperboard side, there's been – a lot in RISC about weakness there, and we just haven't seen that. I mean, our overall beverage business, as you saw, has performed quite well. It's a global business. The vast majority of that material flows through our own converting facilities. We sell very little of that into the open market, and it's a very good grade paperboard. And, of course, you know what we think about coated recycled paperboard. We've made two very large-scale investments, one in Michigan and now one in Texas. you know, to increase our capabilities, the quality we're able to generate, and ultimately, you know, the cost position that our customers are always looking for. So those two grades are fantastic grades of paper board, and we'll continue to sell them through our converting facilities and cup facilities to customers.

Thanks, Matt. Appreciate it. Thanks, Matt.

Your next question for today is from George Staffos with Bank of America.

Hi, everyone. Good morning. Thanks for the details and taking the question, guys. I guess at three questions, I'll ask them in sequence. So first of all, as we consider the guidance for the year and the fact that this juncture, XFX, will be a little bit below your normal target of mid-single digit, what would be the biggest sort of risk factor you see in guidance and sort of the variance there? Is it just the fact that we're stepping off at a lower point from 2024? Because of all the risks from the consumer, are there other factors at work as well? That's question number one. Question number two, food service obviously up against a tough comp, and you were flat. The industry data shows some pickup in food service volume, recognizing it's production, not consumption. Have you seen any pickup in your data looking at its 25 on the food service side? Because that's been somewhat encouraging. And then last, help us understand how you'll be able to use cash flow and maybe the beginning of Waco and its production to support earnings perhaps in 2025. Thanks, guys, and good luck in the quarter.

So I'm going to ask Steve to do one and three, and I'll handle two then, Steve. All right.

Thanks, Mike.

So, George, on one, you know, on the guidance risk, in terms of the, you know, if you will, the closer and controllables, I mean, overall, of course, volume will be critical there. We're assuming some modest volume growth that has a market assumption that is pretty neutral, as we talked earlier, and as we've described here, that just requires our customers to have some commitments to promotion and to managing through that day-to-day life of a reasonably stretched consumer. So I think it really kind of there evolves around around volume. Our productivity, the initiatives we have in place, we have a lot of confidence in. Our innovation pipeline, a lot of confidence in. Price and margin stability, contract negotiations are kind of in front of us. Obviously, FX, George, can move, and that's mostly just a translation activity, which is the reason we kind of called it out for you here.

No, I understand. I was asking before foreign exchange, but basically it's the volume and the consumer volume variability that's in the guide that you're calling out.

That's correct, George. Thank you. Your question on cash flow is an important one. One, our confidence in the cash flow inflection for the business is very high, particularly given the catalyst that it will provide for margin enhancement as we move out of 2025 and into 2026. It's bring Waco to life and really inflect on the cash flow front. And that is an enabler for earnings capacity as well as cash flow generation. We're looking forward to the startup of Waco. Obviously, the difficult decisions to close down other facilities as part of that, but that is in motion. And as Mike talked earlier to Gabe's question, We're doing some building on the inventory front in prep, and we're looking forward to having that capacity for doing so, and for that being a significant enabler for earnings and cash flow generation. And it also related to capital allocation. I mean, it's allowing us to have confidence in how we allocate capital. Today's announcement increased the dividend, a good, steady-growing dividend, an important part of our capital allocation priorities. and then obviously the other priorities that we've spoken about. So, yeah, they're all related in terms of EBITDA improvement, cash flow improvement, and how we allocate capital going forward.

And in regards to food service growth, George, and you referenced it right, we have outperformed in that space pretty dramatically. So we do have tough comps that we have to meet. But having said that, we're investing heavily in innovation. We profiled on our last earnings call, one really great one that we put in place with McDonald's, I really like it because, of course, it's on a paperboard application. But for them, it ultimately eliminated two SKUs and made it into one. We've got a couple of sizes out there. So we're seeing the roll-through of that on the McFlurry out there. And we've got a number of other things we're working on this year. So I anticipate we're going to continue to grow in the food service space.

And that's our expectation as we go into 2025. Thanks so much.

Your next question is from Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question, guys. You guys are well. I guess the first question, going back to the inventory side, so it looks like you took quite a bit of action over the last half year or so. I know there was some downtime. There was also some downtime a year ago in the second half. I guess as it stands, would you say that your inventories are balanced where you want to be, or is there still some more work to bring those down? You also, I think, built some inventory ahead of the Augusta closure. So maybe you can just update us on that first.

Yeah. So as I kind of mentioned there, Arun, I mean, we had some rebuilding we needed to do with our finished goods coming through the pandemic. We've done that. We have to be able to service our customers in a highly variable market. We feel good about where we're at. Our on-time delivery is very high, and we're servicing them very well. As I mentioned, we made a decision to build a little bit of paperboard inventory here as we prepare for the start of the Waco paperboard mill. But as I mentioned earlier in my comments, that'll wash through pretty quickly as we bring that mill up and running. So by and large, we like where we're at with our finished goods. We've got a little work to do on our raw material side. It's a focus for us, but it's a balance too to make sure that we're able to respond to customer needs in a highly variable market.

Okay, that's helpful. And then I was just hoping we could address some of the concerns in the market out there around new capacity as well as imports. So several of us have seen the reports of imports coming in from Europe, given maybe a softer demand environment there. Are you still seeing that? Is that a credible threat to oversupply? And then similarly, there were, you know, some announcements of new capacity in CRB. There were conversions from SBS into CUK. So maybe you can just give us your thoughts on, yeah, new capacity as well as, you know, import threats.

You know, I think, Arun, and I'll make a few comments on it, but this question is much better for people that are actually in the marketplace selling paperboard, which is not graphic packaging. We're selling packages. In particular, I think what you're referencing is some of the FPP board that's coming into the North American market from Europe, which was up, I think, modestly last year as I look at the numbers. But again, as I indicated, it really doesn't impact our business much, if at all. We're integrated into that in our own paperboard facility and manufacturing facility in Texarkana. We use almost 100% of our own material. So the impact on that really falls on others that are participating in that market. It's the biggest market out there. It's over 4.5 million tons. And again, I'd encourage you to ask the major producers of that paperboard grid what their thoughts are on that. They'll have a more informed view than me. As it relates to people converting you know, encoded on Bleachcraft, I think you're referencing. Yeah, we've got that question. Again, as I mentioned, we run a highly integrated process with specifications, you know, that are very, you know, particular in terms of strength and tear. And that's based on, you know, decades of experience that we have flowing through our own packaging operations. customer lines that run at incredibly high speeds and are intolerable of any variation that, you know, is met. So I like the way we're positioned on that. We're clearly the low-cost producer of uncoated, you know, material here in North America, and that will continue to be the case. And, you know, as I mentioned, too, on a question I got earlier, you know, our integration rates continue to go up on that grade. So that's how we compete there. It's really not a big issue for us.

Yeah, and I wrote it, Steve, I think, and just there are no low-cost alternatives for converting something from a bleached paperboard into an unbleached coated that is our product category. So as Mike said, it's highly integrated, and there are no low-cost alternatives to do that.

It's just an idea. Great, thanks.

We have reached the end of the question and answer session, and I will now turn the call over to Mike Das for closing remarks.

Thank you, operator, and thank you for joining us on our call today. There is no doubt that 2024 was a challenging year for consumer product and quick service restaurant customers. For graphic packaging, it was challenging, but an exciting year. We harvested capital from the business that lacked competitive advantage. We delivered significant packaging innovations to new and existing customers. and we made outstanding progress at Waco. And despite the headwinds, we returned to growth in the second half and delivered exceptional margin stability. Graphic packaging is demonstrating the strength of its business model. I'm proud of our team, excited about our innovation pipeline, and optimistic about our future.

Thank you, and have a good day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.