Graphic Packaging Holding Company (NYSE:GPK) Q3 2023 Earnings Call Transcript

Graphic Packaging Holding Company (NYSE:GPK) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Hello, everyone and welcome to the Graphics Packaging’s Third Quarter 2023 Earnings Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. [Operator Instructions] I would now like to turn the conference call over to our host, Melanie Skijus, Vice Principal of Investor Relations. Please go ahead.

Melanie Skijus: Good morning and welcome to Graphics Packaging Holding Company’s third quarter 2023 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 third 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, the third quarter earnings presentation and the statements made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

A close-up view of a hand assembling boxes of industrial packaging on an assembly line.

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 risks identified in the release and the presentation, as well as our filings with the Securities and Exchange Commission. With that, I’ll turn the call over to Mike.

Michael Doss: Thank you, Melanie. Good morning, everyone and thank you for joining us on the call today. Let’s begin with a highlight on slide 4. I’m very proud of our team’s performance during the third quarter amid a very dynamic environment, we continue to make progress on our goals, deliver adjusted EBITDA growth and margin expansion, invest for the future and fulfill our purpose to package life’s everyday moments for a renewable future. As customers have pointed out in recent months, the consumer environment remains dynamic, and uncertain and evolving macroclimate has resulted in a relatively more cautious consumer in the near term. At the same time and as we have discussed last quarter, retailers are operating with more normalized inventory levels versus a year ago, as supply chain challenges have largely subsided.

The combination of these factors has had a modest impact on our packaging volume. In listening to a broad mix of our global customers and given the confidence we have in our innovation pipeline; we are anticipating a return to our targeted 100 basis points to 200 basis points of net organic sales growth in 2024. Responding to external factors, our team leveraged the scale and flexibility inherent in our system and reduced paperboard production by 150,000 tons during the quarter. Through our disciplined commercial approach and active management of supply to meet demand, we met our commitments to customers and stakeholders while adopting to current volume changes. Together, our team, our capabilities in our strong operational execution provided the path to targeted EBITDA margin levels in the quarter.

Our performance demonstrates the resilience of our business and is a testament to our differentiated approach to servicing and growing consumer packaging markets. We are delivering value to customers with the packaging solutions we provide and optimizing our system to position Graphic Packaging for the long-term growth. The key element of our strategy is supporting growth through advancing innovation capabilities and making strategic investments. We make considerable progress on this front in the third quarter, including new innovations that are driving category and market expansion, continued progress on our multi-year CRB system transformation, both of which I will expand on in a moment, and lastly, the completion of the Bell Incorporated acquisition.

The acquisition of Bell is a good example of how we are investing in our packaging network by adding capabilities, and expanding the customers and markets we serve. Acquisition integration is well underway and we are excited about the new opportunities Bell provides. As we look ahead, we are positioned to benefit from the long-term strength of demand for sustainable fiber-based packaging. We are focused on further distinguishing Graphic Packaging as the leader in recycled and recycled full consumer packaging. We have updated our guidance and continue to expect 2023 adjusted EBITDA of $1.9 billion at the midpoint of our guidance range. In addition, we are tracking to meet or exceed our enhanced vision 2025 financial goals. We remain confident in our ability to achieve annual organic sales growth targets in the years ahead.

One of the many reasons we remain confident in our organic growth outlook is the continued advancements we are driving through innovation with our customers. Slide 5 provides another example of our innovation engine at work and the continued progress using fiber to replace packaging previously created with non-renewable resources like plastic and foam. I’m sure many of you recognize the iconic Nissin Cup Noodles, a leading brand in the Ramen comfort food category. Historically, the noodle cups have been made of foam. Through our innovation capabilities and expertise in both food service and retail packaging, the fiber-based solution we developed serves as a more sustainable packaging alternative to foam and is effective in a shelf-stable retail environment.

Notably, our retail cup solution for Nissan provides added convenience for the consumer as it is safe for microwave use, eliminating an extra step required in meal preparation when using foam. We are excited to share with you today a new partnership we have with Nissan Foods and the upcoming launch of their Cup Noodles product, packaged in our proprietary retail double wall fiber-based cup solution. The rollout is expected to begin in the first quarter of 2024. Aligned with consumer preferences for more sustainable packaging options, Nissan plans to convert their entire 16-ounce cup noodles product line in the U.S. from foam to our solution over time. This packaging application marks our first in microwave cups as we continue to expand the addressable market within the more than $4 billion cup and container market in the U.S. Our history-serving retail markets and our ability to invest behind in scale with customers creates new opportunities across various dry food categories that today are primarily in foam and plastic.

Items such as pasta, hot cereals, breakfast mixes and single-serve dried foods are examples, where our fiber-based solution has tremendous potential to win. While discussing growth opportunities in the broader cup market, let me also provide an update on our program, Chick-fil-A. Last quarter, this important customer went to market with our new, highly-insulated double-wall beverage cup and approximately, 10% of its stores as a potential long-term solution for its beverage program. Feedback from both stores and consumers has been favorable and phase 1 of the program continues with rollouts currently underway to additional stores. We continue to believe our innovation can be a long-term solution for Chick-fil-A and others currently using foam cups in containers.

Frightening innovation with industry leaders like Chick-fil-A and Nissan Foods demonstrates how top brands are investing to transition toward more sustainable packaging solutions. Through our extensive design and packaging network, we are partnering with leading brands to effectively transition to sustainable packaging solutions that consumers prefer. We believe long-term tailwinds support the continued demand of this transition, such as end-use consumers seeking more sustainable packaging, customers responding to demand in pursuing sustainability goals and in a growing number of jurisdictions, environmental legislation requiring the use of more sustainable packaging. Moving to slide 6. let me provide a brief update on the significant progress we have made on our CRB transformation.

Since 2019, we have embarked on a multi-year optimization effort to simplify our CRB system, while strategically expanding capacity and lowering cost. The end result will further distinguish Graphic Packaging as the lowest cost and highest-quality coated recycled paperboard produced in North America. Our efforts to optimize and strategically expand capacity are the result trends we identified early on, including growing consumer demand for packaging made from recycled materials. Our focused investments will ensure we will sustain unmasked quality and cost advantage in this important category for years to come. Since the project began, we have made significant progress in our CRB system transformation, with our new 550,000-ton K2 machine ramped in Kalamazoo, we have effectively increased our net CRB capacity by 70,000 tons to support our growth.

Through higher costs, less efficient facilities and our longest-running paperboard machine in Kalamazoo, the total production of 480,000 tons have been removed from the system. As noted, this total includes our recently-announced permanent decommissioning of the K3 machine. Our decision on K3 reflects the incredible success of the state-of-the-art K2 machine, which has been operating at or above committed efficiency and quality levels. We look forward to replicating the success of K2 with our new CRB paperboard machine in Waco, Texas, which will expand upon our quality and cost advantages when it begins production in late 2025. As we have talked about before, the ability to cost-effectively produce higher-quality CRB allows us to meaningfully and profitably expand opportunities within new markets and ones we already serve.

One example of this quality improvement is the new pay center reviewer recycled paperboard, which we introduced last quarter. This new grade of the highest quality recycled paperboard available will facilitate CRB and more consumer packaging experiences across the food, health, pharmaceutical and beauty product applications. We are pleased to have our first sale of pay center in the year in October and look forward to sharing many more packaging example wins in the quarters to come. The third quarter also included the release of our 2022 ESG report detailing the progress we have made towards achieving our vision 2025 ESG goals. Sustainability is an integral part of our business strategy and our impact extends well beyond our own business. We enable customers, including many of the world’s leading household brands, to transition towards recycled and more recyclable packaging solutions.

I’d like to note a few key highlights from the report that can be seen on slide 7. To start, we successfully achieved our goals for greenhouse gas emissions intensity and non-renewable energy intensity three years early. We did so through investments in efficient manufacturing and expanding the scale of our packaging operations. For example, the K2 machine helped reduce emissions intensity associated with CRB production by an estimated 3% in 2022. We also highlighted we are on track with our goal to have 100% of our global facilities compliant with a fiber certification standard. Forest certification and certified sourcing programs give consumers confidence that our packaging does not contribute to deforestation or biodiversity loss. The goal demonstrates our support for sustainable forest management and forest product sourcing practices we follow to ensure compliance.

We have more than 24,000 teammates worldwide and I am proud of the progress we are making as we build a more diverse and inclusive workforce. There is always more work we can do and we remain committed to fostering continuous improvement in the workplace centered around our employees’ growth and sense of belonging. Slide 8 highlights a recent sustainability achievement I am very excited to share with you. We learned in early October that the science-based targets initiative approved our 2032 carbon reduction goals, which are outlined here. As an increasing number of consumers are voting with their wallets by purchasing products and brands that are doing the right thing for the planet, we are proud to be filling our purpose to package life’s everyday moments for a renewable future.

With that, I’ll turn the call over to Steve to provide more detail on the financial results. Steve?

Stephen Scherger: Thanks, Mike and good morning. Let me start on slide 9 with an overview of the key financial highlights for the third quarter and the first nine months of 2023. Overall, our results demonstrate the resiliency of our business and ability to operate effectively through a very dynamic macro environment. Net sales declined 4% year-over-year to $2.3 billion. As Mike discussed, sales during the quarter were impacted by some fluctuations in consumer purchasing behavior and by efforts from retailers to adjust inventory levels. Those headwinds will partially offset by positive pricing execution in the impact of foreign exchange. Net organic sales growth adjusted for the same number of shipping days as in the prior-year period, was down 4.6% during the quarter.

We now expect net organic sales to be plus or minus 2% in the fourth quarter, with an anticipated return to our targeted 100 basis points to 200 basis points of net organic sales growth in 2024. We remain confident in our innovation pipeline and our ability to execute on commercial opportunities to fuel our organic growth in the years ahead. Our expected four-year cumulative average organic sales growth rate of approximately 2% from 2019 to 2023, remains at the high end of our annual range, established with Vision 2025. Our top-line performance is benefiting from our diverse portfolio of end markets and customers. While sales for the food, beverage and consumer markets decreased 6% in the quarter from the prior-year period. sales in our food service markets grew 8% as our packaging solutions continue to win as mobile consumers are looking for convenience when eating and drinking on the go.

We are actively managing our supply to meet current demand, exercising discipline and production while minimizing the cost of doing so, and focusing on servicing long-term customer relationships with their packaging needs. Given the disciplined approach to production, we exercise throughout our packaging business. Reported profitability is as strong as we anticipated despite short-term fluctuations in the consumer environment. Adjusted EBITDA grew 9% year-over-year to $482 million and adjusted EBITDA margins expanded by 250 basis points year-over-year to 20.5%. Adjusted EPS also continued to grow expanding to 10% year-over-year to $0.74. As a reminder, our sales and EBITDA waterfalls are available for reference in the appendix of today’s presentation.

Global liquidity remains strong at nearly $1.2 billion. Our success driving integration rates higher was evident in the quarter with paperwork integration into our consumer packaging business at 79%. This is an increase of 500 basis points from the prior-year period. As a reminder, this is an increase of 1,200 basis points from 67% since January 2018 when we completed a combination with International Paper’s North American Consumer Packaging business. We will continue to drive integration rates higher as we capture and execute growth opportunities in consumer packaging. Slide 10 outlines updated full-year guidance for 2023, reflecting our current expectations, as well as the recent acquisition of Bell Incorporated. Most notably, the midpoints of our adjusted EBITDA and adjusted EPS guidance remain fundamentally unchanged.

Turning to slide 11. We continue our balanced approach to capital allocation, which focuses on growth and capital return. As discussed during today’s call, we remain focused on investing for growth, such as the recent acquisition of Bell, ongoing advancements in innovation and the new recycled paperboard facility in Waco, while also reducing leverage to the lower end of our targeted range and returning capital to shareholders. As of today, we have repurchased $54 million of stock year-to-date. Our balanced approach to capital allocation positions the business for continued success and delivers value for stakeholders. With that, I will turn the call back to Mike.

Michael Doss: Thanks, Steve and I’d like to thank our talented team around the globe. Their strong execution positions Graphic Packaging to meet our commitments to customers, deliver value for stakeholders and continue our leadership in fiber-based consumer packaging. I am pleased to share with you that we will be hosting an Investor Day in New York on February 21st, 2024. In addition to a strategic update on the business, we will provide Q4 and full-year 2023 financial results, guidance for 2024 and looking further into the future, our new Vision 2030 aspirations and goals. We are excited to see many of you in-person and look forward to providing more details on our plans for the future. I will now 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] So, our first question comes from the line of Ghansham Panjabi of Baird. Your line is open. Please go ahead.

Ghansham Panjabi: Thank you, operator. Good morning, everybody. Mike, so just kind of looking back at 2023, it seems like this was the year price cost led margin expansion and just much weaker than forecast end markets given destocking and some level of consumer elasticity that perhaps offset many of your internal growth and productivity initiatives. Based on what you see at this point, what does 2024 look like? Would it be just better volumes just based on the comparison and some level of margin give back based on the pricing trend line in the industry and then maybe as a correlate to that for Steve, any variances you can share with us on an EBITDA basis such as price cost for ’24?

Michael Doss: Good to hear you. We heard a little break up there, but I think I got the gist of your question talking about volumes here in 2023. how we’re thinking about them and kind of the — as we’re exiting ’23 and then to ’24. And I’d say this, I mean, as we told you, going into this quarter, our third quarter, this is going to be the toughest quarter [Technical Difficulty] versus ’22, we’re up almost 5%. And today’s adjusted basis, we came in and clapped with second quarter, really what we communicated at the end of the second quarter. So, pretty much in line with what we thought. And our comps get a little easier here in Q4. We were up a little less than 1% last year in Q4. So, we’ve got a range out there of minus 2 to plus 2.

And really the real reason for that, as you know is the recovery is just not linear. It tends to be a little bit lumpier than anybody says. And from our standpoint, our crystal ball is no better or worse than anybody else’s in terms of when the actual inflection occurs. We have some customers that are talking about an elongated recovery. We have some customers that are talking about promotions that are going to occur in Q4 and dry volumes. So, it’s a balance between those two things. They give us confidence as we head into ’24 around our ability to grow at our medium to long-term and we can put out there 100 basis points to 200 basis points of growth. The first, of course, just the costs get easier, coming off of this year. So, that’s point number one.

Point number two is we’ve got a very robust and deep innovation pipeline. Examples like we gave here today, the cup noodles and the Chick-fil-A, cold and gold cups, and there’s been others almost every one of our updates. So, we point to another thing that we’re doing out there to replace usually plastic or foam into fiber-based packaging. So, we know we’ll grow with our innovation. And then second — or the third point that I’d make is that’s really what our customers are telling us. They need to grow too, because ultimately, their stocks don’t work if they don’t have top-line growth that also translates into volumes as well. So, those three things really give us confidence as we go into 2024. Now exactly, what’s going to happen in Q1? Probably not, but our confidence is high that in ’24, it will grow again.

And if you really take a step back to over a four-year period of time and you just say we’re at the midpoint of our guide for volumes here in Q4, we grew a 3% a year for the three years coming into this year. This year, we take a step back 2%, maybe 2.5%. But if you look at a four-year stack on that, we’re at our 2% target that we put out there. It’s high end of the 100 basis points to 200 basis points. So, we knew over a long-term aspiration goal that we put out like Vision 2025, there’d be some ups and downs that occurred. But overall, we’re very pleased with the overall trajectory and the growth that we’ve experienced in the business and expect that to continue in ’24.

Stephen Scherger: And Ghansham, this is Steve, you want to just repeat a little bit of your — about ’24 just to make sure I’ve got it right?

Ghansham Panjabi: Yes. I was just curious on the variances on EBITDA, on price cost, and whatever else you can share at this point.

Stephen Scherger: Yes. Thank you for that. I just wanted to make sure that’s what I thought you said. I mean, listen, as Mike just said, if we look into the ’24, there’s some real positives that we would expect will be beneficial to the P&L if you kind of look out to next year. We’ll have a full year of the Bell acquisition. We acquired that in the fourth quarter, so modest EBITDA this year. Just by way of reminder, we bought $30 million of EBITDA and $10 million of synergy. So, we’ll pick up probably incremental $20 million from that next year along with the synergy. So, think of that as a plus $30 million [Technical Difficulty] will earn on 100 basis points to 200 basis points of organic sales growth and you know what that value perspective would be at or above our margins as we generate.

And we should have a very strong productivity here. We will have less planned maintenance [Technical Difficulty] have less market-related downtime as we return to growth. And [Technical Difficulty] weather-related, the bet that was of substance, which certainly, we don’t plan for that to repeat. So, those are three very positive benefits as we go down [Technical Difficulty] labor benefits and inflation this year running a little bit higher than normal. We’d expect that to get back to the levels. And if you mark to market the current price cost environment, so just mark [Technical Difficulty] and all of it pricing related, $80 on SBS, the $20 on [Technical Difficulty]. We’re in a very benign inflationary environment here [Technical Difficulty] obviously, as we’ve talked, we’re very committed to operating the company through narrow range of EBITDA margins.

And this year, we moved towards the 20%. And certainly, we would expect operating a pretty thin band around that 20% as we look out to 2024. So that gives you some of the components. We’ll obviously provide detailed guidance when we’re together in February and provide that to you in a more granular level. But those are, I think, the high points if you kind of look at the year ahead.

Ghansham Panjabi: Perfect. Thank you so much. I’ll turn it over.

Michael Doss: Thanks, Ghansham.

Operator: Thank you. Our next question comes from the line of Mike Roxland. Your line is now open. Please go ahead.

Mike Roxland: Thank you, Mike, Steve and Melanie for giving my questions and congrats on the good quarter despite the backdrop. On your last call, you mentioned contract resets, particularly in North America, which have long duration in two years to five years. And you mentioned, I think, the way you phrased it was that there’s a meaningful number of contracts out there that you still could be addressed over the next 12 months to 24 months that have yet to reflect the higher prices. So, is there any way that you could help us size that? Is that 20% of all contracts, 30% of all contracts? And the reason I’m trying to just drill down on that is because Steve just answered the prior question on some of the drivers for 2024, but wouldn’t those contract resets also be beneficial to driving EBITDA growth next year?

Stephen Scherger: Yes, Mike. it’s Steve. And [Technical Difficulty] to drive benefit next year, as we also talked on the last quarter, we don’t tend to put those into the kind of mark-to-market discussions that we were just having. And at any time, to your point, we’ve got 20% or 30% of our contracts that are in negotiations and coming due. So, as those play out, we’ll certainly articulate those. If there are some that play out here, late this year [Technical Difficulty] incorporate those in the guidance. But to your point, we continue to actively engage with our customers to put in appropriate value for the products that we’re producing and have a kind of long-term relationship that we have enjoyed with many of our customers.

Mike Roxland: Got it. I appreciate that, Steve. And just one quick follow-up. Any comment you have on trends we were seeing thus far in October? Has there been any improvement at all sequentially? I know one of you appeared reportedly yesterday and basically noted no improvement thus far in 4Q. So, any commentary or color you can provide around what’s happened thus far in October in terms of order patterns, destocking come to an end, CPD promotional activity. Anything that would be helpful. Thank you.

Michael Doss: Well Mike, we’ve obviously gotten a look into October and with October, it’s consistent with the plus or minus 2%. So, we do expect to see sequential improvements quarter-to-quarter and as Mike said, we’ve got customers, who are seeing a positive move volumetrically already. We’ve got others, who are seeing it taking a little bit longer. and so we’re thinking it’s a good mix of customers, who are starting to see some promotional activity, material items in Q4, others aren’t quite there yet, as Mike articulated earlier. But sequential improvements in Q4 we can see happening.

Mike Roxland: Thanks very much.

Operator: Thank you. So, our next question comes from the line of George Staphos of Bank of America. Your line is now open. Please go ahead.

George Staphos: Hi everyone. Good morning. Thanks for the details. Steve and Mike, I don’t know if everyone is hearing it, but your phone has been cutting in and out a bit, at least on our end. And I just wanted to make sure when you’re answering Ghansham’s question, did you put out a — at least mark to market on pricing that you see for ’24? Because if you did, we didn’t hear that before we get into our questions.

Stephen Scherger: Yes, George, it’s Steve. and our apologies if there’s experience in some technical challenges here, but let me end with line to Ghansham’s question. What we did indicate is that if you just do a pure mark-to-market on price cost, we’ve got very little happening on inflation. So pretty benign and if you sequentially just look at the price impact year-over-year, it’s down roughly about $80 million year-over-year. And as Mike Roxland just mentioned, obviously, we’ve got other customer negotiations that we’re always involved with and improving terms and conditions, where they are in our negotiations. And so, I think that hopefully you were able to get that in response to anything that may have cut out. Did that work, George?

George Staphos: That’s perfect. Actually, that’s kind of where we were modeling and doing some back down. So, thank you for that. So, two questions here very quickly. First of all, in terms of the noodle cup and related markets, what do you think that market opportunity is for you and maybe, what kind of tonnage you expect maybe for ’24 and ’25 from those markets? The coding in that cup, is that a biocoding or is that a polycoding and how will you handle that? And then the other question is just sort of near term, we noticed that and again, performance was good given the backdrop. We don’t want to take away from that. The free cash flow guide came down a little bit this year, and you mentioned labor and benefit is running a little bit hotter this year than your prior guide. What were the factors in that? Thanks guys, I’ll turn it over from here.

Michael Doss: Okay. the first part of that, George, and then all that Steve handled questions that are on working capital in particular. But the reality of it is, if you look at our total addressable market and we put out there, $12 plus billion and within that addressable market, there’s $4 billion segment of it. That’s what we call cups and containers. So, that’s really where that sits. And so it’s a very big opportunity for us and one that we can work on for years to come. In fact, the vast majority of our cups, including the cup noodles, has some form of a low-density polyethylene or polyethylene area or coating inside. And as we talked about, what we’re really excited about is our ability to take those cups back to Waco and we can process with new vertical drum pulper that we’re installing.

There are 15 million of those paper cups today. With that coating on the inside, clean them up, take advantage of the fiber. It’ll be on the top wire. It’ll be the first fiber we put down and we’ll recycle those cups. So, we’re working with our customers within about a 200-mile radius of the mill to be able to have that capability. And eventually, you can expect that we’ll be able to do that in Kalamazoo as well. That’s our plan. So, we feel like we’ve got our focus.

George Staphos: Could that be 50,000 — I’m sorry, could that be 50,000 tons next year, do you think this new market? Just a new customer?

Michael Doss: I don’t know. We’re not going to put a ton of number up there right now. I mean, I can tell you this, that the fully transition, the cup noodles is 15.

George Staphos: Okay.

Michael Doss: So, I mean, these are meaningful numbers that come forward. So, it depends on kind of what Chick-fil-A’s trajectory looks like and some of the other conversions that are out there. But over the medium term, we expect that we’ll be able to make a pretty strong pivot out of our coded SBS and get more into manufacturing, the cup stock, which as you know, George, the split right now is of our 1.2 million tons. It’s roughly 400,000 tons to 800,000 tons. So every time, we sell a cop is something that we integrate into our own operation. Did you get all that, George?

George Staphos: Thank you, Mike. Yes, that’s perfect. Thank you. And on the [Technical Difficulty]?

Stephen Scherger: Yes. And let me just touch on that a couple of things. Really, on cash flow, we’re just dialing in our working capital. We’re running very much to demand, as you know, and all we were really doing is saying, okay, we’re just going to continue to service customers, make the products that we need to make, carry the inventory that we want to carry to make sure we’re servicing customers. So, we were really just dialing in that cash flow. I also will remind folks that when we had talked about 2.5 times leverage ratio, that excluded Bell, we [Technical Difficulty] as we mentioned, we’ve got to be up in that 2.6 range. We put 2.6 to 2.7, because we’ve also been acquiring some shares as you saw in the modeling that we were chaired with you on the guidance.

So hopefully, that gives you a sense for — we’re real pleased with where we’re generating the cash flow and as we look into 2024, it sets us up well to make sure we’re servicing customers as they return towards the bureau.

George Staphos: Okay. thank you very much.

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.

If you really take a step back from that and think about CUK, in terms of what’s going on there, over the last couple of years, we’re buying globally some additional paperboard in different geographies to run our business and service our customers. Because of some of the efficiencies we see and some of the demand adjustments that have taken place, we can now integrate all those tons into our own operation and export to more tons to Europe, as well as to Australia and New Zealand. And so, that really helps us on the CUK side. And on CRB, with our K3 machine now being dumped down, and it didn’t produce actually in the third quarter, but we did have a very significant annual outage in Kalamazoo on both our paper machines, ranging from seven days to nine days.

If you factor that seven days to nine days out, our 90% was actually in the mid-90s. And we’re running wide open on our CRB system, the mills we have, Kalamazoo, Middletown and East Angus, to service our business in Q4. And we expect that to be the case as we go into 2021 or 2024 as well. Cup stock, as we talked about with things like Cup of Noodles and our Chick-fil-A, and our overall food service business, which grew in the quarter organically from a volume standpoint, that’s a very solid business, highly integrated, over 90%. So, our challenge is on the coded. the SBS has been well chronicled. But in our case, I gave the math for George, 400,000 tons of cup, 800,000 tons of coded, of that high level numbers, we need about 300,000 of that to run our business.

So, the open market portion of it for graphics, 500,000 tons. So, it’s about 10% of our overall volume. That’s it. And as I’ve stated earlier, we’re trying to find ways to continue to grow our cup business. And we’re going to meet that capacity to ultimately serve as customers as these transitions out of foam and plastic continue to occur on the fiber side. So, that’s how I think you should think about the overall demand profile, which usually is tied to some level of pricing.

Arun Viswanathan: Great. Thanks for that — all that detail.

Michael Doss: You bet.

Operator: Thank you. Our next question comes from the line of Matt Roberts of Raymond James. Your line is now open. Please go ahead.

MattRoberts: Hey. good morning, everybody. My question, in regard to permanently shutting the K3 machine in a quarter, while that seems consistent with the initial plan you laid out in 2019, can you discuss how the timing as that played out versus your initial expectations? And what are some of the assumptions or scenarios you’re considering on the timing of closing East Angus and Middletown ahead of Waco?

Michael Doss: Yes. thanks, Matt. and appreciate the question, I mean, from our standpoint, our plan was always to shut down our K3 facility. The question was, when could we do so and take care of our customers? And so with the ramp up K2 and exceeding our expectations in terms of productivity and quality, we were able to do that on June 30th. So that timing was good. And as I just mentioned, we need our remaining mills and assets to run well to take care of the business that we have. And so, we do not plan on shutting down any of those mills prior to our Waco facility up and running just simply, because we’re going to need the tons to service our business on the CRB side.

Stephen Scherger: Yes, Matt. just to expand on that, if you kind of step back and we shared it on one of the slides, I mean, we’ve really played this out since 2019, as described. How we got there is a little different, of course, but the 550,000 tons in, 480,000 tons out, we’ve grown at a 2% CAGR over the last couple of years. We need those tons and we’ve got demand for our CRB. And so as Mike mentioned, we’ll continue to run the CRB platform, very full, taking of course, our planned typical maintenance outages were appropriate. but there’s a real strong outcome there relative to our original commitments and just repeating something like I mentioned, same applies with CUK, because of global demand for fiber-based solutions.

MattRoberts: Right, that makes sense. Thank you, both Mike and Steve. If I could follow on to that, thinking about maybe longer-term supply here, a competitor announced, seems like they delaying an FBB conversion, citing market softness. How has that action changed your longer-term industry supply estimate for 2025 and beyond if so? thank you all for taking the questions.

MichaelDoss: I think on the margin, they’re seeing exactly what I just got done describing. Where the FBB was going to compete is on the coded SBS side, which is the weakest of all the grades. So that probably caused them to take some pause. In our case, we’re actually shifting out of coded SBS as we can and growing our cup stock business. We’re going to have the lowest cost platform for CRB. In the Western Hemisphere, our CUK is incredibly competitive and highly-integrated business, over 95% integrated. So, we’re just running a different race in terms of how we’re putting it together. And that isn’t where we’re going to spend our capital dollars or place our emphasis. We’re a packaging company. We want to sell a cup. We want to sell a carton. And we’ll make the grades of paper, where we can actually earn a good return for our investors. And that’s how you’ll see us allocate our capital.

Stephen Scherger: Yes. and Matt, just to add to Mike’s point, if you kind of then step back and assume that there’s a long-term delay on the project that you were referencing from a capacity perspective, there’s very limited capacity that is underway coming into the market. There’s one conversion happening with the competitor up in Maine that has some incremental capacity. Obviously, we will bring on a little bit of incremental capacity to support our growth. And you’ve actually had some capacity reductions that are playing themselves out in SBS. And they take some time to roll through the market. I mean, the Canton mill that was closed here is now fully down, and I’m sure inventory levels are being managed through. So, actual capacity across all three substrates, very modest additions, if you look out over the next three to five years, knowing the timelines for any other decisions that someone may or may not make over time.

MattRoberts: Very helpful. Thank you, again.

Michael Doss: You bet, Matt.

Operator: Thank you. Our next question comes from the line of Mark Weintraub of Seaport Research Partners. Your line is now open. Please go ahead.

Mark Weintraub: Thank you. There had been quite a bit of static when you were answering Ghansham’s questions, and I apologize, I didn’t get everything. So, I just wanted to quickly review some of the framework on bridging ’23 to ’24. I think you mentioned Bell, including synergies, was about 30 million positive EBITDA, and then 100 basis points to 200 basis points, being your kind of baseline. those I did hear. And I thought I lost; I didn’t hear too much on the productivity versus labor. Historically, that used to be a bit of a wash. Did you give specifics on sort of netting those two out for next year?

Michael Doss: Yes. why don’t I give it, it sounds like there was a problem with that. Let me just repeat the answer for you, Mark, just so that you have kind of the whole context again. What we indicated was that on the positive front, as you just articulated, but playing it back to you again, Bell will be an incremental positive next year, probably in the $30 million range combination of the business we acquired plus the synergies. We’ll earn on our 100 basis points to 200 basis points of organic sales growth. So, if you assume $100 million to $200 million of top-line growth, we’ll earn on that. That actually is a bit of a counterbalance to the price-cost relationship on a mark-to-market basis. So, just all known, pricing actions probably about an $80 million net headwind offsetting the significant price that we’ve executed on over the last three years.

And then we would expect our productivity to be very strong next year. We will have less planned maintenance downtime. We won’t plan for a weather-related event that occurred in 2023 in the first quarter and less market related downtime as we return to growth. And so we would expect that to fully offset our labor and benefits inflation as it normalizes back towards probably more towards that $100 million range. And so, those were the components marked that we would see playing themselves out in 2024. So, it’ll be a different year than 2023 in terms of some of the pluses and minuses. But as also repeating it, we expect to operate in EBITDA margins that are within range, a tight range, a tight range around that 20% that we’re executing on this year.

Mark Weintraub: Okay, great. And then lastly — and a follow-up, I think for Mike, you were talking about how there are resets, et cetera. And I just wasn’t quite clear. So, is the bias on the resets necessarily to the positive? And it’s a question of magnitude, or is that to be determined?

Stephen Scherger: Well, this is Steve, Mark. Our bias is to the positive, obviously, because we were renegotiating if someone has been under contract for quite some time and may not have the full increases that we’ve executed on, because of the model they were on or what have you, the resets we would expect to be net favorable as we renegotiate them. And as repeating it from earlier, we don’t outlook those until we’re done, until we’ve successfully executed on them. And that’s one of the reasons you’ve seen price generally moving beyond what might be expected, because of those successful negotiations that we’ve been undertaking for the last couple of years. And of course, we would embark — continue to embark on as you look out to 2024. I don’t know, Mike, if there’s anything you’d add to that.

Michael Doss: I think you said it well.

Mark Weintraub: Got it. Very helpful. And maybe, just lastly, and I hope you’ve already been hitting on, totally understand kind of the idea of shifting some of the SBS folding cartons over to cup stock over time. You are operating at 70%. So, I guess, there’s also opportunity if that market gets better next year, just selling it as coded board. Can you give us kind of thought, what is it that would make that, what is it that needs to happen for that market to get better, so you’d be running more full in that business and is that part of the improved productivity that you were expecting and alluded to in the prior comments?

Michael Doss: Yes. So, it’s really two things. We need demand to obviously pick up. And there’s a variety of different verticals, where that could happen. On the coded side of SBS, some of the more high-end stuff, as you know, that historically has been used for that kind of paperboard. So, that would be, we’d earn on that if we had those sales. But as we talked about here, our approach has been we’re going to match our supply and our demand, and that’s what we did here in the quarter. And ultimately, yes, it enters itself and we pick up under-absorbed fixed costs. I mean, that’s exactly how it works if we’re able to operate the mill. But we’re only going to do that if we have the orders to actually match that.

Stephen Scherger: Yes. and Mark, to Mike’s point, as you know, SBS folding cartons, so that specific grade is the most fragmented, most global, least integrated. And so, given that there was obviously an overproduction of a little more magnitude over the last year, I think that speaks to the depth of the down, so down towards the 70%, we’re matching our supply with demand. And to your point, when all of that plays out, which it is, whether it plays out and you go into 2024, when it does return to a normal pattern of buy/sell, if you will, there should be value creation there as you get more normalized volumes rolling into 2024.

Mark Weintraub: Great. Appreciate all the color. Thank you.

Michael Doss: You bet.

Operator: Thank you. Our next question comes from the line of Anthony Pettinari of Citi. Your line is now open. Please go ahead.

Anthony Pettinari: Hi. Good morning. I think you saw net organic volumes down, I think 6% year-over-year, but vol mix was a 9% top-line headwind. I was just wondering if you could talk about any mix shift you saw during the quarter. And then separately, I guess in 3Q food service outperformed grocery on easier comps. Is it reasonable to expect maybe those end markets could perform similarly in 4Q as they did in 3Q?

Stephen Scherger: Yes, Anthony, it’s Steve. I think the differential there that you’re describing is all the open market paperboard sales, which were down year-over-year. So, we outlined that on the third quarter net sales performance, you’ve got open market sales down a little over $100 million. So that’s matching supply and demand only producing paperboard that we sell into the open market, where we have orders at pricing that we find consistent and acceptable. And so that’s really the point there. The organic sales, as you know, as we’ve described it, is on when we make an end consumer package. And so hopefully, that kind of breaks it out for you.

Anthony Pettinari: Got it, got it. And then the food service versus grocery, I mean, you think 4Q would maybe play out similarly to 3Q?

Michael Doss: Yes. I think the relationships probably yes, it’ll all be sequentially better as we’re articulating. but I think as Mike had said and we’ve shared with you, the drive-through just continues to win. And fiber-based packaging through the drive-through is winning. And so overall, the performance of our food service business has been very good. It was actually up modestly, organically in the quarter, which was a favorable outcome as part of the 8% improvement year-over-year. So, there’s good momentum there as consumers want to be mobile. And they also want to have products that are delivered to them effectively, mostly through the drive-through. So, I think the momentum there is very strong. And then it’s supported by the innovation activity that we articulated to you as well here, like Chick-fil-A and others.

Anthony Pettinari: Okay, okay. that’s helpful. And then shifting gears, there have been a lot of questions in the CPG and food service space around potential long-term impact of GLP-1 drugs. I’m just wondering if you had any kind of high level or initial thoughts on if or how this could impact your business or any anecdotes of consumers using GLP-1 or maybe, buying less or more or shifting their mix of products that you provide packaging for.

Michael Doss: Yes. So Anthony, if you really — and you’ve been watching many of our customers have done their releases over the last couple of weeks and they’ve commented a lot on this, because they’ve gotten a lot of questions on it. It’s early days in terms of that drug and I don’t think we even know all the questions to ask yet. But having said that, many of them have actually said, they don’t expect it to be much of an impact at all on their business and several have said they anticipate that this can be an area that perhaps they can innovate behind it. So, I think we’re just going to have to wait and see how that plays out over time, what the adoption rates are and how it all plays out. But there’s nothing there we’ve seen or read that gives us pause relative to our ability to drive our 100 basis points to 200 basis points of organic volume growth over the medium to long term.

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

Michael Doss: Thanks, Anthony.

Operator: Thank you. Our next question comes from the line of Phil Ng of Jefferies. Your line is open. Please go ahead.

Phil Ng: Hey, guys. I appreciate you squeezing me in here. Sorry to harp on this, I mean, the non-integrated tons are obviously quite small for you, but you’ve given some color on how your volume strength has progressed through October and since you stripped that out in your net organic sales number, and certainly, SBS folding carton seems to be a little more under pressure. How do you kind of see the open market tons progressing through the year? And I’m curious if you’ve seen any more impact just broadly on imports, at least RISI seems to be dialing up comments around that and maybe, it having more impact and making its way to the Midwest.

Michael Doss: I think the way we’re dealing with the open market, particularly on the coded SBS side, as you’ve seen in terms of the 70% operating rate for graphic is, we’re matching our supply and our demand, and we’ll continue to do that. That’s a plan relative to how we would operate the business. I’ve already told you our CUK and CRB, and uncoded cup business, those are strong businesses, highly-integrated, our operating rates are solid there. and I’d expect that thing to be the case, particularly as we get some growth.

Stephen Scherger: Yes. I mean, it’s a great question around imports. When you read, some of the trade journals and how they talk about imports, it sounds like there’s a wave coming. And I was interested, particularly on the most recent one relative to CRB coming from Western Europe. So, our team went back and pulled all the census data. We looked back a couple years in terms of what it looked like. Phil, 20,000 tons are less a year for the last three years. It’s a two-million-ton market. It’s like 1%. So, what’s most surprising to me on that is just the amount of airplay that got, and because we don’t see it, in the marketplace, and we’re out there every day with the biggest producer of coded CRB, as you know, and we’re getting bigger.

And maybe, even to build on that a little bit, we’re the lowest cost CRB producer in North America. And if you compare net gas against Europe even today, it’s almost five times more expensive. It’s almost $20 in MMBTU. And it’s more expensive to get a container from Europe than it is to go from the United States to Europe, almost 2X. And so if we thought selling CRB to ourselves, where we buy over 100,000 tons of material in Europe was a good long-term plan, we’d be doing it and we’re not, because it just isn’t economically profitable over the cycle to be able to do that. So, there’s some stuff maybe around the margin out there. It gets a lot of airplay, but when you really look at the data and the numbers, it doesn’t support the hype.

Phil Ng: Okay, that’s helpful. That’s a great color. And then since you brought up Europe, just curious how is your business holding up there, appreciating your — on the converting side. Maybe, you’re able to work through all this, but your ability to kind of manage price costs in the medium term as well.

Michael Doss: Our overall volumes in Europe were substantially similar to those in the United States. And I’ll tell you what I, in a word — well, a couple of words maybe. Our strategy is working there. And if you look at how we’re doing it, we’ve got a non-integrated business there, where we’re one of the largest buyers of paperboard in Europe and that puts us in a great spot right now, where the markets are a little bit softer as you’ve already mentioned here. And so, we’re buying paper board very effectively. We’re able to export our CUK into that market profitably and have for a long time as we continue to grow our beverage business. So, when you really look at it, and Steve and I talk about it a lot, having a non-integrated business over there, we don’t have as much capital tied up to drive the revenue line in our European business.

So, when you look at our return on invested capital and compare Europe to North America, which is obviously heavily integrated, in our own paperboard, they’re on top of one another. So, our overall strategy is actually delivering good results for shareholders.

Phil Ng: Okay, appreciate the color. Thank you.

Michael Doss: You bet.

Operator: Thank you. Our last question comes from the line of Gabe Hajde of Wells Fargo Securities. Your line is now open. Please go ahead.

Gabe Hajde: Mike, Steve, good morning.

Michael Doss: Good morning.

Stephen Scherger: Good morning.

Gabe Hajde: I had a question about backlogs. And I know you guys don’t necessarily express it this way. but the three to four weeks, I think historically speaking, you guys have talked about is probably being towards the low end of what you’d consider to be sort of a healthy-balanced market. I’m just curious for this time of year, taking into account seasonality, is there anything different, unique about that number? You called out the 15,000 tons that would be associated with Nissan, and I appreciate that was, I think, full adoption. So, more thinking about Chick-fil-A, I think you’ve identified that as maybe an 80,000-ton opportunity, and correct me, if I’m inaccurate. Is there anything in that backlog number, sort of for a pipeline fill into ’24 associated with those two products? And then sort of when we were talking in February, would you expect to see that backlog number changed materially from where we’re at today again, just taking into account seasonality?

Michael Doss: Well, I’ll answer the second part of your question first. I mean, the overall numbers you talked about are accurate relative to what some of those full conversion adoption rates would be. they’re directionally correct, at least for your modeling. In regards to backlogs, I think you got to take a step back and think about we’re talking about operating rates now and you’re taking downtime to mass supply and demand. So, backlogs, quite frankly, are artificial, because they can be whatever you want them to be based on the amount of downtime that you take. And so, the more germane point is, as we try to articulate here Gabe, out of three of the four substrates, we’re very busy on three of those. It’s the coded SBS, that’s the one that’s got the biggest challenges for us for the reasons we’ve already chronicled.

So, I wouldn’t get overly hung up around whether it’s three, four, five, six weeks. That matters when you’re running full. And right now, particularly, on the coded SBS side, we’re not. And so I’ve watched those operating rates and really watched, and see what our overall growth development looks like here in Q4 and into 2024, because as we grow 100 basis points to 200 basis points, that’s where those tons come. And I already mentioned the other thing that is out there is that we’re no longer going to buy as many tons internationally on the CUK side. So that will actually help try some of that back too.

Stephen Scherger: Yes, Gabe, just playing that back, I mean, you just kind of rounded that Mike was just articulating. We’ve got fundamentally SBS folding carton in the open market, which has the appropriate headwinds. And it’s well under 10% of the company, well under 10% of the company. And so, you’ve got 90% plus of the company that’s functioning as we’ve been articulating to you here this morning with good volume and an expectation of a return to organic sales growth that we’ll earn on in 2024.

Gabe Hajde: Okay. I appreciate that, gentlemen. The last one, if I could squeeze it in real quick, if my model is correct or my notes, you had about $65 million last second half of 2022 of additional incentive comp accruals. I’m sort of bridging this into the free cash flow number. So, I’m assuming, I don’t know what that relationship looks like on the IC front versus H2 2023. Just curious if that’s helping the second half at all. And then really, again, to put a finer point on the working capital component of your cash flow bridge. Are you assuming some sort of a call it, $150 million, $175 million use this year?

Stephen Scherger: Hey, Gabe. it’s Steve. On the first component, the incentive compensation year-over-year is very similar. So, there’s not anything there that there is a headwind or a tailwind. So, it’s all pretty consistent, ’22 to ’23 and it’s all in the guide. I don’t have the exact number in front of me. But yes, to get to the midpoint of our working capital, there’ll be some use of cash on the working capital front. As we dial in kind of where do we want to end the year on inventory levels, where do we want to run supply to meet demand? So, I’m sure your model on the use, knowing where interest expenses, where pension expenses, where taxes are, you may be a little light on taxes, our cash taxes this year are moving up as we become a U.S. cash taxpayer.

We’re on the right to do that. So, we’ll provide some more detail as we kind of work through modeling for next year. But I think the key is that we’re going to generate, the midpoint of that cash flow and our leverage is going to end the year at the lower end of our range. And by the way, that’s a raw leverage calculation. It’s not pro forma. It’s the real leverage of the company after spending $260 million to acquire Bell.

Gabe Hajde: Appreciate it. thank you.

Stephen Scherger: Thank you.

Operator: Thank you. As there are no additional questions, waiting at this time, I’d like to hand the call back to the president and CEO, Mike Doss for closing remarks. I want to thank all of you for joining us on the call today. We apologize for the technical difficulties if you experienced those on your end. And we look forward to talking to all of you in February at our investor event in New York City. So, hope everybody has a great fall and a safe day today. Happy Halloween.

Operator: Ladies and gentlemen, thank you for joining the Graphic Packaging’s third quarter 2023 earnings call. Have a great rest of your day. You may now disconnect your lines.