Graphic Packaging Holding Company (NYSE:GPK) Q1 2024 Earnings Call Transcript

Graphic Packaging Holding Company (NYSE:GPK) Q1 2024 Earnings Call Transcript April 30, 2024

Graphic Packaging Holding Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator Instructions] I will now hand the call to Melanie Skijus to begin. So Melanie, please go ahead when you are ready.

Melanie Skijus: Good morning and welcome to Graphic Packaging Holding Company’s first 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 call, we will be referencing our first quarter earnings presentation, which can be accessed through the webcast and also on the Investors 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.

Michael Doss: 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 growth and substantial cash flow. During the first quarter, the strength and balance in that portfolio was on full display as the 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 bleached 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 $0.66. As Steve will discuss later, the biggest part of the sales decline and essentially all of the EBITDA decline was a function of our decision to reduce production of bleached paperboard to match demand. In the context of that decision, adjusted EBITDA margin down just 30 basis points at 19.6% is an outstanding result that demonstrates the strength of our portfolio and the strong execution our team delivered. Holiday timing and fewer shipping days accounted for about 2% of the sales decline. Turning to Slide 3, in 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 bleached paperboard manufacturing facility to Clearwater Paper. We expect that sale to close tomorrow, May 1st. At that point, open-market paperboard sales, which 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 of 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 startup. Meanwhile, 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 cups, 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. Our broad 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 foodservice and stronger beverage volumes helping to offset weaker results in certain food categories and household products. Some consumers have responded to inflation by shifting to private-label 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 know that volumes remain sluggish across many consumer stable 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&Go cup as well as Boardio paperboard canister solutions. The cups are replacing foam, while Boardio, 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 4 is a reminder of how broad our packaging portfolio has become. We serve five markets with food the largest, beverage next and our growing foodservice category not far behind. Our investments and new capabilities have taken us further into household products and provided 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 days adjust 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 better diversified across consumer 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. Foodservice 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 paperboard for cups is 180 degrees removed from the reality of consistently strong and healthy market. Our customers ultimately want the same thing we want, accurate and transparent pricing.

We plan to eliminate third-party indices as a price change mechanism 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 has been a pullback on the healthcare side broadly with some offsetting strength in beauty markets. Yet if we look to the future, our PaceSetter 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, we are optimistic that these results will improve as the year progresses. I want to spend a little more time with you on our sales results and where they differ from our expectations. If you join me on Slide 6, 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. Package 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. So our positive first quarter performance is setting us up well as we move into the strongest part of the beverage selling season. Foodservice 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 and 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&Go 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 a quarter. February is a 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 of the quarter. But this year, March had an extra weekend and with the timing of Easter and particularly Good Friday negatively impacting our results in both the US 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 then tend to support a pickup in prepared foods, convenience items and on-the-go meal options. We are 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 categories 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 Boardio 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 Boardio paperboard coffee canister to the US coffee market for the first time through large mass retailers. Our growing penetration of the coffee market really demonstrates Boardio value proposition. For our customers, Boardio reduces transportation and warehouse space. Meanwhile, our integrated degassing valve keeps coffee pressure longer. Boardio 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 has a built-in lid and can be tossed in with the rest of your recyclables.

Finally, before I turn it over to Steve, I want to spend just a moment on Slide 9, 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 and scale and substantial competitive advantages. We really do have manage 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 in 2024 and confident that we will drive tremendous value for investors and for all of our stakeholders in the years ahead. Now let me turn it over to Steve. Steve?

Stephen Scherger: Thank you, Mike. 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. A 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 2%. The normal pass-through of input costs in our European business reduced sales by approximately 1%. On a days-adjusted basis, our sales were down about 1% year-over-year, a good improvement sequentially, but modestly shy of the flattish 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 paperboard sales were much stronger. That kind of margin consistency is the result of a strong and balanced portfolio with solid execution and cost controls. 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 at Investor Day, the strategic rationale for the Augusta sale, so I’ll not repeat that here. We’ve always run our bleached 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 at 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 the build out of capacity to support our Cold&Go Cup Chick-fil-A as well as our new Nissin Noodles 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 product 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 KeelClip are steadily replacing plastic ring carriers.

Having the 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 foodservice 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 so the $100 million and $33 million of adjusted EBITDA at the midpoint 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 midpoint 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 to maintain 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 in modeling. That concludes our prepared remarks. Let’s turn the call back to the operator to begin the question-and-answer session. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Mark Weintraub from Seaport Research Partners. Mark, your line is open. Please go ahead.

Mark Weintraub: Thank you. First, a real quick simple math question. So it seems that Augusta balance of the year $65 to $70, I’m sorry, a $65 million to $70 million impact on EBITDA. Since you highlight $40 million in the second quarter, does that mean the second half is only $25 million to $30 million?

Stephen Scherger: Hey, Mark. Mark, it’s Steve. I think your math is directionally right. Most of the earnings profile last year with our bleach paperboard 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 began to not own the facility is where you see most of the reduction.

Mark Weintraub: 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?

Stephen Scherger: Yeah. Thanks, Mark. So from a business standpoint, as you’ve seen in the guidance that we just kind of laid out today, we expect continuing strengthening in the second quarter and then in the second half of the year. So at a high level, that’s our view in the markets that we sell in. And again, by a 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. We choose to make paperboard where we have higher ROIC and competitive advantage.

But we also buy a lot of paperboard on the open market, both here and in Europe. And so as you kind of think about what that looks like that’s how I think you really got to model it going forward or how I’d ask you to model it going forward. 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. I don’t — we don’t talk about future pricing actions that we would take. So I’m not going to do that here. But in general, you see it. And I think I’d also point back to the fact that with that strategy and that execution, we generated a 19.6% EBITDA margin in the first quarter. So it’s working. We really are moving with the end-used consumer and we are finding ways to pass along our input cost inflation to customers over time, which is what you’d expect us to do.

Mark Weintraub: Okay. I appreciate it. 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?

Michael Doss: No, that would 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 — where we have the opportunity to do so.

Mark Weintraub: Okay. I appreciate that. Thank you.

Operator: The next question comes from Lewis Merrick from BNP Paribas. Lewis, your line is open. Please go ahead.

Lewis Merrick: Good morning and thank you for taking my question. Two, if I may. And focusing on the foodservice end-market, we’ve heard from some of the major foodservice players talk about this slowdown in customer traffic growth and a shift to cheaper menu items. And how does the shift from the premium end of foodservice to the more value end of foodservice impact you? And that’ll be my follow-up to ask this question.

Michael Doss: Okay. So from our standpoint, Lewis, 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.

Lewis Merrick: Okay. Clear. Thank you for that. And also you flagged that Waco will be at $160 million EBITDA run rate after two years of operations. And is that the fully ramped contribution or can we expect a bit more trailing into the third year for that project?

Stephen Scherger: Yeah, Lewis, it’s 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 will 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. But the line-of-sight to that first $160 million over the first two years is what we can see through cost and supportive of our growth.

Lewis Merrick: Many thanks.

Michael Doss: Thank you.

Operator: The next question comes from Ghansham Panjabi from Baird. Ghansham, your line is open. Please go ahead.

Ghansham Panjabi: Thank you. Good morning, everybody.

Stephen Scherger: Good morning.

Michael Doss: Hi, Ghansham.

Ghansham Panjabi: Hey, good morning. So I guess if we go back to Slide 5, we have all the breakdown across the end markets and so on. Beverage and foodservice, clearly were 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?

Michael Doss: Well, certainly, from the standpoint, we were at 1% off of where we had 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. On Good Friday, we’re shipping strong and hard. Our customers 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, Ghansham.

Ghansham Panjabi: 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, 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 adjust out for Augusta, et cetera. But 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?

Stephen Scherger: Yeah, Ghansham, it’s Steve. I think you touched on it in the first quarter as an example, we had inflation, as you noted, OCC obviously up, some logistics costs were up. For us, those were more than offset by deflation that we saw in wood, energy, primarily nat gas and overall in our chemicals and resins. So those were playing relatively modest. The mark-to-market today remains relatively modest. That being said, you’re correct, there is some inflation out there that we’re actively looking to and will continue to manage. But as Mike said, volumes were about 1% shy of our expectations. Overall, everything else on the top line played out as we expected, and we were very pleased with nearly 20% EBITDA 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.

Michael Doss: And I think maybe just a little bit to add on to that, we tried to give you a little insight, Ghansham, into the seasonality of our business, which is kind of distinct. It’s not major in a normal year, but ’23, ’24 setup really because of the destocking that occurred in ’23, really kind of sets us up a little bit more than we usually would see for our first half, second half for our business. And that’s one of the things that gives us a fair amount of confidence too, because as you heard Steve say, we took a fair amount of market-related downtime, economic downtime in the second half of last year based on what we see now on the backorders that we have and how we’re running. We don’t see that. And again, the exposure to bleached paperboard on the open market side is not going to be something that we manage going forward, so we put all those things together and we see a nice setup for the balance of the year.

Ghansham Panjabi: Thank you for that.

Operator: The next question is from Phil Ng from Jefferies. Phil, your line is open. Please go ahead.

John Dunigan: Good morning. This is actually John Dunigan 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 would — 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?

Stephen Scherger: No, 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, 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.

John Dunigan: Okay, great. And then on the Augusta sale, if I remember correctly, the transaction value was at $700 million and I think you were expecting a little bit over $100 million in tax. The net proceeds you’re calling out now of $550 million, 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-five. Is there something that changed there? Anything to note or call out or that was kind of in line with your expectations originally?

Stephen Scherger: Yeah, John, it’s 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 million 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.

John Dunigan: Got it. All right. Thank you very much. I’ll turn it over.

Stephen Scherger: Thanks, John.

Operator: The next question comes from George Staphos from Bank of America. George, your line is open. Please go ahead.

George Staphos: Thanks very much. Hi guys. Thanks for the detail. I guess maybe a different take on a similar question you’ve had earlier today. As you look 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?

Michael Doss: Yeah. I can give you a little insight into that, George. So again, at a high level, we talked about in our prepared comments and with Ghansham, we saw stronger foodservice and beverage, and beverage was a strong quarter for us. And we got a couple of things emailed into us around with that some pull forward. The reality of it is, for us, it was pretty de-minimis. So our beverage is off to a very solid start here in the second quarter. So we expect that to be good. Foodservice continues to ramp up. I mean, it’s really about food in many ways. And as Ghansham said, with the destocking you being largely behind us why didn’t you see more? And all I can tell you is that the categories, as I mentioned, cereal and frozen pizza, usually those are big categories for us.

They were a little bit slower in Q1. We expect them to bounce back during the course of the year, consumption doesn’t change that much. Sometimes it can be how our customers choose to run their production schedules and those types of things. So that can have an impact on it. In terms of household, we saw some declines in tissues, soaps and cleansers, a little more detail than we usually give you there. But on the other side of that, we saw a strong market for air filter frames. So there tends to be a bit of a mixed bag. And I think it’s important to remember 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 at the end of the day. And George, to the second half —

George Staphos: I’m not picking out, 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 customers’ 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 then, 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.

Michael Doss: No, that’s a fair statement. That’s what we’ve heard. And of course, we like you read many of their releases and their prints that have been coming out here over the last week or so and we’ll see some more over the next week. And we’ve not seen anything to suggest a difference from kind of the recovery and from the destocking that occurred in 2023, largely from any 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. In the second quarter, we’ll see some improvement. And then we do expect it to accelerate quite a little bit in the second half of the year.

And again, that’s off of a lot easier comps. I mean, if you remember, last year, our comps were 5%, I think 6% respectively in Q3 and Q4 year-on-year. So when you model that in, but 3% to 4% bounce back for 2024, which is kind of how we’re thinking about it, it’s pretty conservative view.

George Staphos: Okay. Mike, just to that point and then I had my second follow-up, the — 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 on EBITDA. 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.

Michael Doss: Yeah. Thanks, George. I’ll take the first part of it. The answer is yes, we’re up a little bit here in April as we expect it to be kind of coming on the Easter holiday weekend, and I’ll let Steve put a little finer point on Q2.

Stephen Scherger: Yeah. No, George, you summarized it low 4s in Q2. By reminder, it’s a pretty intensive planned maintenance downtime quarter for us. We have two of our wood fiber facility, Texarkana being one of them down from normal planned maintenance. So that’s a normal activity in the quarter. And then, we have very limited planned maintenance downtime in the second half of the year. And what we expect is the elimination of other supply demand market-related downtime in the second half of the year, of which we had significant amounts in the second half of last year. So, yes, there’s a — you can do the midpoints on the EBITDA as 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.

George Staphos: Thank you, gentlemen.

Stephen Scherger: You bet.

Operator: Next question comes from Matt Roberts from Raymond James. Matt, your line is open. Please go ahead.

Matt Roberts: 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?

Michael Doss: Yeah. So the way I’d answer that question, Matt, is, look, it’s a competitive marketplace. We compete with a variety of different substrates and with different competitors that make the same things that we do, but that’s not new. 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, 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. And that allows us to be able to get acceptable cost of capital return, the types of margins that Steve talked about, and 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.

Matt Roberts: That’s helpful. Thank you, Mike. Appreciate that. And maybe think a little longer term about Waco, you talked about the $50 million cup per day recycling capabilities. What percent of your output does that represent? And what’s the cost trade-off 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 trade-offs there. Thank you.

Michael Doss: We’ll take a step back and really think about how we price for value with our customers and ultimately, the end use consumer and our customers are driving for more circularity, more sustainability and more convenience. Our ability to work with our customers and in the case of Waco, think about that Texas Triangle we’ve talked about, collect the cups that are within that region, our customers will get some revenue just like the retailers get some revenue for OCC. So that’s a positive for them. And they like that because it’s also an answer for an ability to show their consumers they’ve got a license to use that cup without feeling guilty about it not being recycled because it’s going to go back to us 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 off, it’s incredibly high-value bleached fiber and we’ll lay that fiber down on the very top of the paperboard that we’re manufacturing in Waco. And historically, producers that make coated recycled paperboard had to buy sorted office paper and sorted office paper has increasingly become difficult to get and when things get difficult to get, it gets more expensive, which is exactly what has been happening. So from our standpoint, over a multi-decade period of time, our ability to control our own destiny with stable pricing, helping our customers with their circularity and their sustainability 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 cost stability there. We’ll work with our customers and ultimately we’ll create a more sustainable package and it’s really exciting.

Matt Roberts: Certainly. Thank you all again for the time.

Operator: The next question comes from Arun Viswanathan from RBC Capital Markets. Arun, your line is open. Please go ahead.

Arun Viswanathan: Great. Thanks. I just wanted to get your thoughts on, 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 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 get some of those gains back on the volume side or will be — will it be different just given the sale of Augusta? Thanks.

Michael Doss: 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 customers taking a little bit more production downtime around the Easter holiday than we had anticipated they would. It’s bounced back here in April as we talked about. We expect the second quarter to be sequentially stronger than Q1, but our strongest quarters will be in Q3 and Q4, and you’d expect that to be the case given the comps that I kind of ran through for George a few minutes ago. So second half will definitely be volumetrically our strongest year. And that’s a little unusual. As I mentioned to Ghansham, but it’s really a function of the ’23, ’24 destocking 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 pretty well.

Arun Viswanathan: Great, thanks. And then if I could just have one follow-up. So you will be getting the cash from Augusta. I guess you’re going to be winding down the Waco investment over the next year or two. So as you look out into the future, I guess, you’ve laid out a nice Vision 2030 plan that’s potentially more aggressive. How does that relate to maybe how you’re thinking about leverage and capital return? So do you think next year you could pivot to maybe a stronger capital return profile or what are your thoughts there? Thanks.

Stephen Scherger: Yeah, Arun, it’s Steve. I think as we discussed in the prepared remarks, obviously, we measure our capital allocation decisions against share repurchase as we always have. And in the context of the funds from Augusta as an example, sitting here today with the confidence that we have in the business and the forwards that we’re conveying to you today, 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 in 2025 and then significantly more in ’26 and beyond. But overall, we are comfortable with the debt levels that we have today. That’s a good thing because it gives us the optionality that we’ve shared with you around capital allocation trade-offs.

Arun Viswanathan: Thank you.

Operator: The next question comes from Anthony Pettinari from Citi. Anthony, your line is open. Please go ahead.

Anthony Pettinari: Good morning. We’ve heard a lot about imports impacting SBS. And I’m just wondering if you’ve seen any meaningful impact on CRB or CUK from imports of those or other grades. And with the boxboard hikes not being reflected in Pulp and Paper Week, I mean the CRB, CUK, I mean there’s really relatively small number of domestic producers. So I’m just wondering if there’s anything about the competitive environment that’s different and if the import dynamic is meaningful or different than in previous years?

Michael Doss: Thanks for that, Anthony. I’ll take that. I think if you take a step back since you asked the question, I’ll give you a complete answer. I mean, if you really look at the imports, which is primarily from the Nordic countries, wood, energy, transportation are all up, right? I mean, the producers were talking about on their 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 compete in the marketplace where we’re competing. And so it’s different things.

And I’ll give you an example like a LithoFlute top sheet is a big item that comes in there. And I know you understand what that category is, so I’ll give you a little color on that. But from our standpoint, you guys and Richie spent a lot more time thinking about it than we do. We buy FDB in Europe and we have normal pass-throughs that pass it 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 anybody competing with that to be fair. If it is, it’s some really small packaging converter that 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 there’s pluses and negatives that always occur. But I’ll point back to again, 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. And I think that’s the most important takeaway to think about the company we’ve become now with 95% of all our sales being a package of some kind, whether that’s a tray, a bowl, a wrap or folding carton or a cup, all those things are what we sell to customers and that’s really where our focus is as opposed to kind of the supply and demand dynamics where we actually, in some cases now can win some of those dislocations just given the — 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, tomorrow is a big day for us.

Anthony Pettinari: 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 the EU. Generically, like how has that business performed in terms of sort of end-market demand year-to-date, Europe specifically?

Michael Doss: You can appreciate that healthcare in general tends to be pretty stable. I asked our European President, Joe Yost, a little bit about that. His view is this was just largely timing how they chose to produce. We don’t expect it to materially change with the demographics of people continuing to age in both North-America and Europe. Those are going to be good markets going forward.

Anthony Pettinari: Okay. That’s helpful. I’ll turn it over.

Operator: The next question comes from Gabe Hajde from Wells Fargo. Gabe, your line is open. Please go ahead.

Gabe Hajde: Hi, Steve. Good morning.

Stephen Scherger: Good morning, Gabe.

Gabe Hajde: I wanted to revisit the price — thank you, Steve. 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 indices 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. And I’m talking about sales volume versus I appreciate production volume will likely be up given the downtime that you took?

Michael Doss: Yeah. Look, I think you answered the second part of the question accurately. And that’s exactly how we expect it to play out. In regards to kind of pricing, Gabe, as we talked about at our Investor Day, we’re just not planning to disclose the percentages anymore relative to how it all works, whether it’s a cost index model that we’ve got with our customers or 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 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 you a little bit more color on is talk about how it actually works. So the mechanism itself isn’t something that, is the first thing we talk about with customers. We contract with customers on a renewal or in a new situation with pricing that we establish both with them and with us. What we’re really talking about is how input cost inflation moves over time up or down and there’s a variety of different methodologies to do it. We’ve been moving away from third-party indexes for years. As you know, we’ve been very public about that. And now we’re just going to accelerate that process going forward. And so we’re working with a number of customers on different ideas that we have and they have for how to provide better transparency between the two parties, more accuracy between the two parties and an agreement that shares the value that we bring and that they ultimately want from us.

And so that’s really how we’re approaching it. It’s a multifaceted commercial process that we’ve got. And beyond that, we’re just not going to get into kind of necking it down to the finance percentages because that’s really not — that doesn’t help you understand the business better in our opinion.

Stephen Scherger: And, Gabe, just repeating a key point that Mike is making. The vast majority of the pricing-related discussions we have with our customers are focused on the value of the package, a 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 about the price change mechanism, which is what you’re asking about. 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.

Gabe Hajde: 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, a $100 million of EBITDA. Did you mean 100,000 tons of downtime? And I apologize I just — I missed it. 100,000 tons of downtime in the second half?

Stephen Scherger: 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 bleached 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.

Gabe Hajde: Yeah, understood. Thank you.

Stephen Scherger: Thanks.

Operator: Our final question today comes from Adam Samuelson from Goldman Sachs. Adam, your line is open. Please go ahead.

Adam Samuelson: Yes, thank you. Good morning, everyone. There’s been a lot of grounds covered today. So I’ll try to be brief. As we think about the innovation sales growth for the year, $200 million of which realized $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 PaceSetter Rainier at this juncture versus just — it doesn’t seem like some of the big items, whether it’s the Chick-fil-A or Nissin or Boardio would be applicable on that? And are you actually seeing incremental value uplift from PaceSetter Rainier at this juncture or is that still incremental into the future and maybe dependent on a second source of supply in Waco?

Michael Doss: Yeah. Thanks for the question, Adam. We are and continue to see traction with PaceSetter Rainier. We actually have three commercial applications. We’ve got a dozen or more in testing and I think that’s an important distinction to make. Since it is a new grade of paperboard, 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 huge chunk of it in 2024, but momentum building into ’25 and ’26, absolutely, yes. The balance of the $200 million is the types of things you just described. It’s a foam to paper conversions for cups, it’s trays and bowls, it’s Boardio.

We’re really excited about Boardio. You look at Boardio, it started as a friendship and formula. Anything that’s kind of that granular 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 $200 million worth of sales in the next couple of years for that category alone. And it’s a sticky sale. There’s a machine that goes in with our customers and really helps them with merchandising and branding it. So that’s really where our focus is to drive that stuff. But, yeah, very excited about PaceSetter Rainier. And ultimately, as you correctly pointed out, in ’26, we’ll have another paperboard machine capable of making that greater paperboard, which is very exciting.

Adam Samuelson: Okay. Great. I appreciate the color. I’ll pass it on. Thank you.

Operator: This concludes today’s Q&A session. And I would now like to hand the call back to Mike Doss for closing remarks.

Michael Doss: 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. As I mentioned earlier, if you missed our Investor Day, I hope you’ll take the time to listen to the replay, which you can find on our Investor Relations website. Graphic Packaging is a much different company today 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 a very good day.

Operator: This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.