Michael Doss: Thanks, George.
Operator: [Operator Instructions] Our next question comes from the line of Adam Samuelson of Goldman Sachs. Your line is now open. Please go ahead.
Adam Samuelson: Yes, thank you. Good morning, everyone.
Michael Doss: Hi, Adam.
Adam Samuelson: I guess, the first question just to clarify is, I think, with the fourth quarter, the slides talk about organic volume mix down two to up two. Steve, it sounded like you were talking about plus 2 in the fourth quarter. And I just wanted to make sure I was talking with the same thing; you’re talking about the same thing that we’re seeing on the slides.
Michael Doss: Yes. no, Adam, for clarity and maybe, something got lost there with some of the technical issues. No. what we’re saying is Q4 plus 2 to minus 2, so zero at the midpoint. And so, we will see sequential improvement over the minus 4s that we’ve seen over the last two quarters. And so, it was plus 2 minus 2 and October is playing itself out consistent with that as we kind of look towards the fourth quarter.
Adam Samuelson: Okay. now, that’s helpful. And then as we just think about moving into next year, you talked on a bunch of these calls about kind of the — how optimistic you’ve been about pay setter and the quality of that board and the opportunities that, that can unlock for a recycled board in new applications. How should we think about the commercialization of that and meaningful volumes that can be switched into CRB based products away from a CUK or SBS type offering and what that can do from a margin perspective in ’24 if you think about that bridge?
Michael Doss: Yes. I think, it’s really a longer play than just ’24. Adam, what I’m really encouraged about is the fact that we had our first sale in the quarter. It’ll ship actually here in Q4, which is great. I’d tell you that customer interest is extremely high. We’ve got many trials going underway and continued to have a lot of interest as you’d expect given its characteristics as we described on prior calls. So, what it really does is gives us confidence as we look out the end of ’25 and ’26 as we get Waco up and going. As you know, we’re adding a couple hundred thousand tons. So, we’re going to be able to grow into that with the work that we’re doing with the trial work and this new grade that we’ve got. Some of the things we have around our mailer business that we got from Bell, we expect that would grow.
That’s all CRB. So, we’re in a really nice spot. We’ve optimized Kalamazoo. We’re building out Waco. It’s on schedule. It’s coming along great. I was there a couple of weeks ago and got a chance to tour the site. And all the efforts that we’ve got going on here are really focused on making sure that we’ve got the demand to take advantage of that 200,000 tons of growth that’ll show up when we start that machine up.
Adam Samuelson: Okay. I appreciate that. I’ll pass it on. Thanks.
Michael Doss: Yes. Thank you.
Operator: Thank you. Our next question comes from Arun Viswanathan of RBC Capital. Your line is now open. Please go ahead.
Arun Viswanathan: Great. Thanks for taking my question. Good morning.
Michael Doss: Good morning.
Arun Viswanathan: I guess, the first question around volume, I think prior to this call, you had made some comments that your — customers were reducing inventories at both maybe, the brand level as well as the retail level. What have you noticed there? I mean, is that ongoing? And then similarly, do you consider any of those reductions as structural that is just given the high interest rate environment and the inflation that we’ve seen, would it take really reductions in those two areas to really get things going again? And do you expect that, that should materialize next year? So maybe, we’ll start with that. Thanks.
Michael Doss: Yes. Arun, I’ll take the first cut and then Steve can add any commentary that he’s got. I think, look, what you’re referencing there and what we talked about on our second quarter call was the destocking phenomenon that really in our industry started to hit the end of Q1 and kind of played out into second quarter, a little bit of third. We view destocking largely in our rearview mirror now. We’re dealing with some elasticities with pricing and some of the products that our customers are selling. That’s probably having more of an impact on top-line sales than anything else right now as I talked about with Ghansham with his question. Trading down, we don’t see a lot of that in North America yet and it makes sense if you think about it.
We still have less than 4% unemployment here. Anybody that wants a job and have a job, mobility is high. That’s really why our food service business actually grew organically from a volume standpoint. Of course, from a net sales standpoint, it was up almost 8% in the quarter. That’s solid. We’re seeing trading down anywhere in Europe, which you’d expect given the inflationary pressures that they’re seeing. We’re all positioned to be able to handle that there too with the portfolio business that we have.
Arun Viswanathan: Okay. Thanks for that. And then just kind of a follow-on would be, have you seen the increase for emotional activity from some of these customers? And then another topic that I was just curious about was just on the side of pricing. I know that there was a reduction in SBS folding carton grades. Is that all that we’ve seen on the pricing front? Do we expect any more maybe some price normalization or reductions next year? Maybe, you can just address the promotional environment as well as the pricing environment. Thanks.
Michael Doss: Yes. As I said around the promotional side of things, it’s a bit of a lumpy. Some customers are doing more of that right now, and some have said they’re protecting their pricing and expecting more of elongated recovery. It’s a bit of a mixed bag there. I expect, as most of our customers have told us, they want to grow their volumes next year as I commented earlier. So, I’d expect them to figure out ways to do that. And that usually comes in the form of promotions that they do or different merchandising options they’ve got available to us. And I don’t think this will be any different this time. And that’s what gives us confidence in our ability to grow 100 basis points to 200 basis points next year or room two. In regards to pricing, you mentioned the SBS folding that’s decoded.
That is down $80 a ton. CRB and CUK have moved down $20 in total this year. So that would be a complete summary of what has happened in terms of pricing in 2023. And as you would expect, we’re not going to prognosticate around pricing here on a call. But what I would tell you is that at Graphic Packaging, our overall operating rates were pretty good. I mean, you saw it on one of the slides, three of the four substrates that we manufacture, we were actually at 90%. That being CRB, CUK in cup stock. those are highly integrated businesses for us, as all of you know. The one that actually was light was the coded SBS. And in our case, that was down around 70% as we chose to really operate those assets to match our supply and our demand, which would be our plan going forward here, too.
